The Truth About Volatility
March 26, 2009
How Long Does It Take?
Here’s a quick quiz for you:
Assume you started with $100,000 in your account. If your investments decreased by 25% percent one year—then increased by 25% the following year—how much would be in your account?
- $100,000
- More than $100,000
- Less than $100,000
The correct answer is “C”—less than $100,000. Let’s do the math.
25% of $100,000 is $25,000—which brings you down to $75,000. Now, 25% of $75,000 is $18,750—which brings you up to $93,750.
But what if you had the gain of 25% the year before the loss?
The same thing happens! Let’s do the math.
25% of $100,000 is $25,000—which brings you up to $125,000. Now, 25% of $125,000 is $31,250—which brings you back down to the same $93,750.
That fact of the matter is that for every 25% loss you incur—you must gain 33⅓% just to get back even!
In our equation most investors would say that they averaged 0% over the last 2 years. In other words +25% and -25% averages out to 0%.
The truth is if you go up (or down) 25% and then go down (or up) 25% your average return has been a negative 3.17%.
The moral of the story is….maybe it’s time to eliminate volatility in your investments.
Catching Wild Pigs
March 15, 2009
I just got this in an email. Interesting analogy.
“There was a Chemistry professor in a large college that had some
exchange students in the class.
One day, while the class was in the lab, the Prof. noticed one of the
exchange students who kept rubbing his back and stretching as if his
back hurt. The professor asked the young man what the matter was.
The student told him he had a bullet lodged in his back. He had been
shot while fighting communists in his native country who were trying to
overthrow his country’s government and install a communist government.
In the midst of his story he looked at the professor and asked a
strange question. He asked, ‘Do you know how to catch wild pigs?’
The professor thought it was a joke and asked for the punch line.
The young man said this was no joke. ’You catch wild pigs by finding
a suitable place in the woods and putting corn on the ground. The pigs
find it and begin to come every day to eat the free corn. When they are
used to coming every day, you put a fence down one side of the place
where they are used to coming. When they get used to the fence, they
begin to eat the corn again and you put up another side of the fence.
They get used to that and start to eat again. You continue until you
have all four sides of the fence up with a gate in the last side. The
pigs, who are used to the free corn, start to come through the gate to
eat, then you slam the gate on them and catch the whole herd.
’Suddenly the wild pigs have lost their freedom. They run around and
around inside the fence, but they are caught. Soon they go back to
eating the free corn. They are so used to it that they have forgotten
how to forage in the woods for themselves, so they accept their
captivity.’
The young man then told the professor….that was exactly what he was seeing
happening in America.
’The government keeps pushing the people toward socialism and keeps
spreading the free corn out in the form of programs such as supplemental
income, tax credit for unearned income, tobacco subsidies, dairy
subsidies, payments not to plant crops (CRP), welfare, medicine ,
drugs, etc, etc, etc. while the people continue to lose their freedom -
just a little at a time. One should always remember: There is no such
thing as a free Lunch ! Also, a politician will never provide a
service for you cheaper than you can do it yourself.’
I hope you see that all of this wonderful government ‘help’ is a
problem confronting the future of democracy in America. God help us when
the gates slam shut! Listen closely to what the
politicians are promising you – just maybe you will be able to tell who
is about to slam the gate on America”
"A government big enough to give you everything you want
is big enough to take away everything you have."
Thomas Jefferson
The Infinite Banking Concept
March 13, 2009
The essence of the Infinite Banking Concept is how to recover the interest that you normally pay to a banking institution through the use of dividend paying life insurance, so that the policy owner makes what a banking institution does. It is a third alternative to making a purchase. Instead of losing opportunity cost on cash, or the finance cost of using someone else’s bank, this alternative provides a way to do what you would normally do anyway, but recapture the cost of those purchases. Earnings grow within the policy tax deferred. You are both reducing your tax burden and capturing monies for yourself that a banking institution normally would receive. And by the way, you have a death benefit thrown in on the side!
Anytime you can cut your payment of interest to others and direct that same market rate of interest to an entity you own and control, which are subject to minimal taxation then you will have improved your wealth generating potential significantly.
The Infinite Banking Concept is not about investing, it is about financing, and financing is a process not a product. Financing involves both the creation of and maintenance of a pool of money and its use. However, when a financing system is combined with an investment system the combination of the two will always out perform an investment system. When the system combines reduced tax liability with a financing engine and allows complete control over your investments there appears to be no system capable of generating wealth with as much consistency or speed.
A primary concept or principal is that you finance everything. You either finance by: Paying interest to someone else – a bank, lender, etc. Or giving up interest you could have earned otherwise. (When you pay cash the interest the money could have earned is forfeited).For these reasons when we are discussing investment alternatives we must not only weigh the return we will receive but we must also evaluate what we are forfeiting or giving up. This mind set will become more important as we evaluate the “Infinite Banking Concept.” For all of the reasons mentioned above every person should be fully engaged in two businesses – Your occupation and Banking.
Becoming Your Own Banker
March 13, 2009
Creating Your Own Banking Solution Is Always Better!
November 5, 2008
The financial world today is full of many errors, and one that I hear often when speaking to other financial advisers is, “Well I can get a better rate of return here.” I could spend hours writing about the absurd claims I heard about rate of return, and how scary it is that some of these people actually control your money and your future, but I’ll spare you. Suffice it to say that you would be better of in Vegas than with them.
EVERYTHING gets better with my banking system.
If you’re familiar with my blog you know we speak of the concept of becoming your own banker, also known as the infinite banking concept, through the use of participating, dividend paying, whole life insurance. We over-fund and maximize a whole life insurance policy that leaves us with a self-funding pool of money that grows tax differed, and is drawn tax free, while maintaining liquidity, use, and control.
So the question becomes this, “what if I think I can get a better rate of return somewhere else, won’t that be better?” The answer is simple, you can have the best of both worlds. Interest paid on borrowed money for investment purposes is a write off, but by using your own banking system, or policy, you are able to keep the interest paid while writing it off aswell. What does this mean? becoming your own banker will always increase your overall gain because of the tax deduction…this is huge!
Do I still get dividends?
This is the best part. Because dividends are not paid based on cash values, I will always get the dividend whether I use my cash values or not. So not only do I get better returns because I get an interest write off, but I also get another “return” from money I was using elsewhere.
So the point I want to make is that whenever I use my banking system, I improve what I do. If I can write off the interest, I get better returns; if I borrow from my policy, I still get dividends.
The foundation for wealth is the banking process. Understanding these concepts will not only increase your actual net worth dollar for dollar, but you will increase safety, maintain control of your money, and stop worrying about losing money in markets like today’s.
Becoming Your Own Banker
October 29, 2008
What if you could recover the interest you pay to finance cars and other major purchases?
What if you could recover the thousands upon thousands you freely give to financial institutions?
What if you could recover the lost opportunity cost of the funds you use to make cash purchases?
What if you could do this on a tax-free basis?
This is easily accomplished when you learn how to Become Your Own Banker.
Becoming Your Own Banker will teach you how to create wealth by:
-Creating your own private banking system using dividend-paying, whole life insurance.
-Utilizing your savings and cash flow to build your own “bank.”
-Creating tax advantages that exceed those of traditional accounts.
-Using the method to finance your automobile purchases and any other major purchase, putting you in control
-How a business can use the concept for even more advantages.
If you are not yet educated on the concept of becoming your own banker, its time you do so. There is no match to the growth, safety, and control that you find as you become your own banker. The ability to create wealth with so many advantages and not rely on the market to do the work is unsubstitutable in our economy today.
Christian Financial Planning
October 25, 2008
Christian financial planning is about creating a strong foundation for your financial life. Most people don’t understand the importance of a strong foundation for wealth accumulation.
Much of what we hear is RATE OF RETURN. Though this is important and to be sought after, it is not what produces the greatest of results.
A guy making 100,000 a year on average saves about 5%, or 5,000 dollars. He may go out and look for a high rate of return, say 10%. If he accomplishes his task, and gets 10% he will have increased his wealth 500 dollars. Great! But christian financial planning is a little different. By looking at this same situation, and taking a different approach, we could potentially produce greater results. If instead of focusing on risking his money, the focus was on recapturing even 1% of the other 95,000 dollars, this particular person would have, in essence, double his rate of return, and he did it with no risk. Now he not only has found more money, but can also make that money work for him.
Now, lets look a little deeper into the return on his savings. Within the 95,000 he is spending every year, do you think there could be some money he owes somewhere? He most likely has a mortgage, a car loan, maybe some consumer debt. Christian financial planning will teach him that instead of going out and risking his money he could actually “invest” in his own debt. He would still pay the same interest he would normally pay to a financial institution back to himself. He is now redirecting his lost dollar back to himself.
Christian financial planning is important, and understanding that the foundation of wealth accumulation is the most important part of the financial equation will do more for you than any rate of return could ever produce.
The Bailout and the Economy
October 22, 2008
WHY A BAILOUT?
I constantly think about the bailout and the consequences of this intervention. Our government seems to be doing more to destroy capitalism then to help it. Many would say that this is the overall goal, to incorporate socialism. I like to read from an economist named Henry Hazlitt. He gives this interesting scenario of two farmers:
Suppose that there is a farm for sale. A private lender would normally be willing to lend money to farmer A who has proven his abilities in the past, rather than to farmer B, who has demonstrated a lower level of productivity than has A. However, because government taxes productive citizens or borrows money itself in capital markets, private lenders have fewer funds available to lend to A. Instead, government lends the money to B on the grounds that B is underprivileged, in need of a hand, or some other politically based argument. The more productive borrower, A, loses out on the scarce land while the less productive borrower, B, gains the resources. Because the less-productive individual acquires the scarce resource, there will be less total production, and the entire society is worse off.
In the above example it’s clear that the government takes bigger risks with taxpayer’s money than private lenders take with their own money. Private lenders who make bad loans will go bankrupt and be forced out of business. But when the government gets involved, it lends funds for riskier ventures since the bureaucrats who approve the loan face no personal recriminations — much less loss of profit — for error. We have seen this first hand with sub-prime loans. Government all but forced banks to loan to the “underprivileged,” the less productive borrower, and we have all seen and will feel the effects of this policy for years to come.
In summary private lenders would loan to farmer A, the more productive member, while government lenders would loan to farmer B, and farmer B is the less-productive path. After all, there is no need for government to loan to farmer A; it can be handled quite well in the free market. With less taxation there is even more capital from private lenders to loan to farmers like farmer A. There will be greater production, and the entire society is better off.
THE BAILOUT CAPITAL:
The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn’t bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments.
Even the failing banks pay lip service to their fiduciary responsibility, but any privately funded firm that took money from more-productive people to give it to less-productive people would soon go out of business (sub-prime loans). Only the government can violate Hazlitt’s logic and survive, because only government can socialize its losses through the tax system.
Is there really such thing as a “BAILOUT” or is this merely a “STALL” before the inevitable?
Dan Thompson
The Economy is unstable, and we need now, more than ever, safety in our financial planning.
WHY A BAILOUT?
I constantly think about the bailout and the consequences of this intervention. Our government seems to be doing more to destroy capitalism then to help it. Many would say that this is the overall goal, to incorporate socialism. I like to read from an economist named Henry Hazlitt. He gives this interesting scenario of two farmers:
Suppose that there is a farm for sale. A private lender would normally be willing to lend money to farmer A who has proven his abilities in the past, rather than to farmer B, who has demonstrated a lower level of productivity than has A. However, because government taxes productive citizens or borrows money itself in capital markets, private lenders have fewer funds available to lend to A. Instead, government lends the money to B on the grounds that B is underprivileged, in need of a hand, or some other politically based argument. The more productive borrower, A, loses out on the scarce land while the less productive borrower, B, gains the resources. Because the less-productive individual acquires the scarce resource, there will be less total production, and the entire society is worse off.
In the above example it’s clear that the government takes bigger risks with taxpayer’s money than private lenders take with their own money. Private lenders who make bad loans will go bankrupt and be forced out of business. But when the government gets involved, it lends funds for riskier ventures since the bureaucrats who approve the loan face no personal recriminations — much less loss of profit — for error. We have seen this first hand with sub-prime loans. Government all but forced banks to loan to the “underprivileged,” the less productive borrower, and we have all seen and will feel the effects of this policy for years to come.
In summary private lenders would loan to farmer A, the more productive member, while government lenders would loan to farmer B, and farmer B is the less-productive path. After all, there is no need for government to loan to farmer A; it can be handled quite well in the free market. With less taxation there is even more capital from private lenders to loan to farmers like farmer A. There will be greater production, and the entire society is better off.
THE BAILOUT CAPITAL:
The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn’t bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments.
Even the failing banks pay lip service to their fiduciary responsibility, but any privately funded firm that took money from more-productive people to give it to less-productive people would soon go out of business (sub-prime loans). Only the government can violate Hazlitt’s logic and survive, because only government can socialize its losses through the tax system.
Is there really such thing as a “BAILOUT” or is this merely a “STALL” before the inevitable?
Dan Thompson
The Economy is unstable, and we need now, more than ever, safety in our financial planning.
Rate of Return
October 21, 2008
I was talking to a guy today, a client we’ve been working with for a couple weeks, who is deciding if he wants to pursue his insurance policy through us or another guy. He’s a great guy, he’s a slalom skier (course skier), which is something we love to do, and waterskiers are somewhat hard to find these days. His big question is what I discussed in my last post about universal life and whole life. He understands the incredible benefits of life insurance, and is thrilled about the cash value accumulation by over-funding and maximizing his policy. He realizes that he can self fund it in about 5 years, and it is a great wealth creation tool, but there are 2 problems….
1. He was only seeing the half of it. He saw the advantages of life insurance as a great tool for wealth accumulation, that solves the need for insurance at the same time, but his mind was heavily focused on the product, not the process. Today we helped him see a little more of the “banking” equation, and that he wants to be able to use it as a financing solution so that he can recapture a lot of wasted dollars. This is key to understanding wealth accumulation. So many lose wealth either unnecessarily or unknowingly, because they don’t understand the PROCESS of wealth, and that it is not a product. Understanding the benefits of life insurance is one thing, but understanding the incredible power of banking is another. Its the larger part of the equation. But we talked to him about the cash values in a universal life policy, being eaten up in later years. We told him of a lady we know, who is currently debating whether she should put up the $88,000 to keep her universal policy alive, or lose all the money she ever put in. Her policy has literally deteriorated because the projected numbers (the TRAP), were well below the actual growth. His exact words were, “well…I don’t want to do that.” No one does, but the reality is for this lady, that if she puts in the money this year, it will only keep it alive for this year, she will have to fork up more next year, and even more the year after. Where are the numbers the policy illustration showed now?! These policies are never what they seem. With whole life, you pay the same cost of insurance every year, and the numbers will ALWAYS get better every year.
2. The second problem is this. The agent working with him on the universal life policy is pushing what ever one else pushes…RATE OF RETURN. Though important, and sought after, this is not the factor that should be looked at. This is no what produces the best results. Its the environment of your money that is key in wealth creation. These universal life guys are showing him returns at 8.75% projected over his lifetime, this is just not possible, or realistic. Again, they are alluring him by projecting numbers and rates of return that are just not feasible in this market. What is not understood is that whole life is the safest version of insurance, but will rise with the market as well. The only difference in growth is that whole life policies with a mutual company don’t have to pay stock holders. The Universal life will take more risk in order to compensate both you and the stockholders of the company. With a whole life policy in a mutual company, YOU ARE THE STOCK HOLDER. They don’t have to take more risk to get you your money, you become the stock holders, and by mathematical equations, actuarial data, and safe, safe investments, can get you strong returns that create the foundation for wealth. The rest is the process of wealth accumulation that lies in understanding how to handle money at its most efficient levels.
Example:
The average American spends 34.5 cents of every dollar on interest alone. On the other hand they are doing everything they can to save even 10 cents of every dollar (average saves less than 5), a 3.45 to 1 ratio of interest to savings. Instead of searching for a higher rate of return and risking those hard earned dollars, changing the environment in which your money is working will dramatically change your financial status. Imagine a plane flying at 100 miles per hour, a relatively good speed, but the actual speed relative to the ground will be determined by other factors as well such as a 345 mph headwind. How fast is the plane going now? Still 100 mph in speed, but relative to the ground it is actually going in the reverse direction 245 mph. The pilot might as well ground the plane and wait it out, its only doing him worse. Now let’s imagine that he waits for a 345 mph tailwind. He is still flying his plane at 100 mph, but this time with a powerful tailwind that brings his actual speed, relative to the ground, to 445 mph! A 690 mph difference all because the change in environment.
The same applies to infinite banking and wealth creation. In the case of flying an airplane you cannot necessarily change the environment, but in the financial world you can. You see, most financial advisers are trying to increase the “speed of the airplane.” Going from 100 mph to 110 or 120 mph is not the answer to the problem. It’s the environment. Implementing the principles of Infinite Banking will create as radical a change to your financial situation as the change in wind is to the airplane.
So in the end he understood the concepts we were showing him, and realizes that its not all about rate of return, but about safety and understanding the process of wealth accumulation. Plus, he realized that universal life is not the answer, but another way to project radical numbers that are never realized.
