Investments in a Down Market: What do People do? - Financial Fridays #48
Alright good morning everybody Mike Courtney here MassMutual Eastern Pennsylvania on a beautiful Wednesday morning beginning of June and it feels like summer is here we kind of skipped right past spring which seems to be the norm these last couple of years. I'm joined by a good friend and counterpart Steve Parisi President and CEO and founder of IBC Global. Steve how are you today? [STEVE PARISI] Fantastic Mike it is definitely summertime hot and humid out there this morning.
[MIKE COURTNEY] Does that mean those runs get a little bit shorter or do they get a little bit harder? [STEVE] Harder, I won't cut it short I've actually upped the mileage lately I got a new pull-up bar so I started that again so I'm trying to get back in shape but yeah I was suffering this morning. [MIKE] Yeah so Steve and I were having a conversation before we started this pod just about general market conditions I always feel I'm a pretty good barometer for these types of conversations because I work for MassMutual a long time in the insurance business long time working with and alongside financial advisors but when it comes to the markets and equities and projections and forecasts I'm an average consumer I have a little bit of knowledge just from the type of work that I've done over the years but I am by no means an expert in investing and I rely on advice from others just like everybody else does. So with all the uncertainty out there today I think a lot of times people are scared people don't really know what to do people are they certainly don't want to be too aggressive right now but they also don't want to miss out it always feels like there's a lot of kind of sexy opportunity out there so one of the things that we talk about all the time that we see all the time especially in these kinds of uncertain turbulent times is people that are hoarding cash or people that are sitting on really low yield cash equivalent assets and that's where cash value life insurance can really be a great alternative. Like what kind of conversations do you see with your high net worth folks that you're talking to? [STEVE] Yeah that's a good question and this I'd say it's consistent for those who are high net worth and those who don't have a very high net worth because any time there's a market crash or just say a short period a day or a couple days of a down market I have noticed over the years there's a lot of attraction to cash value life insurance just being that it's a safe, liquid and tax-free area to position money if you do things right those core benefits we always talk about but the reason why is really you've got that safe asset if things crash the fear is I can lose what I have if I've got funds in the market I've gained money there I don't want to lose what I've waited so long to actually see a gain so in the event of a down market there when I actually take those funds out of money I have in stocks bonds, mutual funds, wherever where do I put it? And I can put it in a low yield savings account like you mentioned the money market or if I discover cash value life insurance and how to properly design it do I actually see my cash value right out of the gates and it's cash-rich that's where people look at it and it creates that aha moment.
Wait a minute I can put money in this asset okay it's life insurance that's great but the cash value piece that continues to appreciate I've got guarantees okay and I can access the money as well if I want to take advantage of opportunities that I have I need cash, whatever it might be the answer is yes so really just being that it's a safe area to position money with certainty and guarantees that it goes nowhere but up that's what attracts people and it does 3% to 5% if you set it up properly just for transparency like that's what it will do if it's set up properly if not it does worse. [MIKE] It's interesting just recently on our side of the business we've seen a real uptick in the fixed annuity interest rates so in a world where you still can't get a good strong rate on a CD or a money market you can park your conservative money with a 3 to a 5-year fixed annuity and let's say you're getting somewhere 3% or 3.25% a lot of people are finding that really attractive I think people who traditionally are more stock market-driven and equities driven will look at that as an alternative for their cash and for their safe money I think they're missing out on some of these solutions that maybe aren't going to give you a 3% rate of return on your money in the 1st 3 years but over the long haul are going to give you 4% to 5% rate of return over a 20 to 25-year period maybe or something like that.
[STEVE] With access to it. [MIKE] Right, totally different access totally different obviously death benefit for heirs and a lot of other benefits that come along with the policy. [STEVE] Yeah what a lot of people advisors and clients have done with cash value life insurance and other assets I've seen this strategy discussed and used beautifully and when we do it I'm only helping with one piece the life insurance piece because that's all our company does but in the event of a down market so let me actually just begin this where if you've got money in the stock market stocks, bonds mutual funds retirement assets qualified accounts and you're in retirement that's tip or close to retirement this is typically where people have the biggest fear because I'm not working anymore and whatever my assets are that's what I'm living on now so I can't really afford to lose money like that's the fear so if I've got money in retirement funds and when I say retirement funds this could be qualified and non-qualified assets when the market's up when things are going well I can take income and typically conserve the principal or I don't really impact that principle much I can live off the interest or take a little bit of principle and I'm good I don't have that fear I've got more peace of mind that I'm not going to outlive my money from the fear of running out.
When the market's down that's where people can get hurt I can't take the same amount of income because now I just took a 30% hit and everyone takes income that's where it really hurts so a strategy that a lot of people use effectively is really using life insurance the cash value aspect as a hedge they're hedging against the down market what they're doing is when the market's up they're taking income from their other assets their retirement accounts when the market's down they will stop taking income from those other investments money in the stock market they'll let the market do its thing and allow their investments to recover and what they're doing now is going to their fixed asset the cash value life insurance product to take income because they've got certainty there that'll just continue to go up no matter what happens that it's not impacted by the down market almost like a fixed bond alternative or a bond alternative so it's a nice strategy there that I've seen executed over the years in 2008 people did that I remember seeing a presentation with an advisor where he went through here's exactly what we did for our client and they've got peace of mind more than anything else the client that is because they can dip into this fixed asset and then when things rebound they can go back to the market where their funds in the market take income against or from those investments and then when it's all said and done they still have a life insurance death benefit when they die is paid income tax-free. [MIKE] Yeah MassMutual's got a great we talk about that all the time that concept is labeled taming a bear market in retirement at Mass they've really got some great marketing collateral around that that shows the real time frame over a 20-year period S&P returns let's say that there was 4 years where the S&P was down over that time frame and it shows starting IRA X amount of dollars taking out level taxable income from that IRA every year and here's your balance at the end and then it shows taking out income from that IRA every year except for the years following the down year in the market and in those years pulling the money elsewhere and the amount of money the difference is staggering regarding it's really significant how much money you have left in that IRA utilizing that other strategy. The other thing is you're pulling non-taxable income out of life insurance policy so if you need a net of $100,000 coming out of your retirement account on an annual basis well you might have to pull $150,000 out of your qualified plan or out of your IRA depending on how it's structured and life insurance policy you pull the $100,000 it's tax-free and we know how that works so that is an interesting concept. I feel like a lot of the real-life folks that I've worked with that ends up being more they're in that scenario but it wasn't the plan upfront which really has driven a lot of my behavior where I don't have real locked in specific plans other than I maximize my qualified plans every year I put money into my whole life insurance policies every year I put money into my kids' 529 plans every year I try to carve out as much money as possible to invest in just regular brokerage accounts every year and I invest in real estate and I feel like as that has grown I'm hoping that I'm going to find myself in that kind of position it's rare to see somebody I think as a 30 or 40-year-old younger person with family who kind of creates the taming a bear mentality. [STEVE] Yeah that's true most people my age or younger I used to always say my age but as I get older younger are not doing that even for someone my age I mean it's not going to be 30 years until you're in your mid-60s at that point you're much more aware to that.
[MIKE] That's a shame though because if you could lock on younger I mean this sounds so you know this is just like a typical insurance salesperson type thing to say but my kids like I have policies on my kids if they can keep those policies and keep adding to them I mean they're just going to be so much further ahead than I was even when they're 30 years old I mean you really have an opportunity when you're young to get started very small it is really hard to do I mean I didn't do it that way either but it's important to keep talking to people about it. [STEVE] It is I mean that just comes down to discipline saving as well whether things are going well or not so well the person who keeps saving typically does very very well. [MIKE] Even if it's small keep [STEVE] Right, correct. it's a great habit as well but yeah that taming the bear market I mean that's a nice concept that does work well when people are aware of it and they actually see it oh I didn't know you could leverage life insurance in that manner and then the other piece is kind of what you mentioned in the beginning the attraction to cash value life insurance and just more so the awareness right now because everyone panics when there's any type of down market talks of inflation inflation is real I mean you can just drive somewhere and see the gas prices.
[MIKE] I went to the grocery store the other day and was blown away by what I got I did like a regular run for our family that I don't know maybe normally would have been $200 and it was like 290 bucks. [STEVE] Yeah I mean it's real I mean it's going up then there's talks of a recession you see all the panic you see some companies a lot of companies big companies trying to force people back to work Tesla looking to cut people I just saw a Google article so who knows the validity to that but my point is all of the panic in the air that's scary and that typically means okay if I look back at history I've got a down market it's happening right now everyone says it's going to continue if it does and companies lay off what am I going to do? That's the panic and sometimes that goes through my head it goes through everyone we're all human we're gonna panic and get emotionally involved with all that said though and I like to use the illustration is when you're in the storm you don't know what direction to go imagine if you're in the middle of a hurricane you can't see more than 5 feet in front of you it's scary however if you're flying over that hurricane if you're in an airplane or if you're in space you can say go this direction go left or go right whatever it might be it's going to be okay batten down the hatches for a little bit and then progress forward and imagine you're talking to yourself down there on a radio and just you're in a helmet saying do this you can navigate through all of a sudden it's a different story so again when we're in the storm we don't know what to do but at the same time if we're going to give advice to someone else we might say based on history and just everything going on here's what I would do or if we talk about cash value life insurance here's what a lot of companies and individuals do with these products you've got the safety there during the storm you've got access to this money it will generate a higher internal rate of return than your bank account what I would try not to do is panic because that doesn't do anyone any good and we will get through it just keeping calm more than anything else is the most important thing but not letting that fear cloud your judgment and make decisions you normally wouldn't do meaning do what you would advise someone else to do and you'll be okay. So I kind of got off track there. [MIKE] Do you notice a difference like have your conversations changed a bit over the last few months? [STEVE] Not a whole lot no they haven't. What I'm expecting to occur because this has happened in the past is during a down market the individuals we work with do one of two things (1) they will take advantage of opportunities they'll buy more stock because they view it as a discount which is true or for their safe money and often it's a combination of both they'll move it to cash value life insurance they'll say okay here's money it's going to be sitting in cash I don't want it to sit in cash I want to put it somewhere safe I want access to it in the event I see a good opportunity cash value life insurance safe, liquid, tax-free okay sounds great I can access it as a personal line of credit the core benefits we always talk about and that's often where the point of attraction comes into play whereas a safe, tax-free area I can position money that I don't have to sweat about or look at every day when there's a down market yeah so that's it.
[MIKE] I've kind of noticed the same I definitely have been talking to more people who seem like they are stockpiling cash more than usual but also the flip side I feel like people also have become a little desensitized to the dramatic nature of the equities markets and the ups and downs in the economy I mean if you just look at not to minimize the effects of the pandemic but I feel like a lot of white-collar America which is a lot of folks I feel like that we deal with were not all that affected by the pandemic and it felt like there was all this disastrous I mean obviously health-wise and mental type scenarios going on but also like a lot of really significant economic impact and I think there was a big portion of the population that was relatively unfazed. [STEVE] Yeah and also a ton of money was just being dumped into the economy I mean they're flooding everyone with money so from a monetary standpoint we saw more money than we ever have and that stopped to a degree the helicopter that was just pouring money down that slowed down however when we look at everything right now now the sense of payment comes in because you've got prices going up the money train is not what it used to be or the money helicopter we got all this panic with the market the economy oil prices are going up when you look at history when oil prices have remained high for a period of time typically you see a recession that follows afterward and recessions are scary but they're not always a bad thing I mean a lot of companies have really made their biggest moves and became powerhouses during a recession because competition pulls out everybody goes on defense and if they've got the means to expand into the marketplace whether that's with more effort whether they've got finances to do so they can really gobble up a lot of market share so strategically speaking a recession is not always a bad thing in that respect a lot of big players are made during those times but there is fear there because it can have a dramatic impact on a lot of people and companies as well it does. [MIKE] You know it's funny talking about all this stuff there's so much always so much uncertainty so many different variants with regards to investing in the economy and what could go wrong and what could happen it really does make me feel really good about a lot of the things that we talk about that are tried and true that are just kind of conservative bland, vanilla, smart and offer real flexible solutions. I always like slow and steady wins the race is just life is not 2 or 3 years long hopefully you live a long happy healthy life and you want to make decisions with that in mind, I think.
[STEVE] Yeah I can mention something we can kind of wrap up with this on that point too when you look at history what we do slow and steady wins the race what's starting right now is very very reflective of what happened years ago before I was born with hyperinflation and interest rates going up back in the 80s so if you look at whole life insurance back in the 80s dividend rates could not keep up with rising interest rates from a competitive standpoint you looked at a whole life insurance policy and people are saying I'm not going to buy it it doesn't make sense. That's happening some people have made that comment right now whole life insurance what I'm earning on my cash value is not keeping up with inflation even though the inflation increases for the past few months but the same thing's happening when you look at history. What happened back then in the 80s and 90s? Insurance companies realized they had to do something in order to keep that revenue coming in so they created universal life current assumption based on the interest rate environment and then variable universal life so those products if you take a universal life insurance policy back then in the 80s it could be run at the current interest rate environment at a 16% assumption so the interest rate assumption on that universal life insurance policy would always it would be at 16% forever and it would always outpace the expenses that were associated with that universal life policy now when we fast forward a very easy sale what happened though obviously interest rates came back down those illustrations did not pan out with the universal life policies you had expenses that continued to increase the expenses actually ended up exceeding the interest earned on that universal life policy and we know that story a lot of them blew up people had tax issues it was not good at all there were lawsuits all that stuff but my point is if someone could rewind the clock today go back and purchase a whole life insurance policy back then which would have produced we've got historical policies that started back then between a 5% and 6% internal rate of return today net tax-free no risk how many people would say yes? So that's where we look at and say everybody lost their mind back then and said I gotta do something else because it's not gonna work okay right now yes even Tom Brady doesn't win every football game but when he loses two in a row everybody says he's done like I'm sticking with the man he's gonna win he's gonna win stay calm and look at what's happened throughout history. [MIKE] Not just over the last 60 days. [STEVE] Correct which is hard to do because everybody it's instant gratification. [MIKE] So accessible.
[STEVE] But that delayed gratification when people can do that they win. Have you ever heard of the marshmallow experiment? So this was back in the 70s I think they did a study at Stanford it was Stanford where they had a group of 5-year-olds and they gave them a marshmallow and what they said is here's a marshmallow you can have it now or if you wait 5 minutes you can have two some kids ate it now some kids waited but what they found out is the kids that waited 5 minutes in order to get a second marshmallow they did a study years later when they're in their 20s or 30s and when you look at just the levels of success like what they've done in their lives it was off the charts delayed gratification they're willing to wait longer if you wait you win. There's someone that says that I like his saying a lot if you wait you win in business which is so true but everybody wants that instant gratification and it ends up hurting you it's like just stay calm man it's gonna be okay. [MIKE] I know I'm starting to feel bad thinking about this because I think I want to eat I'm afraid I want to eat the marshmallow on the spot but we'll never know, we'll never know.
STEVE] Yeah I don't know when I was a kid I might have eaten it if they said wait 5 minutes you can have 2 probably I would have waited just because. [MIKE] 5 minutes might have sounded like five hours then. [STEVE] Yeah but knowing that now here's the difference though we may have not done that when we were a kid but now if we hear wait a minute people that wait when I just look at business and finance in general wait and have that delayed gratification it's not something that you either have it or you don't you can work on acquiring that yes you got to work on patience you might be frustrating internally but you can do it and you know I won't talk anymore I'll go on and on about it. [MIKE] Alright well listen if anybody's interested in anything we talked about here today feel free to reach out to myself Mike Courtney or Steve Parisi at any time we're always here for you guys talk about concepts talk about different sales ideas and what's going on in the market and what we see on a day-to-day basis. Steve thanks a lot for your time today and I'll be talking to you soon.
[STEVE] Likewise. thank you Mike, enjoy
2022-08-17 10:12
