It seems that common sense isn't so common anymore. Many people don't think for themselves. Instead, they entrust their minds and money to others to influence how they live.
Recently, in Jacksonville, Florida, a man who ran over and killed a child in a crosswalk was not prosecuted because the mother had failed to push the crosswalk button, which would have given them more time to cross before the light changed. Apparently, not pushing the button -- even though the light was red -- made it okay for the driver to run over the child. Do you find any common sense in this tragic event?
Ben Stein recently spoke at a meeting I attended and said he asked two southern California college students who attended a prominent university in California what the name of the world-wide conflagration that took place in the early 1940s was that involved Germany and Japan. The student's answer was the Civil War. These people were old enough to vote for the president of the United States. With that in mind, we should administer some sort of competency test before we allow people to vote.
One of America's larger mutual funds, based in Boston, Massachusetts, has as its chief money manager a person whose degree was earned in art. People entrust their life savings to mutual funds, not knowing who is investing their money on their behalf or what they are investing it in or how often they sell the holdings (which is often a 100 percent turnover of all holdings in a single year), replacing them with yet another hunch.
On Sunday, January 24th, the New York Times headlines read "Tax Increase for the Rich Is at Issue in Oregon." The state has 11 percent unemployment and one of the highest tax rates in the nation. The government is strapped for cash because, like our federal government, they spend more than they bring in. So, they have decided to bring to the voters in November a tax increase of 3 percent on income if the taxpayer makes over $125,000 annually. Apparently some politician decided that an annual salary of $125,000 makes you rich; and as the article stated, you deserve to be taxed more so that the state can give your money to the poor. Hopefully, the voters will overlook the fact that very little, if any, of the revenue from this proposal will go to the poor. Now get this. If this tax increase is passed, the projected $727 million in revenue it will bring in has already been spent by the politicians in Oregon. Now there's a great example of common sense.
From 2000 to 2002, when the stock market lost more than 50 percent of its value, brokers were encouraging the general public to stay fully invested, not selling anything. The rhetoric was, "If you sell now, you will lock in your losses." Yet, I guess it was okay that when you lose 50 percent you have to have a 100 percent return just to break even. The stock market's average return for the past 100 years has been 5.3 percent.
The same message of buy and hold was again the sage advice offered by Wall Street in 2007, when the market again declined by over 50 percent. The market's gains only benefit an investor if he gets to keep them. I have yet to meet a retired person living on unrealized gains.
Money managers often tell their clients to buy a particular stock or mutual fund because it is going up. Warren Buffett says the dumbest reason to buy a stock is because it is going up.
This is what we hear: "The stock market is going up today; it looks like a big rally. The market is down today; it seems investors are taking profits from yesterday's rally. The market is up today; now this is the rally we've been looking for. The market is down on the release of bad economic news. The market is up due to good earnings released on this morning's report." Again, no common sense is found in the way many invest, or in the advice given to us.
Would you drive a car without insurance? Can you get a mortgage without insurance on your home? Of course not. Then why do we place our life savings on Wall Street, where fortunes are more easily lost than made without any insurance? Some may say, "I didn't know you could buy insurance." Well then, let's show them they can have it. Fixed indexed annuities (FIAs) don't place your principal in the stock market. Instead it is put in the insurance company's bond portfolio, managed by risk experts who do not invest your funds in the market. Instead, they use hedging, which is insurance for your principal. They buy options to represent principal in the market without placing it there. They ensure that principal cannot be lost based on the claims-paying ability of the insurance company. Do you know of anyone who has ever lost any money in an FIA? The answer is you don't, because it hasn't happened, even in the most unprecedented financial meltdown since the Great Depression. Now that's insurance for our clients' nest eggs.
Taxes are our single largest expense. We pay federal and state income taxes, Social Security and Medicare taxes, property tax, sales tax, toll road tax, license plate tax, taxes at the gas pump, airport taxes, hotel taxes, and the list goes on and on.
The government always gets paid first, and they don't mind waiting while your IRA grows larger, increasing the amount your financial partner in an RIA will take before you get anything. Think about the security the government has created for itself. The government is encouraging Americans to wait to pay their taxes while the government spends as if they already had the dollars today, knowing that in the future, they can raise taxes dramatically.
Ed Slott says the greatest gift congress has given the taxpayer is the Roth IRA. You can pay the tax now on the seed and avoid paying at a higher tax rate on a higher account value (the crop) later on. Although Roths don't make sense for everyone, they do make great sense for many. Common sense will save you tens of thousands of dollars in taxes; and yet, many will not take advantage of this tremendous tool.
In 2012, an estimated 83 million baby boomers will begin to retire en masse. You can't take this many people and have them reduce their spending without it having a negative impact the market's ability to sustain a recovery. Yet, I predict that many will have no insurance on their nest eggs when the market drops again. The situation is akin to the 2 million Americans who were still taking Vioxx when it was pulled from the drugstore shelves despite widespread reports that more than 25,000 heart attacks were directly linked to the drug. Warren Buffett says what we learn from history is that we don't learn from history. If only people would apply some common sense to investing, they could learn from their mistakes and avoid significant financial losses in the future.
The FIA is a great common sense play. We know markets are volatile; we know you can lose your shirt in the market; we know we need to keep pace with inflation and we know the one thing we have to have to be able to retire is income. The FIA offers common sense solutions to all these problems. To benefit by an FIA, all you have to do is use a little common sense.
You need to help your prospects understand that their financial advisor does not know what direction the market will take. They have a major conflict of interest, which is that they have to keep the client invested in the volatile market at all times because if they take the client out, the brokers can't feed their own families. Their fees stop when clients sit on the sidelines. That's partly why they promote buy and hold. Notice that a buy and hold strategy is an entrance strategy into the market without a capture-the-gains strategy while they are there, or an exit strategy. How do you ever win if you never realize a gain?
Your clients don't need anything more than common sense to realize that no one will watch their money more carefully than they will and to know that they have to have an exit/income strategy if they ever hope to retire.
Common sense tells me I'm better off relying on my common sense for a secure retirement than to turn the steering wheel over to people or strategies that don't have my interests and needs at heart without conflicting with their own.
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