Editor's note: The markets and our offices will be closed tomorrow for New Year's Day. Look for the next issue of DailyWealth on Thursday... And enjoy the holiday!
Most of us have been guilty of this at one point in our lives...
I'm talking about making an investment based on advice from a friend or relative. You know – the kind of purchase that leaves you wondering if you made a good decision or an emotional one.
Five years ago, my wife invested $50,000 in a specific kind of financial product. Her childhood friend had recommended it enthusiastically. It didn't go well...
So what is the worst financial product... the one my wife unfortunately bought?
The insurance industry calls them "variable life insurance products." These essentially give the holder both insurance coverage and investment returns over a fixed period.
To most people, this sounds great. Your beneficiary has a guaranteed payout in the event of your untimely death. And the money you initially put in has a chance to grow.
These types of investment products have boomed in popularity for good reason. They offer buyers both safety and a shot at higher-than-average market returns.
Moreover, yields were crashing in just about every corner of the world five years ago. So it was an enticing proposition for my wife.
But again, it didn't work out as advertised.
When my wife's policy matured last month, she was dumbfounded to receive a check worth less than $50,000. They gave her $49,740, to be exact.
Mind you, this was a five-year policy... yet she ended up with less money than she started with!
Throw inflation into the mix, and the total value of money she lost was enough to make my blood boil.
Adding insult to injury, this happened during a period when the local stock market gained 7%, real estate prices nearly doubled, and stocks worldwide soared 35%.
How is this possible, you might ask?
It boils down to two key factors: cost and risk. And unfortunately, many investors fail to understand the role these factors play in determining their returns.
In the case of the variable life insurance product, it was laden with cost and risk.
That's because underwriting the insurance product costs money. The agent's commission, the processing fees, as well as the risk the insurance company took to insure my wife... all these things carried a price tag.
And that price tag came out of the returns this financial product generated. So my wife's $50,000 initial outlay was already costing her money... even before she had invested a single dime.
The insurance firm also needed to invest the money in assets it believed would generate better-than-market returns. There's another addition of both cost and risk.
Someone needs to manage that money. That someone obviously needs to get paid. And as most folks know, assets that generally deliver higher returns also carry higher risk... particularly stocks.
In short, there were several layers of costs that the company's managers had to cover before any positive returns could come to my wife. That's a major handicap.
So you see how this kind of product actually worked against my wife instead of for her, even during a period when the stock markets were going up.
My wife vowed never to invest in something like this ever again. She learned the hard way... But at least her losses were manageable.
The way I see it, if you want insurance, buy a plan that suits your needs and know exactly how much it costs. (That's usually called the "premium.")
Then, seek out investments that have a high probability of delivering returns that will not only pay for your insurance, but also help you live a comfortable life.
It's generally best to keep investing and insurance separate. Putting them together creates the worst kind of financial product. And I recommend you avoid it.
Good investing,
Brian Tycangco
Further Reading
"Most people only want the hottest stock tip," Brett Aitken writes. But making money in investing is about much more than the latest trend. The best investors follow time-tested strategies to grow and protect their wealth... Learn more here: The Problem With "Rich by Next Tuesday."
"Far too many investors suffer from 'confirmation bias,'" Austin Root says. Most folks only search for reasons that their investment theses are correct. But a better approach is to seek out the "dark side" of a security and understand the reasons not to own it... Read more here.
Being a successful investor means avoiding major costly mistakes. And ignoring this timeless rule is one of the biggest mistakes you can make...
THE CLOUD 'MEGA TREND' IS A GAME-CHANGER FOR THIS COMPANY
Today, we're checking in on a massive trend in the technology sector...
As time goes on, more and more data is being stored on the "cloud." This means it's hosted remotely through the Internet rather than being housed on folks' personal computers. Research firm Gartner predicts the cloud-services industry will grow roughly 50% to more than $330 billion in 2022. And today's company has positioned itself to take advantage of this massive trend...
Adobe (ADBE) is a $160 billion software giant. It boasts popular graphic-design and editing products like Photoshop and Acrobat. Over the past few years, it has shifted from packaged software to a cloud-based model. And the shift has done great things for Adobe's business... In the most recent quarter, it reported sales just shy of $3 billion, almost all of which was from its cloud subscription offerings.
The shift is paying off for ADBE's stock, too. Shares have more than tripled over the past five years, and they just hit a new all-time high. It's more proof of the gains that are possible when you invest in "mega trends" like the cloud...
