A Disorganized Conspiracy…
America is prone to adopt ideas that are popularized by the advertising and indoctrination of Behemoths (big business, big unions, and big government) regardless of the intrinsic value of the idea itself. The idea that average Americans should be investing is a disorganized conspiracy and its premise lacks intrinsic value.
That doesn’t mean Americans are all lemmings and sheep. Even those on the inside of a disorganized conspiracy, such as the one that is damaging your personal economies today, are unaware of the untruth that supports the manufactured myth. That lack of awareness gradually creates a shibboleth – an oft-repeated idea that the public as well as the purveyors come to perceive as truth just because it is so often repeated by so many.
The idea that most Americans should be investing is such a shibboleth. It is time for insurance and financial advisers to begin demonstrating the untruth of that idea. It is time for them to challenge the ethics of selling investments to their friends, neighbors, and clients.
The argument against investing begins with a clear understanding. What most Americans believe to be an investment is really a speculation, i.e., a gamble. Benjamin Graham said it best when he stated, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Mutual Funds and 401(k)s…
Does anyone believe that buying a mutual fund promises safety of principal? Is a sixty percent loss of value an adequate return?
Mutual funds and their counterparts inside 401(K)s and equivalent tax qualified retirement plans are inscrutable, defy analysis, and do not promise “safety of principal and an adequate return.” In other words, they are speculative; they are gambles. Their only promise is that they promise nothing at all.
Well, that’s not entirely true. It’s especially untrue for tax qualified retirement plans, which promise future taxation at a potentially much higher rate than the rate applied to the deduction taken and the taxes saved when contributions are made.
“Yes but…” what about the matching money from the company? Doesn’t that free money make up for the losses?
It does, but only to the extent that the tax rates do not increase between now and the time you begin taking income from your retirement accounts.
If you follow the conventional wisdom and contribute the maximum to your retirement accounts, the employer portion represents a minimal amount of the total in the account. If you choose to contribute only as much as qualifies for the employer match, you will still be taxed on the entire amount. If that amount happens to be 50% of what it was last year, you’ll end up paying tax at a potentially higher rate on significantly less money.
From a different perspective, the amount of the tax deductions you receive currently constitutes a lien against your future earnings – a loan from the IRS. However, unlike the lien on a property, the contributions to a tax-qualified plan do not diminish your tax liability. Additional contributions increase it. If tax rates also increase, your are faced with the negative effect of compound interest.
There are a few additional myths that the Behemoths promote as part of the foundation to the shibboleth that all Americans should be investing. One of the most pernicious of these myths is the idea that a family only needs enough ready cash to cover three to six months of income or living expense.
The reason this myth was born was to free up more of your money for investing. Ready cash of three to six years of income or living expense is much more reasonable and is entirely achievable when investing is not a part of the picture.
“Yes but…” what about the rate of return? Can’t you expect a greater rate of return from investments than you can from savings?
NO! That’s Another Myth.
Recent studies demonstrate that money in safe bonds perform as well over the long term as the equity investments which are most commonly available in tax qualified retirement accounts. This is significant. Compare tax qualified investments to the participating whole life insurance, which tends to rely on the Prudent Man Rule and low risk uses of your money such as bonds.
The author just completed a study that compared the returns in a whole life policy to those of the Dow Jones Industrial Average over the past ten years. The whole life policy outperformed the DJIA by almost 130%. Moreover, the DJIA would have to average over 7.2% net of commissions, fees, term insurance costs, and losses over the next ten years to have any hope of catching up with the whole life contract.
When Is Your Long Term?
A third myth, implied in the previous discussion and designed to tempt your to gamble your money, is that investing is for the long-term. However, individual investors do not produce the same results that the Behemoths have promoted and advertised to induce Americans to invest – aka, gamble – their money in the markets. The Behemoths speak only of averages. They focus your attention on the top of the mountain and fail to recognize the chasm that looms immediately ahead. (You know that’s true today more than ever.)
The purpose of this article is to raise the question: “Is it ethical to sell investments – especially tax qualified retirement plans – to Americans that have auto loans, credit card debt, mortgages, lines of credit, and only a few months in cash reserves?”
Consider how many Americans today quickly exhausted the unrealistic three to six months emergency fund and are raiding their retirement accounts to keep up with debt payments or deal with other of life’s surprises during what is going to be a very long and painful recovery.
Consider the recent revelations about the greed for your client’s money on Dull Street (formerly Wall Street) and in the halls of government by the power hungry Dolts in DC (all 535 in Congress and the 43,000+ lobbyists that feed them).
Can we afford to be silent about the conditions that have led so many Americans to or over the brink of financial ruin?
Is it time for advisers to recommend you withdraw from tax-qualified plans and put your money into cash value life insurance where you and you alone have control?