Friday, July 25, 2008

“Professional money management is a gigantic rip-off”

“Professional money management is a gigantic rip-off.” This was written by one of the most successful fund managers, Bill Gross, Director of PIMCO. He admits that his industry is more about luck than skill. People pay managers for the same reason we all think we are superior car drivers. We all think we are above average. Stop and reason! Average means in the middle. For investments, the average—the S&P 500 index—actually beat 88% of large managed funds.

Recently, a study of the performance of all mutual fund managers over the period 1975 through 2006 shows that NO MANAGER is a consistent winner throughout their career. Some have beaten a market index for some time BUT you can’t count their fees. That’s not fair. We are required to pay the managers’ fees; even when they lose our money! Just think if plumbers operated like that: Get paid handsomely and don’t fix the leak—they would be sued immediately. Managers don’t stop charging when they lose your money.

Take Away: your earnings will be higher by doing nothing—don’t use someone else to pick stocks or funds—just let it ride on the average of the markets.

An investment in a mutual fund that holds common stocks has provided returns of 12% over most periods 10 years or more. An index fund holds many different company stocks so you don’t lose money if one company goes bankrupt. If you use low-cost funds, you will keep more of what your account earns. If the fund earns 12% and you pay 0.1% for bookkeeping, your investment will compound at 11.9% over time. Every year the returns will be different of course. However, when you hold tight and don’t buy and sell, you win. Instead of paying a stock picker, you should pay a hypnotist to make you forget your long-term account. Our members provide their experiences to illustrate where to invest:

Don’t fall for the myth of "professional" money management. Wall Street makes up stories that we want to hear. Money management is just a sophisticated lottery game and only the game owners profit by it.

Tuesday, July 8, 2008

Do you have enough for retirement?

This is the BIG question for many people over age 55 ask their advisors.

Most people over age 55 have no idea if they will have enough saved to be able to quit working and live on the income from their nest egg. They may live another 35 years. Most advisors don’t know the answer either.

There is a simple answer: $5.55 a day.

This is the amount necessary for you to have an additional Wealth Reserve of $150,000 in 20 years. BOTH of you can make the $166.67 monthly contribution and have $300,000. It would take doubling that again—$666.67 a month—to reach $300,000 in less time—15 years. Time is the key factor in compounding your money.

EVERYONE needs more money in retirement because of increasing expenses. Most people need their Social Security income too. That income is now in doubt. Our Treasury Department contends that changes are inevitable, because the program seems likely to become insolvent in 2041. Most policymakers seem to agree that, if benefits must be cut, the cuts should affect higher-income workers and retirees before they affect lower-income workers and retirees. Treasury wrote a new “progressive benefits reduction” analysis.

Everyone can invest $5.55 per day—that’s a cigarette/coffee or a 15 mile trip. Some people can afford to double that. If you can add more, fine. Unless your joint income exceeds $169,000 in 2008, put the money in a Roth IRA. The earnings—$150,000 less $40,000 deposit—are not taxed. There is no income tax, ever. That adds 25% more to your balance. Unlike pensions, regular IRAs, insurance, annuities and savings, there is NO tax or fee. You get to use all your money!

Do you have enough for retirement? NEVER

Ask anyone who is in retirement today. Bread, milk and eggs went up 20% so far. Health care and long-term care expenses are rising. How long will the young people want to pay for our Social Security if it ends before they use it?

Set up an account for you and your spouse in 30 minutes using our members’ strategies:

Monday, May 19, 2008


Keep YOUR kids out of debt! Explain the FACTS OF LIFE now!

You can help your kids stay out of debt and reach all their goals in life by explaining the FACTS OF FINANCIAL LIFE. You can do this only if you know the answers to these two questions asked of 12th graders. These questions were asked of participants in the JumpStart Coalition on Personal Financial Literacy.

Which of the following tends to have the highest growth over long periods, say 18 years?
a) A checking account.
b) Stocks.
c) A U.S. savings bond.
d) A savings account.

At age 25, Mary began investing $5.56 per day, $2,000 a year. At age 50, Rob started saving $4,000 a year. They now are both age 75. Who has more money saved for retirement?
a) They each have the same amount.
b) Rob, because he saved a bigger amount each year.
c) Mary, because her money grew for a longer time at compound interest.

If you correctly answered "b" and "c," you did better than most of the nation's high school seniors. Most got them wrong. A Schwab survey found that while 70 percent of parents had taught their kids how to do laundry, only 19 percent had explained how to invest money to make it grow.

It is not difficult to learn these lessons. In fact, our members have found the pictures and charts in our FREE Guide make it easy to explain the FACTS OF FINANCIAL LIFE. Try it yourself for FREE at

It is a curious thing that our representatives in Washington have not found a financial literacy course for our schools after 220 years. According to John Adams:

"All the perplexities, confusion and distress in America arise, not from defects in their Constitution ... not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation."

By the way, Mary will have about $6.5 million and Rob will have about $630,000 using a tax-free low-cost broad market index account.

Monday, April 28, 2008

Are Roth IRAs good for retirement?

Members and their kids keep asking me this question.

Consider two choices: 401k with matching and Roth IRA.

If your 401k has no match, skip it. Yes, a 401k does reduce your income for tax purposes now and lets your eggs grow tax-deferred. If you invest 10% of your gross, say $3000 a year, you could have $1.2 million in 35 years. However, when you take it out, you may pay 25% or more in federal and state income tax. (We will likely pay Bush’s ‘free ride for the rich’ in the future.) Your tax rate is lower now. Pay the tax on the $3,000 now and avoid tax on the $1.2 million later. Inflation takes HALF your buying power every 25 years, so a MILLION BUCKS won’t buy what it used to. So add $10 a month every year to get ahead of inflation.

Matching funds from your employer is FREE money! Take it. If you receive 50% on your first 5% of salary, that’s $750 a year. Add that to your 10%--$3,000—and you may find $1.5 million in 35 years. You may have to pay $388,000 in tax on that, but at least you will have $1.2 million to enjoy for the rest of your life.

No matter what you do—401k with match or Roth IRA—success in retirement savings is just a matter of sticking with it. Put your savings and investing on automatic and your future life will be assured. Your employer or mutual fund trustee will debit your account monthly for the $250 and you don’t have to worry about retirement again. Our members show you how they did it. They bought “assets that grew by themselves.” They didn’t have to rely on bad investment advice. They didn’t have to write a monthly check.

Start TODAY! It takes 30 minutes. I will email you our FREE Guide:

Friday, January 4, 2008

Drop your insurance: buy only what you need

This statement is not what you usually hear from an insurance person. However, a new way of buying insurance and all financial services has arrived.

Based upon the model used by businesses, this approach builds on the trend of more of us who must manage our own pensions--401k, 403b and IRA accounts. Even though many of us say we don’t want to manage our own financial futures, we will be better off in the long run.

We are being forced to self-direct all our financial products. Our agents, bankers and brokers have all moved on. Typically, we practitioners of this new “self-insurance” model use our savings to build up our own reserves. This “Wealth Reserve” as I call it is a self-insurance fund I use to cover many risks so that I don’t have to buy a policy for every risk. I built a sizable reserve by buying products “wholesale.” I invest the savings.

Businesses have been doing this for a long time. For instance, most large businesses do not buy health care like we do. They buy it “wholesale.” They pay the claims from their own account. The insurer acts as the administrator—following the employer’s plan to decide it your claim should be paid. The business funds the claim account only to the extent necessary to pay claims. The insurer makes a fee for processing.

This costs the business less because the money to pay the claims is actually part of the working capital of the business. It is not sitting in an insurer’s investment account paying interest before it is needed to pay claims. For large claims, like brain surgery or death, the business buys catastrophic insurance. Some companies have their own (captive) insurer (reserves) to save even more.

How can you use this example? Let’s take homeowner’s insurance. Did you know that many agents purchase the standard HO-3 homeowner’s policy for their own coverage, but with a $2,500 deductible? That policy takes care of 99% of the claims and saves them 20-30% a year. They understand that they need to maintain the property to prevent it from deteriorating faster than it needs to. But by investing that 30% savings each year, they build a Wealth Reserve that earns them interest and will cover the deductible if they ever need it. So, over 10 years, they save $2,000 in premiums and earn interest on the funds.

Taken together for all your risks, you can build a large Wealth Reserve. For instance, we have helped people save over $3,000 a year on financial services, including banking, mortgage, education, mutual funds, securities, annuity, insurance—life, health, disability, long term care, vehicle, homeowner’s, lawsuit, vehicle purchase, legacy, wealth transfer, retirement spending . . . almost any service. Over time, those savings will compound to a $500,000. This fund can be used to pay for your insurance, retirement, and health care needs. Some clients plan to save $120,000 on long-term care insurance this way. Others have dropped their life and disability insurance—placing the premium in investment accounts that compound at the market rate over time.

When I was just 22 and working part-time during college, I was induced to buy permanent life insurance. I later cancelled it when I could not afford the $1200 annual premiums. I was in grad school and taking out loans to finish an MDiv. The agent representing Columbus Mutual probably earned all of that $1200 in the first year. I got little back when I couldn’t make the payments.

The agent did not explain that I would be better off buying a mutual fund instead of insurance. This was probably 1970. By the end of the 1960s there were around 270 funds with $48 billion in assets. No one advised me to invest in mutual funds at that time. My high school and colleges mentioned nothing about the miracle of compounding $1200 a year in a mutual fund at the average market rate of 12% per year. I think I would have paid attention if someone had told me it would be worth $1 million by the time I was 60.

1970 0
1980 $ 23,233.91
1990 99,914.79
2000 352,991.38
2008 933,673.59

There are few financial literacy programs in high school or college even today. Consequently, even in 2006, the Jumpstart Coalition for Personal Financial Literacy found that half of high school seniors failed to answer basic money questions. Schools don’t teach basics of saving, investing, compounding, and getting what you want, so parents are expected to. This leaves the blind leading the blind. Parents teach spending but few are role models in investing with compound interest. The subject they missed the most about was investment in the market.

For Example, question 26. Kelly and Pete just had a baby. They received money as baby gifts and want to put it away for the baby's education. Which of the following tends to have the highest growth over periods of time as long as 18 years?
44.8% a) A U.S. Govt. savings bond
34.8% b) A savings account
6.3% c) A checking account
*14.2% d) Stocks
* correct answer