Archives For Investing

I agreed to look at another book about retirement. Last night, the book’s author emailed me and thanked me for agreeing to give his book a look. He included a link to a YouTube video he put together that explains his strategy.

What I found is his strategy is similar to Pamela Yellen’s Bank on Yourself strategy. UH-OH…haha. What’s different is he uses Indexed Universal Life Insurance. I AM NOT an insurance expert. I won’t discuss the intricacies of the policy. What I do want to discuss is how the interest is credited to the account holder (about 5:42 into the video). NOTE: Notice that he uses the average return of 8.12% (I get 8.13% when I calculate it), and not the average annual rate of return, which is 7.98%.

So the way this particular policy works is it will credit the policy holder’s account a maximum of 13% and a minimum of 0%. So, if the market returns 10%, you get 10%. If the market returns -10%, you get 0 (you won’t lose money except for inflation). If the market returns 20%, you get 13%. Pretty straight forward.

What I found interesting is the index they use in order to calculate the annual credit.

If you look, you’ll see a column titled “Actual S&P 500 Growth %”. This column represents the PRICE return of the S&P 500 Index, NOT the TOTAL RETURN. His numbers look like this:

IUL Account Credit

Now, what would the account look like if the insurance company used the S&P 500 Total Return Index? Let’s see:

IUL Account Credit Using SPTR

That’s quite a difference.

It’s important to point out that the insurance company is only using the S&P 500 as a guide for crediting the interest that goes into the account. The problem I have with this is that’s not how it is often sold to the buyer. It’s usually sold as a “What if you could get the return of the stock market without the risk?”

My point in all of this is just to make you aware of the way interest on most of these policies is calculated. They aren’t using the entire index. That’s important to know.

I’ll review the book once I receive it and have read it. Stay tuned…

If you want a good chuckle, watch this video:

First off, this insurance policy DID NOT have an annual return of 9.94%! It was more like 6%. It’s fine if you want to add hypotheticals in order to draw comparisons to other investments, but you can’t claim that those numbers represent YOUR return. They do not. How it is legal for them to make this claim is beyond me.

That’s not all…

Pay particular attention to the part where Paul Nick addresses “what if you invested in the stock market instead…” (10:17 in the video).

NOTE: He mentions a few times in the video that he’s “bringing some truth to the matter…” Gag!

He simply takes the annual price returns for the S&P 500 Index and plugs them into his spreadsheet and claims that’s what an investor would have received. HE CONVENIENTLY LEFT OUT DIVIDENDS! On top of that, he THEN adds a bogus 1% management fee (who pays 1% for an index fund) AND he taxes annual returns at 25%. His ending balance before the fees and taxes was $223,442. Take a wild guess what that number would have been had he been honest and used the S&P 500 Index Total Return?

Paul Nick's Example from Bank on Yourself

$749,628!!!!!!

That’s over $500,000 more than Paul shows in his example.

As you can see from the following graphic, DIVIDENDS MATTER!

S&P 500 Total Returns vs. Price Returns

I find it funny that he mentions dividends when showing how the insurance cash value balance grew, but left dividends completely out of the equation when he talked about the S&P 500 Index.

Here’s the deal: I know very little about the Bank on Yourself strategy. It could be the best thing since sliced bread (I doubt it). What I do know is that if the people behind it have to lie—and cling to their lies when confronted—in order to make their strategy look better, I don’t want any part of their strategy.

Yesterday’s 1.58% decline for the Dow Jones Industrial Average was the 6th worst first day of the year in the history of the Dow (going back to 1929).

If history is our guide, we’re in for a ho-hum year. I looked at the 20 worst first trading days for the DJIA and then looked at the return for that year. Please note that I used price returns for the DJIA and also included total returns for the S&P 500 because I don’t have total returns for the DJIA going back that far. Because I used two different indexes you’ll see instances where the total return is less than the price return.

20 Worst DJIA Starts

I miss the days when total return information for various indexes were available for download. For some reason, companies have decided to take their information offline. For data nerds like me, this is hard to stomach.

I always liked to follow the sector returns for the Dow Jones Total Market Index. Fortunately, iShares has had exchange-traded funds for all ten of the sectors since mid-2000. That data is easy to find.

To calculate these returns, I used the adjusted closing price from Yahoo!.

By far the best performing ETF of the group over the last 15 years was the iShares Consumer Goods (IYK), which had an average annual ROR of 8.44%. The largest holdings in IYK is Proctor & Gamble, Coca-Cola, and Pepsico. This makes sense because consumer goods are usually defensive and hold up well during rough markets.

By far the worst performer over the same period was Telecom (IYZ), which returned only .68% per year. Ouch!

By far the worst performing asset class for 2015 followed by AFM was the MSCI Emerging Markets Index, which was down nearly 15%. Based on the numbers I found this morning, it’s a very volatile index:

MSCI Emerging Markets Index TR

Yet, even with all that volatility, it still performed a lot better than the S&P 500 over the same period. NOTE: The iShares MSCI Emerging Markets ETF (EEM) began trading on 4/14/2003. Since that day, it has had a 10.51% average annual rate of return vs. 8.95% for the iShares S&P 500 Index ETF (IVV).

Here is the up-to-date report through 2015 (click on the graphic to download the PDF).

Total Returns for Various Indexes - Dec 2015

For those of you not familiar with Pamela Yellen, she is the author of the Bank on Yourself strategy. She has written a couple of books espousing the insurance based strategy. I haven’t read them. What I have to say in this blog post has nothing to do with the message of her books.

I can understand an insurance person not liking the stock market. I get it. When you sell products that are supposed to “reduce risk” you’re not going to be a fan of something like the stock market.

What I don’t like and can’t respect is a person who willingly misleads others by not telling the whole truth.

How does Ms. Yellen mislead her followers?

Take a look at the following snippet that was recently published on her blog:

Okay… so over the last nearly 16 years, since January 1, 2000, the S&P 500 (which represents the broad market) has had only a 2.15% average annual gain.

Did you guess that it was more than 2.15%? Most people do.

And coincidentally, that 2.15% per year return was cancelled out by the 2.19% average annual rate of inflation during that same time period! Oops!

So, was that return worth the risk you took? Was it worth your sleepless nights?

It Gets Worse, Because You Didn’t Actually Get that 2.15% Average Return – Here’s Why…

For starters, in order to participate in the returns of the S&P 500 (or any other index), you have to buy a financial product, like an S&P 500 Index mutual fund or an Exchange Traded Fund.

And those financial products have fees, typically totaling at least 1% per year.

So when you subtract that from the 2.15% annual return of the index, well… now you’re down to maybe 1.15%.

Which means, when you factor in inflation, you’ve actually been going backwards for the past 16 years. All that risk for so little reward.

Now take a look at the chart she included in her post:

Yellen's Chart

Look closely. What did she conveniently leave out?

DIVIDENDS!

I have called her out on this before (NOTE: I have since been banned from leaving comments. Only people who agree with her are allowed to post comments on her blog.). She claims that talking about dividends would confuse the matter. Interesting. Dividends will confuse people, but using the price return for an index and then subtracting off another ONE PERCENT for management fees and then reducing it even more for inflation isn’t confusing?

Because I’m a nice guy, I will help Ms. Yellen out with the math. To be fair, I used the Vanguard S&P 500 Index Mutual Fund (VFINX) since it is an actual investment vehicle and not just an index. Its adjusted close on December 31, 1999 was $102. Its adjusted closing price on December 16, 2015 was $192.11. There were 15.96 years between the two dates, giving us an average annual rate of return of 4.05%. The math looks like this:

[(192.11 ÷ 102)1/15.96] – 1

[1.883431.062657] – 1

1.040465 – 1

.040465 or 4.05%

That’s roughly 3.5 TIMES the return Ms. Yellen posted on her blog!

I’ll be the first to admit that stock market returns have not been great during the 2000s, but they haven’t been nearly as bad as Ms. Yellen makes them out to be.

Not only that, most people have to dollar-cost-average into an investment. For kicks, I ran the numbers to see what the personal rate of return would be for someone who invested $100 each month into VFINX since December 31, 1999. Using the XIRR function in Excel, I found the personal rate of return to be 7.95%. This is due to the fact that the investments are made a little at a time over a long time horizon.

For someone who holds herself out as an “expert,” she should know better.

For your entertainment, here is my first post regarding Ms. Yellen’s tactics from 2014.

UPDATE: I just ran the numbers to reflect the last two down days (the DJIA has lost over 600 points on Thursday and Friday (12/17/2015 – 12/18/2015)). The personal rate of return for 12/31/1999 through 12/18/2015 is 7.44%.

This is a video from 2014 in which Dave Ramsey addresses yet another question about his use of 12% as a benchmark rate of return.

Looking at the 30-year rolling return spreadsheet I put together, we can see that 12% or greater returns are possible. They occurred 19 out of 60 times.

When we take the average of all 60 of those 30-year annualized returns, we get 11.21%. You might think 11.21% is close enough, but over 30-years it’s a big difference. A person who received an 11.21% annualized return over 30 years would end up with a portfolio about 80% of the size of the person who achieved a 12% return.

What’s even more important to note is that these are index returns, NOT what a person could get in the real world. After fees (and don’t forget about inflation), the actual returns would most certainly be lower than published index returns.

I would respect Dave a lot more if he would come out and admit the error of his ways, but as you can tell from the above video, that’s not going to happen.