A Disorganized Conspiracy…

America is prone to adopt ideas that are popularized by the advertising and indoctrination of Behemoths (big business, big unions, and big government) regardless of the intrinsic value of the idea itself.  The idea that average Americans should be investing is such a disorganized conspiracy.  Its premise lacks intrinsic value.

That doesn’t mean Americans are all lemmings and sheep.  Even those on the inside of a disorganized conspiracy, such as the one that is damaging Americans’ personal economies today, are unaware of the untruth that supports the manufactured myth.  That lack of awareness gradually creates a shibboleth – an oft-repeated idea that the public as well as the purveyors come to perceive as truth just because it is so often repeated by so many.

The idea that most Americans should be investing, is such a shibboleth.  It is time for insurance and financial advisors to begin demonstrating the untruth of that idea.  It is time to challenge the ethics of selling investments to their friends, neighbors, and clients.

The Challenge…

The argument against investing begins with a clear understanding.  What most Americans believe to be an investment is really a speculation, i.e., a gamble.  Benjamin Graham said it best when he stated, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.  Operations not meeting these requirements are speculative.”

Mutual Funds and 401(k)s…

Does anyone believe that buying a mutual fund promises safety of principal?  Is a sixty percent loss of value an adequate return?

Mutual funds and their counterparts inside 401(K)s and equivalent tax qualified plans are inscrutable, they defy analysis, and certainly do not promise “safety of principal and an adequate return.”  In other words, they are speculative; they are gambles.  Their only promise is that they promise nothing at all.

Well, that’s not entirely true.  It’s especially untrue for tax qualified retirement plans, which promise future taxation at a potentially much higher rate than the deduction rate available when contributions are made.

Free Money…

“Yes but…” what about the matching from the company?  Doesn’t that free money make up for possible losses?

It does, but only to the extent that the tax rates do not increase between now and the time you begin taking income from your retirement accounts.

If you follow the conventional wisdom and contribute the maximum to your retirement accounts, the employer portion represents a minimal amount of the total in the account.  If you choose to contribute only as much as qualifies for the employer match, the entire amount of your future income will still be taxed.  If that amount happens to be 50% of what it was last year, you’ll end up paying tax at a potentially higher rate on significantly less money.

From a different perspective, the amount of the tax deductions you receive currently constitutes a lien against your future earnings.  However, unlike the lien on a property, the contributions to a tax-qualified plan do not diminish your liability.  Additional contributions increase it.  If tax rates also increase, you will experience the negative effect of compound interest.

More Myths…

There are a few myths that the Behemoths promote as part of the foundation to the shibboleth that all Americans should be investing.  One of the most pernicious of these myths is the idea that a family only needs enough ready cash to cover three to six months of income or living expense.

The reason this myth was born was to free up more of your money for investing.  Ready cash of three to six years of income or living expense is much more reasonable and is entirely achievable when saving replaces investing as a part of your personal economic picture.

“Yes but…” what about the rate of return?  Can’t you expect a greater rate of return from investments than you can from savings?

NO!  That’s another myth.

Recent studies demonstrate that money in safe bonds, which reflect savings returns, perform as well over the long-term as investments.  This is significant because the insurance companies that we recommend tend to rely on the Prudent Man Rule and low risk financial vehicles for your money.  The author just completed one study that compared the returns in a whole life policy to those of the Dow Jones Industrials over the past ten years.  The whole life policy outperformed the DJIA by almost 130%.

A third myth, implied in the previous discussion and designed to tempt you to gamble your money, is that investing is for the long-term.  However, individual investors do not produce the same results that the Behemoths have promoted and advertised to induce Americans to invest – aka, gamble – their money in the markets.  The Behemoths speak only of averages.  They focus your attention on the top of the mountain and fail to point out the chasm that looms immediately ahead.  (You know that’s true today more than ever.)

The Question…

The purpose of this article is to raise the question: “Is it ethical to sell investments – especially inaccessible tax qualified retirement plans – to Americans that have auto loans, credit card debt, mortgages, lines of credit, and only a few months in cash reserves?”

Consider how many Americans today are unemployed and raiding their retirement accounts to keep up with debt payments or to deal with another of life’s surprises during what is going to be a very long and painful recovery.

Consider the recent revelations about the greed for your money found on Dull Street (formerly Wall Street) and in the halls of government by the Dolts in DC (all 535 in Congress and the 43,000+ lobbyists that feed them).

Can we afford to be silent about the conditions that have led so many to or over the brink of financial ruin?

Isn’t it time for Americans to withdraw from tax-qualified plans, get their money out of the banking, investing, and tax systems, and put it where they and they alone have control?

By Jeffrey Reeves MA, youbethebank.com

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