Reasons To Avoid Whole Life Insurance – The Eggerss Report (9-23-2017)

On this week’s show, Karl discusses the Fed taking off the other training wheel. And, Karl gives you the various reasons to avoid whole life insurance.

Transcription of Show:

Karl Eggerss:                      Hey everybody. Welcome to the Eggerss Report. It’s your investing playbook. My name is Karl Eggerss. Eggerss Capital Management is a fee-only independent registered investment advisor, and our telephone number is 210-526-0057. Our website is eggersscapital.com. Lot of things on the website. First of all, what you’re going to find is ways to get a hold of us. Number one, our telephone number, our address. On top of that, you’re going to see the social media links: Facebook, Twitter, Instagram are all on there.

There’s a little something for everybody. If you’re somebody that wants to know what’s going on day-to-day, things of that nature, what you will see on Twitter is economic releases, comments, things that we’re observing throughout the day. Our Facebook page, you can like us on there. Our Facebook page has our articles, has our shows, things like that. Then Instagram are going to be for you that like technical charts. We put those on the Eggers Capital Management Instagram page, which is fairly new, and I think I mentioned last week that we also have a new Twitter handle called ETF charts, @etfcharts, and that is exactly what it sounds like. We’re going to put charts of ETFs that we think are interesting, whether they’re charts of things you should be looking at that might go higher or, on the other hand, you may want to avoid. Those are a couple of different things.

The other thing that we’re going to start doing, probably in the upcoming week, is we’re going to have a new video series called Technical Tuesdays. In the past we had done some video podcasts for a long time and, while we got a lot of positive feedback, we did hear some people say, “It’s hard for me to sit down and watch a 30-minute video.” We kind of stopped doing that, and couple things we did was the audio podcast that we do. Of course, we’ve made it available with a transcription now, so that you can actually read the podcast, which is pretty neat.

The other thing that we’re doing with this Technical Tuesdays, it’s going to be very short. These will be probably two, three-minute videos highlighting something big. It could be an ETF. It could be a stock. It could be the market overall. Just something that we’re seeing that you need to be able visually see to help you become a better investor. We’re going to be calling that Technical Tuesdays, and of course you could go to our YouTube channel to see that, and of course we probably won’t put that on our blog, so make sure that you check out our YouTube channel.

You’ll have to go look at that, but anyways that is some information about us and on the website. Of course, if you need any help with anything financially related, let us know. We are a place for learning, we’re a place for financial planning, and we’re a place for investment management. 210-526-0057 or eggersscapital.com.

Well, this week, probably the biggest highlight of the week was the Federal Reserve. The odds of them raising rates at their December meeting have gone up to about 65%, we’ll call it. The majority of folks that are putting their money where their mouth is in terms of where rates might go are betting that the Federal Reserve is going to raise rates by a quarter of a point at that December meeting. We’ve seen some mixed signals with the economy recently. It’s not rip-roaring, but at the same time you have to think about it. When people are fearful of the federal reserve raising rates, it’s because they feel like they’re tightening. They’re trying to slow something down. This is not what they’re doing. What they’re doing is unloosening, and there’s a big difference, right? They have kept rates so low for so long. What they’re doing now is saying, “You know what? We need to actually just take that away.” It’s not as if they’re tightening, trying to slow everything down, but they’re trying to prevent runaway inflation at some point in the future.

Now, before you laugh, because we don’t have runaway inflation and you think, “What on earth would cause that?” It could pop up at some point. In fact, think it was either this past week, yeah, I think it was this past week that FedEx said they’re going to raise their prices by 5%. Eventually, that’s going to trickle down to you and I. That is inflation. Regardless of the reason why they’re going to do that, that is inflation. Do we start to see more and more of those types of things that could cause inflation, and if so, then the Fed would scramble to raise rates to try to prevent wild inflation. Some you had voiced concerns in retirement that you’re worried about runaway Carter-style inflation. I don’t think we’re going to get that, but I do think we’re going to get more inflation than what we have seen in the last few years.

Of course, in 2008 we saw deflation, did we not. We saw things going down in price quite a bit, almost everything. Real estate, stocks, bonds, everything lost value in 2008. That was deflation. Now we’re back to moderate, low inflation. The Federal Reserve may raise rates later this year, dependent on what’s going on. Of course, we know because of the hurricanes we’ll take a little hit to GDP, but they’re kind of looking at that saying, “Yeah, but that’s temporary.” They’re on course to do that, but the bigger news was them further reducing their balance sheet.

Remember back in the fall of 2014? You probably don’t because you don’t really remember some of these financial dates like I do, because you got other things to think about, right? But in the fall of 2014 they said, “We’re not going to do quantitative easing anymore.” They ended it. The market had a tizzy fit and basically said, “Whoa, whoa, whoa, what do you mean you’re going to take the training wheels off? We need you.” The market went through some turbulence in 2014 and even into 2015. A lot of turbulence.

Remember Flash Crash 2.0 in August of 2015? That was some turbulence. The market adjusted to that eventually, and obviously eventually went higher, but it was a temper tantrum, or what they called a taper tantrum. The fed said, “We’re not going to inject any more money.” Now, here’s what they had continued to do from 2014 until now. When a bond matured or the interest payments of all these bonds that the Fed owns, when those would come in, all that money, they would reinvest it and go buy more bonds. They’re still putting money into the system, quite a bit. It’s just they weren’t taking new money.

Again, it’s kind of like you owning a security, you either reinvest the dividends or you don’t. They said, “We’re going to stop reinvesting the dividends,” is basically what they said this week. Markets kind of went a little bonkers, but very, very minor in the big scheme of things, and of course brushed that off. What we’re seeing now is, can the stock market completely live with the training wheels taken off of the bike? That is the big question, because what’s happening now is there are people out there that believe that the stock market has been propped up by the Federal Reserve by A, keeping interest rates low; B, doing this quantitative easing and putting all this money back into the system; and C, companies buying back their stock, called stock buybacks.

What happens is companies, they make a profit, they can choose to spit the money out in a dividend, they can reinvest in equipment, they can do research and development, or they can buy their own stock back. Many companies have actually borrowed money through a bond, they borrow money and then they go buy their stock back. There’s an interesting chart floating around right now that shows stock buybacks on top of the stock market, and it’s pretty correlated, but in the last year or so the stock buybacks have gone down, yet the stock market continues to go up. Again, if those two things are correlated, then stock buybacks are going down, will the stock market eventually fall?

Here’s the difference though: Earnings. Remember, we always talk about that on the show, earnings or profits of companies is the key over the long term for the stock market to go higher, and that is going higher right now. So have they, the Federal Reserve, successfully taken one training wheel off, and they’re in the middle of taking a second training wheel off, will this economy and the stock market continue? We don’t know that. I can tell you that I still think the bull market has legs. I think the economy doesn’t look like it’s going into recession anytime soon, but it is still subject to a shock of some sort, right? I mean, there’s a lot of things that could derail the economy.

Some of the economic reports that we had seen the last year or so have slowed down a bit. I mean, the economy isn’t growing as fast as it was, so let’s see how this plays out. But overall we’re still near highs, and again I mentioned last week we’re going to be talking about over the next few weeks, and writing about, what the next bear market will look like, because we believe it will look very different from the 2008 bear market and perhaps even from the 2000 bear market. Look for that coming up.

Now, some of the things that kind of moved this week, probably some of the bigger movers, and it wasn’t a huge move, but transportation stocks did very well and a lot of people are watching those, because back in July and August they were falling. Many folks said, “Uh-oh, they went below their 200 day moving average, and if transportation stocks are going down, then surely the rest of the stock market’s going to go down.” Lo and behold, they bounced back to new highs. They were one of the leaders this week. Aerospace and Defense has just been fantastic, but those stocks are expensive, so that is an area we would not want to participate in right now. Aerospace and Defense, though, did very well this week. Obviously when you get the consistent trash-talking, essentially, between North Korea and the US, you’re going to get Aerospace and Defense stocks going up, right?

We also saw interest rates move higher, and so because of that banks did very well this week. Technically they’re at a spot that they may take a pause, but they had a very good week. Energy, we noted a technical breakout a few weeks ago on energy, and it’s continuing. You’ve seen a nice move up in anything energy-related, and the longer oil stays around $50 a barrel and it doesn’t fall back down immediately, the longer it stays there and perhaps moves a little higher, you will see I think those companies continue to move up because I think people will perceive them as a value in this fairly expensive market.

Now, on the downside this week, silver, gold miners. One thing that we did this week is we actually purchased back into gold miners in our aggressive strategy. If you recall, we saw a technical breakout back in early August for gold miners, so we went ahead and bough gold miners in our aggressive strategy through an ETF. It ran up. We made really good money in a short amount of time. We took profits on that. Lo and behold, gold miners did exactly what we thought, which was pull back. Now we think they’re at an interesting spot once again. Again, that’s an extreme short-term trading where we’re doing something in weeks, not months or years, and that’s why we talk about it in our aggressive strategy, not maybe our other strategies that are meant for more longer-term investing. But gold miners had a tough week overall, which is why we wanted to buy back into them.

Also utility stocks, because rates are going up, you’re starting to see utility stocks sell off, which is something that … And consumer staple stocks, which are two of the areas that we really hate the most. We think that they are overvalued, and obviously when interest rates go up people are going to abandon the high dividend kind of borrowing consumer staple type stocks. Utilities, consumer staples, even publicly traded REITs had a tough week this week. Those were kind of your barbell, your things that did very well and your things that did poorly.

I always tell you, I want to share with you sometimes, things that come out of client meetings where we’re meeting with somebody and we hear certain things they say or certain situations, and we think, “Boy, this is really interesting.” We often wonder how many other people are either thinking something or been affected by something. One of the things I wanted to discuss was somebody had told me that they talked to another advisor who recommended that they put their money in their 401(k) and do the Roth side of things. Okay, I don’t disagree with that, depending on their situation. But then they said, “And they also want me to fund a whole life policy, a whole life insurance policy.”

I’m sitting here thinking about this, which whole life is, I mean, what are we, in 1985? It’s amazing that we’re still here and consumers know as much as they do now about these scams, which is really what I think some of them are. Obviously having insurance is something that people need, but how you get it can be very different. Whole life policies were something that really were popular in the ’80s because interest rates were so high, and they were sold as an investment, which is very wrong. They were sold with these projections, like, “Well, if you just continue to make this 9% a year, look how much money you’re going to have in these insurance policies.” They pay big, fat commissions to insurance agents, which is why they still exist.

Life InsuranceBut what’s happened is, as interest rates fell and fell and fell, all of a sudden the insurance part of it costs more and more each year to insure you because you’re getting older, and it started to cannibalize the cash value in some of these, and then you get a notice that says, “Hey, by the way, to keep this policy going you need to dump in $3000.” That’s happened a lot. I’ve seen that. The sales pitch is always, “Hey, it’s guaranteed. You’re going to get this, you’re going to get that, and by the way you can borrow off of this tax-free.” Well, of course it’s tax-free. It’s your money coming back to you.

What’s interesting is, had a gentlemen in this week who said he’s had this life insurance policy since he was 19 years old, and he’s been putting in a certain dollars amount since he was 19. He’s 62. I ran the numbers on it, and he’s made .75% per year since he was 19. Now, think about that. When he was 19, interest rates were much higher. He went through some times where rates were much, much higher, and yet he still during those times made .75% per year. Now, did he just get his value? No, he’s had insurance along the line. So yes, he got some insurance, but it wasn’t that much. Think how much money that could’ve been had he put it in something else.

But yet there’s still folks out there today selling this stuff, and not only that, there’s people buying this stuff. Do not be one of those people. If you need insurance, term insurance is the cheapest. It’s like automobile insurance. If you don’t use it and after a certain amount of time it goes away, you paid for the insurance while you needed it and then it went away. There’s no cash value. It’s typically a flat, standard premium, but you buy it to insure against something. For example, what if I pass away? I need my wife to have some money to pay our mortgage. Okay, well then maybe you tie your insurance to when that mortgage is going to be paid off. The kids will be out of school. That’s why people do term for a certain amount of time.

I mean, if you look at whole life, the fees are very high. There’s tremendous commissions involved, which is why they recommend them to you. Even if you say, “Well, I could put it in mutual funds inside of the life insurance even.” Yes, but why would you need to pay extra to do that? It’s not very liquid. Rarely, rarely does whole life make any sense, and yet people still believe it because fear sells very well. To say you have guaranteed money, and it’s going to protect against this, and it’s tax-free, but you’re paying a huge premium for those “benefits,” okay? Be very careful about that.

One other thing that kind of popped up this week as we talked to different people in different situations is a gentleman came in that was very aggressive and had done well being aggressive, primarily in all stocks through the last several years. As he’s approaching retirement, he said, “What I think I’m going to do,” he said, “the last bear market in 2008 took about five years to recover. Therefore, what I’m going to do is take five years’ worth of expenses in retirement and put them aside in a savings account, and then I’ll leave the rest in stocks.” On the surface that’s a pretty smart plan because he doesn’t have to sell stocks when the market goes down if he needs money, because he’s got this cash reserve sitting there. The problem is, in his particular case, that amount he was going to put aside was literally about a quarter of his investments, his savings. He’s taken basically 75% putting in stocks and 25% and putting it in cash, or money market, or savings.

The problem with doing that is that he’s deluding his overall return. In other words, his safe stuff’s not earning enough, and it’s okay what he’s doing with the stock portion, but what makes sense in that scenario is to layer these things. For example, maybe keep a year’s worth of expenses in his case in safe money market, or six months, whatever the case may be, and then take the next layer and put it into something that is lower to medium risk, income-based, and then take those last dollars and put them in the stock market. I think his thought process was correct because he is saying, “When do I need the money? That will determine how aggressive or conservative I am.” I think that’s smart. That’s the way you have to think about it. If you need money next month, next month, or a year from now, you don’t invest it. If you need money five years from now, 10 years from now, 15 years from now, you invest it, and the longer you don’t need it, the more aggressive you can afford to be, because you can come back from selloffs.

But one other thing to think about is he was only looking at one major selloff, which was 2008. When he says it took about five years to recover, that was that bear market. What if the next bear market, the market goes down 5% per year for 10 years? It’s kind of death by a thousand cuts. If that happened, he didn’t plan properly because he planned for it to recover within five years. You can’t make this a science like he did in such a way where you look at one bear market, which is one set of data, and you say, “Hey. It came back last time within five years, so it has to do that the next time.” That’s kind of like saying, “This mutual fund made 10% last year, so surely it’s going to make 10% next year.”

But that is a planning thing. If you’re going into retirement, how do you allocate your investments? In his mind there was two options: Stocks or cash. Of course, there’s a lot of gray in there. There’s plenty of things like we’ve talked about before, alternative investments, institutional-type credit funds, including stocks and money market, right? All of that is part of a portfolio. The mutual fund industry really wants you to believe that it’s just stocks and bonds. You want to take less risk? Add bonds to your portfolio. Well, what if you believe bonds are a horrible deal right now, which they probably are? Well, that’s all we have, so that’s all you’re going to get.

Those are a couple of things to be aware of. Number one is how you plan in retirement, when you need the money, and obviously the tax. We talked about tax optimization as well with his investments, which was something he hadn’t thought about. Then secondly, this whole life insurance issue. It’s really the same argument with annuities. Annuities and life insurance typically have the same sales pitch, and they have the same slick brochures, and they pay the big, fat commissions to people that work on commission, which is the insurance agents, and some advisors that do that. For me, I would tell you, “Pay for advice.” You want to talk to somebody who does not work on commission because you know you’re going to get good, independent, unbiased advice.

All of these things prey on your fear, and they pay big commissions, so you pay a big premium. Sometimes you just do the math and you’ll figure out that this doesn’t make sense. How can this person get paid this, which typically they don’t disclose, but how could they get paid a 5 or 6 or 7% commission, pay me some guaranteed interest rate, do all these fancy things they’re talking to me about, and yet the prevailing interest rates in this country on a 10-year treasury bond are 2.4%? How does the math work on that? The answer is it doesn’t work, and you will find that out later on, either by reading the fine print or as you experience that, “Hey, this isn’t working the way that the illustration said it would.”

Just a little bit about that. Hey, by the way, for those that don’t know, we do have a free tool on our website. If you just go to eggersscapital.com/tool you will see on there a place to link or put in manually your investments, your checking accounts, your credit cards, your mortgage, all of that can be linked so it’s dynamically changing that you can access any time, and if you link a credit card and your bank account, what you will see, and it’s a secure way to do this, but what you will see is it will look back three months and actually show you where you’re spending your money. That’s a free tool we have on the website eggersscapital.com/tool, and just a reminder, if you ever need anything from us, it’s 210-526-0057. Of course our website is eggersscapital.com.

Just a reminder, all these different things we’re doing are fairly sporadic in terms of when we can post charts, when we can do articles, really depends on how much free time we have, which isn’t a lot. Yes, we do work a lot, but we try to bring you information. That’s why we’ve added the Technical Tuesdays we will be doing on YouTube, we added the charts on the Instagram page for Eggers Capital Management, so go check that out. If you need anything from us, again, eggersscapital.com or 210-526-0057.

All right guys, have a wonderful weekend, and we will see you back next week here on The Eggerss Report. It’s your investing playbook.

Speaker 2:                          This show is for entertainment only, and information provided by the host, guests, and this station should not be deemed as advice. Your investment decisions should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in this show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.

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