Seven myths and seven mysteries of personal finance and economics, Pt. 7
By Jeffrey Reeves MA
The Seven Mysteries series aims to tear down the wall between conventional wisdom and common sense so you can thoughtfully grow rich without risk and create wealth without worry. This article introduces the final three mysteries.
Mystery No. 5: Volume is more important than rate
Every major product in the financial services business -- every type of mutual fund, annuity, variable insurance product, bank CD, treasury bill, note and bond -- proudly trumpets its rates. If 2 percent is good, then 5 percent is better. If 6 percent compounded is wonderful, then 8 percent compounded is marvelous.
The rates these products advertise, however, are hypothetical. Rate, like the products it applies to, represents the hypothetical aspect of pure unrelenting risk. The only guarantee of touted rates is that they are volatile and vary widely. In other words, they only guarantee is that there is no guarantee.
The facts are:
- If you contribute to your capital base on a regular basis...
- If the financial instrument you chose to protect your capital has a guaranteed rate of return...
- If you are using it as a source of borrowed funds for your own purchases...
- If you are recapturing the principal, interest and fees you would otherwise be paying to others...
- If you are not losing the earning power of your money while you are using it...
In other words, if you are managing your money the way banks manage money, volume is more important than rate.
Remember the refrigerator at $1,000. If you financed it yourself and paid yourself back at the rate of $100 per month, plus 12 percent interest, you would recover the entire $1000 dollars in less than a year, capture about $50.00 in interest, and have the refrigerator to boot. Does the 12 percent rate have great value here or does the recovered principal -- volume -- prove more useful?
Remember what Will Rogers said: "I'm not so much concerned about the return on my money as I am about the return of my money."
Mystery No. 6: "Conventional wisdom" is an oxymoron and tax deductibility is a trap
If you do the same thing everyone else does, then you'll get the same results that they do.
During the recent bear market, some of the highest paid advisors and investors were able to brag only that their clients lost less than others' clients lost. "I only lost 35 percent" is a bragging line. Hardly a single mutual fund showed a gain. 401(k) investments went down to less than half their original values in some cases. All of these results occurred by following "conventional wisdom," the thinking that tends to dominate any given topic.1
The reality is that current financial thinking, planning, and practices are akin to driving your car by looking out the rear view mirror. You get a great view of where you have been but no perspective on where you are going. You could also say it's like mapping; it gives you a two dimensional view of what might be in store, but cannot tell you about the bridge that just washed out.2
Part of that thinking is that you should take advantage of every tax deduction possible, no matter what. This is a trap. A client of mine follows this philosophy to the extreme. If there are two choices and one has a tax advantage over the other -- even if both were tax advantaged -- he always chooses the one with the current advantage.
The results have been demonstrably horrible. His 401(k) went down almost 80 percent. His earnings were so low that he lost almost $100,000 in the tax deductions that he pursued and his balance sheet is worse now than it was five years ago. He is so busy avoiding taxes (legally) that he loses focus on his business and his own best interest.
The Debt Paradigm has created the personal economies of today: low savings rates, loss of the long-term perspective, excessive attention to current tax advantages, follow-the-crowd-investing and saving strategies, high debt, constant refinancing of our home equity and on and on.
It is time to walk away from the madness of the Debt Paradigm and employ solid strategies and practices that promise a solid financial base that the vagaries of the market and the whims of the IRS cannot disturb or destroy.
Mystery No. 7: Compound interest is magic, triple compounding is astounding
Albert Einstein said, "The most powerful force in the universe is compound interest." Compound interest on money you have saved (not invested) is the secret to financial success. What if you could save your money in a century old financial product where:
- It earns compound interest -- guaranteed
- You can borrow against it and it still earns guaranteed compound interest, even on the borrowed amount
- You can repay the money that you personally borrow and reuse the borrowing power over and over
- Your borrowing costs are minimal or non-existent
- The interest you save by not borrowing from others becomes a secondary source of savings and another compounding factor
- Your money earns tax free dividends even when you have borrowed against the money
There are a couple of thousand insurance and investment companies that do not have reliable cash-value life insurance products in their portfolios. There are fewer than two dozen companies that offer participating whole life insurance as one of their primary products.
It's obvious that the almost one million insurance and financial advisors that can't sell whole life insurance will not praise it as the most versatile, flexible, and powerful financial product in the marketplace today.
The companies that sell participating whole life insurance policies are the most respected and reliable insurance companies in the world. Here's a partial list of companies that manufacture and sell participating whole life insurance -- in alphabetical order:
- Lafayette Life
- Mass Mutual Life
- Mutual Trust Life
- New York Life
- Northwestern Mutual Life
- Ohio National Life
- One America Life
- The Guardian Life
1 Dr Agon Fly defines conventional wisdom this way, "Thinking what everyone else thinks and doing what everyone else does because that's what everyone else thinks and that's what everyone else does."
2On a recent trip through New Mexico I followed a "scenic" route on the map that led me down a precipitous, 1,000 foot, one-lane, unpaved, twisting and snow-covered road with no turnarounds, into the Rio Grande Canyon. I cursed the map, aka "plan". I didn't think about my preparedness, which called on every driving skill I'd ever learned and 40 years of focused meditation practice and got me through the ordeal. My wife, Sandy, on the other hand, was frozen and white knuckled during the descent.
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