I liken this age-old question to the Tortoise and Hare analogy. If you want to accumulate wealth quickly, choosing a high risk path such as riding the roller coaster of Wall Street just might get you there or at least die trying. Or if you are already stressed out with today’s unpredictable economy and political environment, then perhaps you might want to take control of your money and put it in a safe place. A decent and predictable return on your money would be nice, little if any downside risk even better, and preferably without Uncle Sam taking his slice of your pie until much later in life, if ever.
Which one are you? Tortoise or Hare? If you are not sure, any wealth advisor worth their salt will determine your tolerance for risk through a series of probing financial questions and “what if” scenarios. Once the analysis is complete the advisor will present various methods in order to accomplish your investment goals. If you were not sure whether or not you favored slow & steady or fast & furious you will after this analysis.
Since we are discussing “safe” money it is assumed your tolerance for risk is on the low side i.e., you are a tortoise. Your Vegas days are numbered and your day-trading is over. You need to save money somewhere, but the banks 0.5% interest on savings accounts just will not cut it. Even a “whopping” 2.25% return on a 5-year CD fails to impress. Your 401(k) continues to suck wind, going up and down with the vagaries of an unpredictable stock market. In order to build real and sustainable wealth you may need to consider forgoing the high risk of playing Wall Street odds and go with something tried, true and safe.
Have you seriously considered insurance? I can hear it now – I heard insurance products are “bad investments”. Well, are they? Consider the source. The real answer to that question resides with you: what is YOUR opinion of a bad investment? Disregard my opinion, the so-called financial industry pundits and the relentless ads on TV. Go with your own gut. Ask someone you trust, perhaps your parents or grandparents who have spent their lives accumulating and preserving their money through the good times as well as the bad times. Then ask yourself, is my life and preserving my money a worthy investment?
Life insurance and annuities have been around a LONG time and are, by and large, responsible for the majority of wealth accumulation and subsequent wealth transfers between generations that has ever existed. Are they safe? Consider this: during the Great Depression, while banks and Wall Street crashed, the insurance industry maintained its strength and policyholder cash values were kept safe. In contrast, it is estimated that over 9,000 banks failed during that time, peaking again in 1989 with over 500 (Savings and Loan debacle) and just recently in 2010 when over 150 banks failed. You decide if history will repeat itself.
As a tortoise you believe that safety and guarantee of your principal is tantamount. Losing money is not in the cards, but making some money is always a good idea. After all, there is that pesky inflation. If prices go up and your money buys less there is a problem. The U.S. Government calculated 2013 ended with an average inflation rate of 1.5%. Not too bad, but certainly feels higher especially at the grocery store and gas pump.
Can a safe money haven such as a Fixed Index Annuity or Cash Value Life Insurance policy beat 1.5% in returns – emphatically yes, if structured correctly. Will these products match Wall Street with double digit returns? Occasionally, but when negative market adjustments happen as they surely will, safe havens such as these generally do not trend downwards. They patiently wait for the upward trend to resume, earning safe and reasonable returns on your money, giving you the restful sleep you deserve.
Capt. Rob Hamilton, Wealth Advisor