The stock market has always been a risky proposition. And, with most investment advisors pushing mutual funds (that invest in mostly stocks), it’s no wonder that investors are looking for other options. So far, in 2014, we’ve seen the stock market remain relatively flat. Whether this trend will continue is a moot point. If you track the long-term performance of the S&P500 (from 1957, when it began in its present form, to 2013), you get an average return of 11.58 percent and a true compound annual growth rate of 10.10 percent.
But, that rarely tells the whole story. You see, if you’re like most investors, you got in under sub-optimal conditions. You didn’t buy at the lowest point in the market. Why not? Your broker told you to dollar-cost average your way it.
That means you kept buying each week or each month, regardless of the actual price of the stocks or mutual funds. It was impossible to get the best price. More than that, it was impossible to predict what you would actually earn, thanks to variations in investment returns based on your buy in.
In other words, if you bought a stock at $20, and your neighbor bought at $21.67, you will both have very different returns on the same stock after 20 or 30 years. That’s because your cost basis is different. And, while it might not seem like a big difference, that difference gets magnified over 20 or 30 years, especially when you cash in and out of the market to take vacations, pay for emergency expenses, pay for medical bills, or to help out a friend in need.
That’s why you need to diversify.
The old-school “investment” is making a comeback. This time, people are investing in equity-indexed universal life insurance. If you’re a little skeptical about buying a policy, don’t be. This is how middle America invested before 401(k)s.
What you need to be skeptical of are insurance agents. If you’re buying an equity-indexed UL policy, you want to schedule the policy’s death benefit as “minimum death benefit/maximum cash value.” You also want to see a policy illustration that shows both option A and option B for death benefits.
Usually, the increasing death benefit option will show the highest cash value accumulation, but this depends on the issuing insurer. You must look at the illustration to be sure. While you’re at it, request that the insurance agent illustrate a flat 6.5 percent on the illustration, as this is probably the most reasonable rate of return on these policies.
Another alternative is to ask your insurance agent for a blended whole life policy from a mutual life insurer that pays dividends (i.e. Mass Mutual, Penn Mutual, Northwestern Mutual, The Guardian, etc.). When buying this type of policy, you want a mix of term and a minimum amount of whole life. Why whole life? Because it’s the whole life portion that will help you build a substantial cash value inside the policy. The term component gives you cheap insurance, so the policy will be priced more like term, with the option for significant additional premium to build up the cash value.
What if you don’t need life insurance? Don’t buy it, but also don’t underestimate your insurance needs. This is a great way to get cheap life insurance plus additional tax-free cash value savings you can use to supplement your future retirement.
Deferred annuities are like savings plans with insurance companies. The insurer sets up a long-term savings account and you deposit money into that account. After 20 or 30 years, you can typically elect to receive all of the money paid out in monthly installments or you can take the money as a lump sum. During the accumulation phase, all of the money grows income-tax free.
During your working years, you can also have access to up to 10 or 20 percent of the total value of the account for emergency purposes.
The downside to this type of plan is that the IRS classifies it as a retirement plan and will penalize you for early withdrawals. The major benefit is that if you elect lifetime payments at retirement, the insurer guarantees to pay you until you die, even if you actually drain the investment account – the insurer keeps paying you.
Gold can protect your savings by acting as a hedge against economic uncertainty. Using a Gold IRA also allows you to buy gold periodically over time. The benefit of this is that you don’t have to come up with several thousand dollars to open up a gold account.
The downside to this is that the IRS will assess taxes on the value of the gold if you ever take physical possession of it. Then, when you cash it in, it assesses tax on the capital gain – ouch. So, make sure you keep it in the IRA if you opt for this investment strategy.
Another method of buying gold is to buy it directly from a broker. By doing this, you avoid the disadvantages of an IRA. But, you also potentially increase your risk by holding it in physical form unless you also buy additional insurance for the metal, which adds to the cost of ownership. You can also elect to store it in a protected commercial vault but, again, this increases the cost of ownership.
Harold Dayton is a commodities investment strategist. He enjoys researching various investment strategies and sharing his results and ideas through blogging.