Everyone loves to invest but most people think investing is risky. It is only risky if you don’t know what to invest in and how to invest. The biggest fear of investment is loss of money. No one wants to lose their hard earned money, so they rather have their money sitting pretty in their savings account earning 0.01% or in a CD (certificate of deposit) earning 3%. Either way, this is not investing. With 0.01% interest rate your money is depreciating in value. With 3% in the CD, your money is barely keeping up with the inflation rate.
What I’m trying to say is, most people think these are safe place to park their money is a delusion. Your money is losing value, which means your $10,000 you deposit today, will not have the same $10,000 purchase power in 10 years.
For the other braver individuals, they invest in the stock market. Of course, we hear every day from people who make big money in the stock market. But the number of these people are far and few, in fact, only between 1-3% of people does well in the stock market.
I don’t care where you get the source from, all these articles that boast the best stock to buy this year, you can’t trust any of them. What about next year? What about the year after?
The only way to invest wisely in stock market is to know how to read the company’s financial statements and know the company’s financial health. Most of us are not well educated in this area.
Let me ask you. If you have a financial advisor, is he or she wealthy and makes his or her fortune in the stock market.
We all know in order to make money in the stock market is to buy low and sell high. Unfortunately, most people do the opposite. When the market is low, we panic and start to “panic sell”, and when the market is high, we don’t want to miss out so we buy high.
Not only that, when your stocks lose 10%, you’ll need a 11% gain to make up what you lost. If you lose 20%, you’ll need 25% to catch-up. So it’s true that over time and with regular purchase, you hope to even out your cost and make money after 10 years. But that’s still optimistic wishing.
Here I’m going to propose a couple of investing vehicles that minimize risk and maximize return on investment.
1. Real Estate
People always think investing in real estate is risky. It is only risky if you don’t know what you’re doing. Investing in the stock market is risky too, for the same reason. But, how funny, people would jump into buying some stocks that their coworkers recommend without second thoughts. Isn’t that riskier? Without any knowledge of the company’s financial status?
The common mistake that most people make with both real estate and stock market is that they try to “time the market”. We all know to reap the most profit is to buy low and sell high. Unfortunately, most people does the opposite based on their emotional state. When the market is going well and price is high, we don’t want to miss out, so we buy high. Then when the market starts to go down, we panic and sell low. So that’s how it goes. We make investment decision based on our emotions, that’s how investing in real estate and stock market become risky. You let you emotions drive your decisions.
What if you know how to do cash flow analysis and read financial statement? All of a sudden you don’t need to time the market, because there is no such thing as “the best time to buy”. You will realize anytime is a good time to buy and sell as long as you find “the deal”.
This is where I can help you find the right deal. Contact me to get you the best real estate deal to add to your investment portfolio.
Read more about the Benefits of Investing in Rental Properties
2. “Indexed” Universal Life Insurance NOT JUST Universal Life
This is a lesser know investment vehicle. To majority of the population, life insurance is like car insurance to them. That’s the cheapo term life insurance they’re thinking about. I wouldn’t waste my money on those.
But there are many different types of life insurance. The one that I’m going to discuss in particular is the indexed universal life insurance.
What makes this life insurance so special and qualifies as a safe and sound investment?
This is where the Be Your Own Bank (B.Y.O.B.) concept comes in.
Everyone dies, no doubt about that. It is just a matter of when. When you buy life insurance, your life insurance has a face value, which is the amount of money that your family gets when you pass onto your next life.
In a cash value life insurance, part of your premium pays into your “cash value account”, kind of like a saving account. This is “the bank” part of the life insurance. This cash value grows during the enforced years of the policy. As this pile of cash grows, you can borrow from this stash to use to buy other investment, such as real estate.
Do you or your family keep this pile of cash?
It depends on your insurance policy.
If you have a whole life insurance, you can still have a growing pile of cash that you can borrow during your lifetime. But when you die, you family gets only the face value amount, and the insurance company keeps the cash. That’s is why whole life insurance is cheaper. If you borrowed from the cash pile, but did not pay back all you owed, the insurance company will deduct your remaining balance from the face value before they pay out to your family. Not to mention the loan interest rate is high. You’re still borrowing from someone else. This is what many companies advertise as “Bank on Yourself” or “B.O.Y.”
On the other hand, if you have a universal life insurance policy, your family will get both the face value amount of the policy AND the whole sum of the cash pile including earnings over the yeas upon your passing. The premium for this policy is usually higher because you are putting extra money into YOUR OWN BANK.
This is the “Be Your Own Bank” or “B.Y.O.B.”
Then, there is the INDEXED universal life. This is like the Rolls Royce of life insurance. So you have all the benefit of the universal life PLUS guaranteed growth of your cash pile.
How do they guarantee growth?
The cash pile in life insurance usually grows according to whichever stock index the company chooses. In the indexed universal life, it is the same. The difference is the floor rate. If the stock market tanks, you’ll still earn 0.75% interest. There is a cap or maximum rate, which is 15%.
Why is this important?
If you lose 10% in the stock market, you’ll need 11% growth to regain your loss; a 30% loss will need 43% and a 50% loss will need 100%. This is the reason why very few people can accumulate wealth in the stock market, because you’re constantly chasing your last losses.
Lastly, you can borrow from your own bank or your own stash at a low interest rate compared to borrowing market rate. This is how many people use a cash value life insurance to supplement their retirement income.
Contact me to find out if the indexed universal life policy can add value to your wealth building or retirement portfolio.