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Posts Tagged ‘personal economics’

The answer to the question, “Is EUREKONOMICSTM opposed to investing?” is an emphatic “No!”

EUREKONOMICSTM is based on investment principles that are as old as money and as current as the 21st century.

Benjamin Graham, the Dean of Wall Street was Warren Buffett’s mentor.  Graham stated this principle in one concise sentence in his classic works, Security Analysis (1934) and The Intelligent Investor (1949)

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

When look at the meaning of this sentence within the framework of EUREKONOMICSTM you discover that…

  • EUREKONOMICSTM relies on the promise of safety of principal as the primary consideration when it comes to investing the money that enters your life
  • The EUREKONOMICSTM‘ corollaries to the promise of safety of principal are…
    • whatever you think of as a satisfactory return has support that basic premise
    • an investment that doesn’t  is not really an investment; it’s  a speculation-in simpler terms it’s  a gamble

Graham’s Promise of Safety of Principal…

The the professionals in the insurance and financial services industry that act on your behalf tend to seek out the wealthiest Americans as clients.  That has an unintended consequence.  It creates a view of personal economics that applies mostly to the small percentage of the population that have already created family wealth.

That perception pervades the part of the industry that creates products as well, especially among financial businesses that create investment products and insurance products that have an investment component. As a result, many products that are called investments actually fall into the group that Benjamin Graham describes as speculative.  They offer neither safety of principal nor a satisfactory return.

There’s another issue.  You can project a satisfactory return on an insurance or investment product by using higher than realistic interest or growth assumptions.  However,  for many of the financial products available in the market today the facts surrounding the real returns of actual investments held by everyday Americans do not support a claim to safety of principal and satisfactory returns.

Take mutual funds as an example.  No registered representative would dare promise-as Benjamin Graham’s definition suggests-that an individual mutual fund could promise safety of principal and a satisfactory return. If they did, the regulators at FINRA would likely bring the advisor making such a claim before a disciplinary board to be tarred and feathered-figuratively of course.

However, financial advisors often suggest that hypothetically and “over the long term” this fund or that or some combination of funds assure safety and returns.  Based on guidelines from the SEC and FINRA, as long as you complete a suitability form and a risk tolerance questionnaire, which protects the advisor and his or her firm from the overreaching arm of regulators in the event an investment fails, the safety of principal and satisfactory return promise requirement has been met.

Take a look at the performance of these types of investments and the losses Americans have suffered over the past decade.  The tremendous American families have experienced have led to only a few disciplinary actions-and those mostly for thieves running ponzi schemes.

The Promise Fulfilled…

Insurance and financial advisors are not in any way irresponsible or engaging in deceptive practices.  The problem is that most of the insurance and investment products that are available in the marketplace are designed to serve the needs of investors and speculators that can afford to take risks-and losses.  These financial products are not designed to help the vast majority of Americans seeking to attain wealth regardless of what the manufacturers of these products would have us think.

It’s easy to recognize the truth of this assertion.  Look at your own financial progress.  I’ve been practicing for almost forty years and have met only a handful of people that started out with wealth.  Most Americans have gained wealth by struggling for years to…

  • educate ourselves about saving, investing, risk management, etc.
  • build equity in
    • our homes
    • our businesses
    • our insurance policies and savings accounts

Almost every person and every insurance and financial advisor I have met can relate to this idea.  Why then would anyone suggest that everyday Americans follow any other path to wealth?  I’ll leave that answer up to each individual to discuss with their insurance and investment advisor.

However, I caution you…conventional wisdom-which is not wisdom at all-will rear its ugly head and suggest that advisors are fools if they rely for wealth creation for themselves and their clients on…

  • financial education
  • building equity in prosaic things like…
  • homes
  • savings accounts
  • whole life insurance policies-especially whole life insurance policies
  • a strongly rooted recognition that their clients deserve nothing less

The Final Word

There is no financial product that will make you wealthy.

There is, however, one financial product that guarantees that you will have more money in it at the end of each year than you had at the beginning of the year and that should be the foundation for your successful personal economy.

That product is participating whole life insurance from a mutual insurance company.

Seven Myths and Seven Mysteries of Personal Finance and Personal Economics

For the past half century, the hubris-laden financial industry has led Americans to believe that the individuals and organizations on Wall Street – renamed Dull Street by the author – and their minions on Main Street know more than we do about our personal finances and personal economies.

In fact, many of these self-appointed gurus of finance ended up penniless, in jail or in failed enterprises…

  • EF Hutton
  • Executive Life
  • Mutual Benefit Life
  • Arthur Anderson
  • Indy Mac Bank
  • Washington Mutual
  • Freddie and Fannie
  • Bear Stearns
  • Lehman Brothers
  • Bernie Madoff
  • and the list goes on

Most financial executives and advisors – in my experience – have bought into the myth that the typical American is incapable of understanding personal finances and economics much less managing them effectively. The unfortunate reality is that many of these advisors don’t actually know enough about personal economics themselves to even discuss the topic intelligently.

They, like the clients they serve, have embraced the myth we call The Debt Paradigm.

These advisors know all about products.  In fact, the financial tools that many advisors use to develop personal financial plans for their clients are often no more than sales tracks that lead to the sale of specific products and services that redirect the money of everyday Americans into the accounts of their Behemoth bosses.

This is especially true of those advisors that are captives of Behemoth financial organizations most interested in selling their own products under the guise of financial planning and advice.  (This class does not include insurance companies that are selling and supporting particpating whole life products as the mainstay of their business.)

The Seven Myths and Mysteries Series is an attempt to begin (just barely, but to at least begin) deconstructing the Debt Paradigm myth and replacing it with a simple and effective model that American families can use to grow rich without risk and secure wealth without worry.

This kind of model doesn’t rely on esoteric insider analyses or on “secret” strategies known only to the initiated few. It rests on common sense and readily available information and ideas. The amazing part of that realization is that the “many” purport to have the inside track but the “few” – and you are among them because you are reading this – are the ones who actually do.

The two most important ideas you’ll take away from this series are these:

1. There is a model for helping you manage your financial lives and creating a personal economy that you control

2. You are in charge! It’s up to you to make your money work for your benefit and that of your family, including (and especially) your future generations.

We wish you well in your quest. We sincerely expect and desire that Seven Myths and Mysteries, while it does not claim to be an exhaustive study, will add to your understanding and insights about how to manage your personal finances and construct your own personal economy.

Here is a list of the Seven Myths and the Seven Mysteries we will discuss in this series.  Some are very easy to wrap your mind around while others require a closer look.

Seven Myths – alias Wealth Destroyers – Bad Thinking Creates Bad Habits

1. I’ll Do OK on Social Security

2. My Home Will Keep Me Secure

3. I’m a Saver

4. I Have A Retirement Plan From Work

5. My Investments Will Carry Me

6. My Financial Advisor Knows

7. I’ll Never Quit Working

Seven Mysteries – aka Wealth Builders – Moving from Bad Habits to Good Practices

1. Pay Yourself First – But Don’t Count Your 401k

2. You Know Best What’s Right for You

3. Don’t Risk What You Can’t Afford to Lose

4. Why Debt = Financial Death

5. Volume Is More Important Than Rate

6. “Conventional Wisdom” Is an Oxymoron and Tax Deductibility is a Trap

7. Compound Interest is Magic…Triple Compounding is Astounding

Myth No. 1

“I’ll Do OK on Social Security.”

I believe in Social Security because I believe in the United States of America. I believe that Social Security will survive its current troubles because Americans are a good and compassionate people.

However, it is naïve to believe that Social Security will continue in its current form. It is equally turning a blind eye to believe that Social Security is at all adequate as the reliable and only source of income for those who qualify for its benefits.

Most of us look forward to a time in our lives when we can dedicate our energies to pursuits that fill our souls regardless of whether or not they fill our pockets. Some of us want that to happen when we are 40, 50, or 60. Others can’t imagine not following their career path until they step into the grave.

Social Security can help those who qualify for its benefits but it is a myth that Social Security is liberating enough to permit us to live in even the most basic prosperity one expects in our wonderful country without any other source of income. For most of us it is not even adequate to pay for rent and food much less the lifestyle we have imagined for ourselves as we age.

The stories about folks who relied on Social Security alone (whether or not by choice) and ended up eating dog food or having to choose between necessities and medical care abound. This is not urban myth.

A simple bit of arithmetic demonstrates that the costs of a modest apartment, food, transportation, Medicare coverage, clothing and a modicum of entertainment add up to more than a monthly Social Security check – even if you are receiving the maximum Social Security has to offer.

Moreover, if you can get by today, you will find shortly that inflation of the cost of necessities added to unexpected but unrelenting medical and long term care costs will quickly erode the value of that monthly check.

Living on Social Security alone is a Myth.

This provides a departure point for the second myth: Many believe that owning a home will insulate them in some way from poverty and need as the years go by.

That will be the first topic for the next installment of The Seven Myths and Mysteries.