Investments and Savings Opportunities.
“The individual investor should act consistently as an investor and not as a speculator.” Benjamin Graham
"There are times to make money and there are times to not lose money." -David Tepper (Hedge Fund Billionaire)
Do you know what time it is?
The stock market has been the default investment for a generation. And it has built wealth for many. But will it be the place to put your money in the next decade?
Inflation is NOT transitory
All year the Federal Reserve has shoved down Mr. Market's throat that inflation is transitory. I would encourage all of these government workers in their gilded offices to spend a week touring grocery stores and maybe do some real on the ground work because they have set investors up to fail.
Oil prices are at seven-year highs. Natural gas prices have nearly doubled in six months. Gas prices along the West Coast are north of $4 a gallon, according to AAA. Cotton prices are up 25% since Sept. 20 (stat complements of NYSE analyst Michael Reinking).
And with labor shortages across the board, business are being forced to raise wages. You don't move a shelf stocker's salary from $12 to $15 (a 25% increase) and then take it away six months later.
Inflation is appearing so sticky that "stagflation" — a slowing economic growth backdrop and high levels of inflation — has become the topic du jour among clients at Goldman Sachs.
"Stagflation was the most common word in client conversations this week as equity market volatility remained elevated," said David Kostin, Goldman Sachs U.S. equity strategist.
Markets have historically hated stagflation, per Goldman's research.
"During the last 60 years, the S&P 500 has generated a median real total return of +2.5% per quarter, but that quarterly return fell to -2.1% in stagflationary environments", Kostin added.
How does inflation affect the stock market?
One of the most common methods used to value a stock is the sum of its future cash flows. Now, this might be a bit deep for some, but bear with me…
When inflation is only around 1-2% a year, there’s not a big difference between the value of next year’s cash flow and one much further out.
However, when inflation begins to rise, that gap widens. That’s because the further out those cash flows go, the more they’re devalued by a rise in inflation.
For example, with 2% inflation, $100 of cash flow ten years from now would be worth around $82 in today’s dollars.
However, if inflation were to rise to 5%, the value of those same dollars now drops to around $60 in today’s money.
That’s a huge difference.
Just a 3% increase in inflation devalues that future cash flow (10 years out) by over 20 cents for every dollar. And that can dramatically decrease the current value of a company’s stock.
But, the real challenge lies within the nature of those cash flows…
If you consider a normal industrial stock like 3M, for example, you might expect its cash flows to grow steadily from one year to the next.
And that means inflation will erode the value of those cash flows at a relatively constant rate.
However, with a growth (or tech) stock, those cash flows are very different. Investors are buying into these stocks on the premise that cash flows will grow exponentially over time.
In other words, they expect cash flows in the future to be multiple times higher than they are right now.
Because the vast bulk of those cash flows are expected many years out, they are more vulnerable to devaluation by inflation.
And that means the current value of those cash flows – and the current value of that stock – is also devalued. That has major ramifications for the market.
Put succinctly, a rise in inflation could lead to a big drop in value of growth stocks – causing a domino effect on the rest of the market.
Now, it’s true that stocks can get much more expensive… Investor speculation and euphoria can keep driving up expensive stocks, making them even more expensive…
But as I say, prepare. Don't predict.
The truth about the stock market has been obscured for too long. Pushed by Wall Street, "too big to fail" banks and their government cronies, mutual funds, ETFs and stocks are now the mainstay of most retirement plans. These investments represent more risk than many have assumed. We are 'saving' in risk assets; not in safe assets.
And Americans are more in love with stocks than at any time in at least 70 years, according to a recent Bank of America report.
The report said that equities now make up about half of the roughly $109 trillion in American-owned financial assets at the end of the second quarter. That's a larger proportion than any time since at least 1951.
The benchmark S&P 500 Index just hit another all-time high this past week.
And equity investors are using more margin debt than ever.
Is this sustainable for the next decade?
Some investors are waking up to these inconvenient truths. They’re searching for assets and investments outside of the stock market, and they’re taking their money elsewhere.
In May 2021, Investopedia surveyed the average investor, concluding that 42% of those surveyed had less trust in the stock market than they did six months prior. Some of this can be chalked up to the day-trading volatility of the year’s earlier risky trading. And unfortunately, this isn’t an anomaly. With millions trading stocks based on Reddit tips for fun and hoped-for gain, the stock market has become detached to fundamentals. Ben Graham wouldn't recognize it.
Clearly, it is time to expand our options beyond Wall Street. It’s time to utilize new and old investment vehicles to provide solid returns without unnecessary risk and speculation. It’s time to make investments outside of the stock market the norm, rather than the exception.
If Not the Stock Market, Where Do You Put Your Money?
Consider your answer to this question carefully, because the ramifications can be enormous. Here are a few traditional options:
While bonds are not without risk, fluctuate with interest rates, and yes, can lose money, their track record as a less-volatile investment has been admirable. Bonds are seen as the lesser-performing, duller counterpart to stocks.
Still, bonds remain a popular choice for investors wanting investment income that won’t roller coaster-like stocks while producing better returns than savings accounts.
In fact, investors are downright giddy for junk bonds these days...Bond prices are stretched to absurd levels... Junk bonds now yield less than 4%, on average.
That's the lowest junk bonds have ever yielded. (Remember, as bond prices rise, yields shrink.)
Junk bonds are supposed to pay you the highest rates because they're the riskiest of all debt.
And it's even worse nowadays when you factor in inflation…
The 'real' interest rate on junk bonds is less than zero today…
The interest rate adjusted for inflation is known as the "real" interest rate. And when you deduct the latest inflation figure – a 5.3% rate – the real interest rate for junk bonds is negative 1.3%.
That's right... the riskiest bonds in the market now yield less than nothing. If that doesn't scare you, I don't know what will.
Bond funds are a dangerous place to invest in a rising rate environment because they are practically guaranteed to lose money.
Many people fail to stretch outside the stock-vs-bond box. “Are you young or do you have a higher tolerance for risk? We’ll put you in 90% stocks, 10% bonds. Have you retired or are you a conservative investor? We’ll choose a bond-heavy portfolio. Somewhere in between? We’ll split the difference between stocks and bonds.” Millions are following these tired exhortations. And that's again to the benefit of the banks and Wall Street. Their objective is to get as much money as they can under their management for as long as they can.
It’s no wonder that so many investors remain unaware of other options! We encourage investors to look at investments beyond the box.
Whether rental homes, second homes, apartments or commercial real estate, real estate assets allow investors to enjoy leverage, tax benefits, and the security of a “real” investment. Not sure you want to be a landlord? You can have others manage your properties for you. Newer crowdfunding options such as Roofstock and Groundfloor allow individuals to participate in real estate with minimal headaches.
Today, the preferred 'buy and hold' strategy involves land banking. What is land banking? It's buying land before it's needed for development, based on growth projections. Then holding it for a few years and selling it for more than you bought it for. MUCH more. Double-digit returns have been achieved for over a decade.
Major companies and investors have been building wealth this way for many years; however, the average investor has been unaware of the opportunity. And you can get started for $40,000.
We know that land has been a favorite investment opportunity for many generations of ultra-wealthy individuals. And it's uncorrelated to the stock market.
John Malone, former CEO of Tele-Communications Inc. and one of America’s wealthiest individuals, owns 2.2 million acres of land. Ted Turner, another extremely prominent and wealthy American media-mogul, owns over 2 million acres. Additionally, the Harvard Endowment Fund, which is worth $30 billion, holds 10% of its assets in land investments.
Why is land such a popular investment? And is it only for the super-rich?
Here’s the reality: If you don’t invest in the handful of assets that can keep your wealth growing ahead of the Fed’s money printing, you’ll be doomed to a life of very limited options.
When you add land to your portfolio, you're adding a tangible asset that will always have value-it's real property protected by a deed, historically proven to be a stable and sustainable investment.
Permanent Life Insurance?
Even more so than bonds, cash value life insurance is a great hedge from the market and is recognized as one of the most “certain” places you can put money. When built and funded properly, these assets have a number of surprising benefits…
If you can find any other financial product with this combination of benefits, please tell us about it!
With permanent life insurance you can...
- Grow your money at up to 7% over the long term
- Have a contractual guaranteed minimum growth rate
- Compound your money tax-deferred (pay no taxes on gains each year)
- Completely avoid risk of principal loss—meaning you can sleep at night knowing your account balance won’t go down in value (even if the stock market crashes 50% tomorrow)
- Safeguard your money in a place with a century-long track record of safety.
It’s such a safe vehicle that you can also…
- Protect your money from creditors or lawsuits (in most states)
- Contribute unlimited amounts to it (unlike an IRA or 401(k))
- Avoid reporting it to the IRS come tax time
- Access your money anytime without penalty or withholding taxes
- Build a line of credit to use for any reason—no questions asked.
One of the first rules in preparing for inflation is not to lose money. Because if you lose money, you not only have to make up for the loss, you have to catch up to the loss in purchasing power of your money…a double whammy. These contracts will not lose money.
Many may not understand the value of permanent life insurance for long-term care. The best policies allow for acceleration of the death benefit when needed. Another 'living benefit' offered by this versatile tool. This can:
- Spare the spouse from having to spend down the majority of their retirement assets to pay the devastating costs of long-term care for their spouse.
- If forced into spend-down, the spouse gets to keep one house, one car, a minimum monthly maintenance needs allowance (MMMNA) of about $2,500 per month, and about $128,000 in cash. The IRS could even force the community spouse to surrender a portion of their guaranteed lifetime income annuity to pay for their spouse's long-term care!
As you can see, there are many benefits to cash value life insurance. Two different people might choose to open an account for totally different reasons. That’s one of the things that makes it such a powerful financial tool.
Insurance policies are not investments; however, they have savings potential and liquidity…often better than actual banks. In fact, banks are putting more and more of their assets into permanent life insurance, which is used largely to fund bonuses and pensions. According to Independent Banker, “Two-thirds of banks in the U.S. hold BOLI assets, according to the NFP-Michael White BOLI Holdings Report for Q3 2020. The cash surrender value of those policies totals $182.2 billion. Banks with less than $10 billion in assets have, on average, approximately 14% of capital in BOLI.”
Perhaps Americans would be wise to do what the banks and big corporations do and leverage their cash value (and yes, even their death benefit) to create income streams and build financial security. “The first beneficiary of your life insurance policy should be YOU.”
Start a Business?
Forty-seven percent of millionaires are business owners, over double the twenty-three percent of millionaires who invested their way to wealth while working for someone else (usually as a skilled professional or manager.)
In Killing Sacred Cows, Garret Gunderson shows how your 401k might be actually keeping you from wealth! Financial media sells us on the model of accumulation as the way to financial independence when wealth building is about the utilization of our talents and assets to create value. Money then becomes the by-product of creating value.
Business ownership, or self-employment, is one of the keys to wealth, not picking the right mutual funds. Starting a business allows you to find and expand your own prosperity rather than just be an investor in other people’s companies who you will never even meet. Franchise models using a tested business model have exploded over the past twenty years, and modern franchises are worthy of serious consideration. The new normal. Virtual. Build your business from anywhere. No restrictions on areas. Read more here.
Invest in Yourself
Prosperity isn’t something we save up for to enjoy in our golden years; it’s a way of life that pays dividends all along the way. Whatever you choose to invest in, use your finances to grow yourself as well as your assets. Learn a new language. Travel to a new continent. Become an expert. Write a book. Create something. Help people gain financial freedom while building financial freedom.
Not only does this give purpose to your life, but as you grow your skills, knowledge, and confidence, you’ll grow your own ability to build a life of Prosperity.
Want to know more about life insurance?
Contact us for details about how you can escape the mutual fund rut and automate your savings into a permanent life insurance policy with certainty and liquidity. This is the ideal foundation with which to build up other investments, including investing in yourself.