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:
Now, what would the account look like if the insurance company used the S&P 500 Total Return Index? Let’s see:
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…
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?
That’s over $500,000 more than Paul shows in his example.
As you can see from the following graphic, DIVIDENDS MATTER!
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 lieâ€”and cling to their lies when confrontedâ€”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.
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:
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).