Lessons From a Former Mutual Fund Investor
I have been studying investing since my undergraduate college days where I studied Finance. Ironically, it wasn’t for many years after college that I really started questioning the common advice being offered by mainstream financial planners.
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When I did, however, I realized how wrong that common advice was and totally changed my approach. Since then, I have been involved in the financial services industry, now concentrating on structuring Equity Indexed Universal Life Insurance policies that creates tax-free income for my clients -though I will not be limiting my posts to EIULs (boy would those be snoozers!) Instead, I will talk about all things surrounding investing and the economy. I have been a long-time fan of real estate investing and believe that owning an EIUL is a perfect complement to real estate.
This first post I want to briefly talk about my voyage from the standard, ” mutual funds inside a 401k/IRA wrapper,” strategy for retirement income to where I am now. I’m sure many of the readers have had similar voyages. There are some lessons to be learned from our earlier mistakes.
Signs of Trouble
In the late 1990s I started to get a funny feeling about my retirement funds which were invested in mutual funds inside an 401K and an IRA. There was so much emphasis on “the number” or the numeric goal you hoped to reach by retirement time that it seemed to me to simplify the process too much. At the same time people were assuming very high average rates of return from their mutual funds, some even over 20%. That is when I started to really look at historic stock market returns and immediately noted several huge issues. The first was the actual sequence of returns from the stock market was highly variable creating what is called “sequence of return risk.”
It became apparent that a large market swoon within 5 years before or after retirement was not only likely, but almost guaranteed. The only way to avoid this was to move out of the stock market sometime earlier which of course kept your overall returns low at a critical time. The other issue was that you never could really get a handle on how long this money was needed to last for (or put uglier: when you were going to die.)
It became apparent that the cycles in the stock market were very long and unpredictable so it was entirely possible that you would spend a large portion of your investing life in bad stock times. Finally, it wasn’t entirely clear how best to turn your mutual fund wealth into retirement income.
To put this in technical terms there were three risks unaccounted for by mutual funds; sequence of return risk, economic risk, and length of life risk. It was easy to see how any of these risks could create havoc even with a carefully planned retirement strategy that depended upon mutual funds no matter how they were balanced.
It also became apparent that there were opposing camps of advice that seemed to be more interested in fighting each other over client dollars than to figure out what were the best retirement strategies for folks. The stock salesmen and the insurance salesmen spent much of their time demonstrating their opposition’s approach was dangerous instead of actually looking at the results of their advice that was streaming in.
By the way, the results of their advice was, and still is very ugly.
The other idea I found somewhat vexing was the idea of diversification. There were many good to great investors that simply did not believe in the need for massive diversification of stocks and even the original work done on diversification was of diversified asset classes not diversification within an asset class.
Six Fundamental Ideas to Keep In Mind
So that is where I found myself with all these ideas rolling around in my head and no strategy in place to account for them.
These ideas are important and should be kept in mind for all investors:
- It’s not “the number” that is important, but the income generated by the investments;
- Variance is an enemy of retirement income seekers;
- Deferring income taxes is a losers strategy because no one can predict what the income tax rates will be in the future and [here is an obvious one]our goal should be to have as much income as possible, pushing us up to higher income tax brackets in the future if we defer the tax;
- One really good investment is much better than 10 mediocre ones;
- Time is always a question mark with investing, so investments should be able to work together to account for the unknowables around how long we live, how long we can actively manage our investments, how long we have to produce money for investments, etc.; and
- Whenever the government and a large influential corporate cabal get together to make you a deal that seems great remember they are not doing this for your benefit but for theirs!
The Path Less Traveled
My search for answers found me focusing on three areas:
- Real Estate;
- Insurance products;
- Growth stocks (including dividend producing stocks.)
It took me a while to get out of my 401k with mutual funds but after around 8 years I accomplished it. This is all described in my blog, which I started in 2008. During my journey I made a decision to get my insurance license and sell Equity Indexed Universal Life Insurance because I found the product so useful and the average life insurance agent so ignorant on how to use it.
It has been a strange journey to having a niche life insurance business structuring policies for maximum cash value build-up, but it has been fun.
I hope to share much of what I have learned with BiggerPockets. Along the way if you have any questions or suggestions for posts please let me know, I can use all the help I can get 🙂
Thanks for the opportunity,
Photo: David Evers