Michael Morrow | Financial Planner

Wealth Management Blog

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22 Troubling Facts Regarding Investing

With US equity markets sitting at all-time highs, the masses are looking to join the investment fray. Needless to say, it would be prudent for potential investors to note that risk levels are also sitting at all-time highs.

With that in mind, here are 22 troublesome investing facts that are hard to look past. They have been divided into three categories (Valuations, Economy, Federal Reserve) for a clearer understanding of the inherent risks that exist:

Valuations:

  • The S&P 500 Cyclically Adjusted Price to Earnings (CAPE) valuation currently sits at levels only seen one other time in history: the late 1990s. Additionally, the current level is eerily similar to the levels seen just prior to the stock market crash of 1929.
  • Based on current economic growth patterns, the CAPE is overvalued more than any other time in history.
  • Total domestic corporate profits have grown at an annualized rate of only .097.
  • The S&P 500 Price to Sales Ratio currently sits at an all-time high.
  • S&P Corporations have earned less in the last 10 years than they have returned to shareholders via stock buybacks and dividends.
  • According to a Prudential analyst, the current yields on high-yield debt, adjusted for defaults, are lower than those found with investment grade bonds.
  • Using the top 200 S&P 500 corporations, the current shortfall on pension payouts sit at an alarming $382 billion with GE leading the way.
  • Investor complacency is currently highlighted by Implied equity and U.S. Treasury volatility, which both sit at 30 years lows.

Economy:

  • GDP has only grown by 1.97%, .83% and .69% over the last 3, 5, and 10 years respectively.
  • The Feds estimate GDP will only grow by about 2% in both 2018 and 2019.
  • Government debt currently sits at 105.85% of GDP. Preferable levels would be around 90%.
  • Debt is expected to grow 3X the rate of GDP over the next 10 years.
  • Corporate debt levels ($8.6 trillion) have grown by 30% over the last 9 years.
  • Private debt + government debt sits at $329,000 per US household.
  • Worker productivity is falling to near zero levels.
  • The ratio of corporate debt to GDP (45.3%) currently exceeds that of the last two recessions. It is currently near historic highs.
  • Instability of Medicare and Social Security continues as 70,000 baby boomers are retiring every day.
  • State and local pension funds are sitting at a shortfall of $3.8 trillion.

Federal Reserve:

  • After sitting at 1% or lower for only one quarter in the 1950s, the Fed Funds rate has now been at or below that level since 2009.
  • The real price of money is being distorted by a Fed balance sheet that sits almost six times higher than other pre-crisis levels.
  • Low interest rates and a high balance sheet have been tolerated too long.
  • The Fed is having great difficulty setting policy and clearly stating objectives.

For these and many other reasons, investors are encouraged to proceed with great caution. When the bubble bursts, the pain figures to be widespread.

Michael Morrow: Indexed Universal Life Insurance

Indexed Universal Life Insurance

One of the best assets that you can add to your portfolio is a Guaranteed Indexed Account (GIA). Both banks and insurance companies sell GIAs. The accounts have a reputation as great assets for many reasons, but one, in particular, stands out: the institution that sells the account provides downside protection while you still get to share upside market potential. GIAs are grouped into three categories: taxable, tax-deferred, and tax-free. This post will focus on tax-free GIAs, specifically Indexed Universal Life contracts or IULs.

What Is Indexed Universal Life Insurance?

As its name suggests, universal life insurance is sold by life insurance companies. Indexed universal life allows the investor to add money to an account that’s indexed to the market. When the market performs well, the account earns money. Yet if the market doesn’t perform well, the purchaser doesn’t need to worry. As stated above, the institution provides protection so you don’t lose your money. IUL is a very flexible form of life insurance. There is no limit on the amount of money you can contribute each year, and you can change the components of the policy when you want.

Safety Of Indexed Universal Life Insurance

An Indexed Universal Life insurance policy is one of the safest assets to hold since the associated risk is so low. In general, if the financial institution holding your money is safe then your money is safe. Life insurance companies have historically been safer than banks. In fact, during the Great Depression, the life insurance industry actually made money; during the Great Recession, no life insurance companies failed.

Benefits Of IUL Policies

The majority of IUL policies are guaranteed to have a 2% minimum annual return. Many states have laws that keep your IUL policy safe in the event that you face bankruptcy or a lawsuit. This means that creditors are prohibited from touching the policy. Over time the indexed crediting bonuses you earn from the insurance will cover any expenses associated with the account. While it’s a prudent idea to purchase an IUL policy early in your career, it’s never too late to purchase a policy and still see returns.

Is An Indexed Universal Life Insurance Policy Right For Me?

An IUL policy is an exceptional asset to include in your portfolio. The best IUL policy must cater to your particular needs, so it’s important to take the time to research your options. If you wish to leave money to your family after your death, an IUL policy is a good investment—the death benefits are income tax-free. Since each policy is different, it makes the most sense if you meet with a financial advisor to discuss your options and learn how an IUL policy can benefit you.

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