Creating wealth and legacies
by Tomas P. McFie, PhDMr. McFie PhD is the founder of Life Benefits (www.life-benefits.com) and author of multiple books including Retirement Curveball.
April 13, 2017 — It has been said that “Death and Taxes” are the only two things you can count on. So on January 5, 2017 when one of my mentors, John (Jack) Bogle, sent me a personalized copy of his book Don’t Count On It, I was elated.
You see, Jack Bogle is a financial superhero. He has proven that mutuality works; that even though something can’t be measured doesn’t mean it isn’t important and that everything that counts cannot be counted nor can everything that is and can be counted counts.
Wow, that’s almost a tongue twister! Never-the-less, these facts are important to understand if you want to create wealth. And so I highly recommend Bogle’s book Don’t Count On It for anybody that is interested in creating not only wealth but a legacy as well. By the way, Jack mentioned in his personal note to me that Chapters 1, and 22 are the best place to start as well as parts of Chapter 6. Just a heads up for those of you who might be intimidated by the size of this tome.
Out-Smarting the Market?
Today, in a world where people are constantly attempting to get rich by “out smarting” the market using detailed charts, computer created scenarios, historical data, and numerous other statistical spreadsheets and mathematical analysis; it is comforting to recognize what Jack has proven. And that is this: “Our best defenses against numerical illusions…are the immeasurable, but nonetheless invaluable, qualities of perspective, experience, common sense, and judgment. The too-often ignored reality is; that returns are shaped by, 1) economics and 2) emotions.”i
“When we face a 3% inflation environment along with taxes and intermediation costs (that) consume another 4% of returns, an average return on investment of say 10% is reduced to a real rate of return of only 3%. Costs and taxes have not destroyed 40% but 57% to 70% of your real return.”ii And that, my friend, is why Jack Bogle recognized that mutuality was the only answer for an investor to protect themselves from those pesky intermediation costs and, of course, taxes. Jack says, “while there’s no way escaping inflation, it is easily possible to reduce both investment costs and taxes almost to the vanishing point.” iii
The issue is that, “The conventional valuation of stocks is established by the mass psychology of a large number of ignorant individuals.”iv But like it or not, in the long run, it is economics that triumphs over the emotions of the masses. In fact, when current prices markedly differ from real corporate value, the difference can only be resolved by prices moving back towards real corporate value. When current investors emotionally lose sight of real corporate value, a bubble is created and sooner or later that bubble must pop, because real value always wins. That is because real corporate wealth is generated by creating value for clients or consumers NOT by putting corporate earnings before the needs and desires of clients and consumers.
All About Mutuality
This is why joining, sharing or participating in mutuality works so well when it comes to life insurance. Stock held companies that issue life insurance are concerned about meeting quarterly demands of their shareholders. As a policy owner in a mutual life insurance company you own part of the life insurance company itself and therefore as a participating policy owner you are rewarded when the company serves their clients and consumers well. You Can Count On It! Because of the guarantees.
Furthermore, because of this mutuality, the costs and taxes can be eliminated “almost to the vanishing point,” on your returns. That means that you don’t have to lose 57% of your returns to taxes and costs. But beyond that, Participating Whole Life Insurance is actually a hedge against inflation, that insidious hidden tax that we all pay more and more of, the longer we live.
With Participating Whole Life Insurance, this insidious taxation is greatly reduced because the premium dollars you use to pay for your policy are guaranteed to be the same, fixed for life, while the face value and cash value of the policy are not fixed but are guaranteed to grow for life. This means that your dollar spent on premiums becomes less valuable over time while the dollar amount of your face value and cash value continues to become more valuable over time. This reason alone is enough for anybody to appreciate the significance of owning Participating Whole Life Insurance.
Finally, “Professional managers as a group will inevitably earn the market’s return before the costs of financial intermediation, and, equally inevitable, lose to that return by the amount of that cost—now, I believe, in the range of $300 billion per year.”v Participating ownership in Whole Life Insurance allows you to over come the cost of money management by becoming your own money manager. And as your own money manager you have the ability to cover your liabilities, set up tax free personal retirement plans, finance acquisition costs, recover the cost of financing and over the long haul recover completely the cost of your insurance.
This is a much better way to build sustainable wealth than always losing 57% of your returns. It’s sure, its safe and its proven. Mutuality works, You Can Count On It!
[i] Don’t Count On It, John Bogle, Page 9
[ii] Ibid, page 11
[iv] The General Theory of Employment, Interest and Money, John Maynard Keynes
[v] Don’t Count On It, John Bogle, Page 419