Retirement Strategy: Beware Of Investments That Are Not Investments (Part 31)

Includes: BAC, GE, INTC, JNJ, KO, NLY, O, PG, SO, T, XOM
by: Regarded Solutions

Most folks who know me would not accuse me of being a wilting flower. I tend to tell it like it is, in my own way, and let the chips fall as they may. I believe that 2 big industries that have been around are just plain wrong for investing.

Actually, they are not investments at all! One is an insurance policy, and the other is a loan. At the risk of ruffling some feathers, I will clearly explain what I believe these products to be and why they do not fit into a dividend growth investment strategy.

Beware Of "Products" That Offer Monthly Income

Yes, I realize that we all want to sleep at night and not have to constantly worry about the market uncertainties. Insurance companies, as well as lending companies, offer products that are misunderstood by many investors to be the path of least resistance in a world of investing that can be confusing.

I am going to be quite blunt, as well as direct, and short and sweet about a few of these products:

  • Annuities

I do not care what anyone tells you or how they package these products, they are not investments. If they were investments, they would not be sold almost exclusively by insurance companies.

Even the brokerage houses who stamp their brand on some of them are actually offering them through insurance companies. These products are nothing more than insurance policies, which are absolutely fine in and of themselves; however, they are not investments.

The bottom line is that you fork over a chunk of cash to the insurance company, so bye-bye to it, and they dole it out back to you in an actuarially based formula so you have an "allowance" for as long as you live. Usually between 5-7% depending on your age.

That is not a 5-7% interest rate folks, nor is it an investment rate of return. The insurance companies are giving you back 5-7% of your own money that you handed over to them, with a sprinkling of interest so low it is almost laughable.

Guess what the insurance companies are doing with your money; investing it, hedging with it, using option strategies, and actually reselling your policy, for a profit, to some private investors!

Annuities make money for 2 groups--Insurance companies and insurance agents, period.

You want one? Ok fine, they are not cheap and please read the fine print.

  • Reverse Mortgages

Got a home? Are you and your spouse over the age of 62? Great! You are now eligible to get a chunk of cash, upfront, non-taxable, that you never have to make a payment on.

Wow, holy capital, Batman! This has got to be one hell of an investment, right? Not so fast cowboy, this is not an investment, it is a loan. Yep, sorry to bust your bubble but that cash you get is nothing more than an advance on the equity in your primary residence.

You do not have to make any monthly payments, but guess what, the loan must be paid back prior to disposing of your home. While you could live there forever until you pass away, your heirs will need to re-pay that loan before the home can be disposed of. I guess what they have not told you is that if the bottom falls out of the housing market (again), then that home might not cover the loan if it's sold.

Didn't realize this stuff? Well now you do.

Also, this "loan" has an awful loan to value ratio of somewhere between 40-60% and has a cap of about $180,000 no matter how much your home is worth. Just in case you were thinking you can get gazillions of bucks on your home of 40 years!

To me, if you must have a chunk of money at your disposal, and many folks do, I would check out a HELOC. You need to make monthly payments, but with interest rates so low, it probably makes more sense than a reverse mortgage. Plus you can get 70% or more, loan to value, no matter how much your home is worth.

Have I got you thinking? Good!

Ok, So How Can We Have Regular Income That We Can Rely On?

As we all know, there is no free lunch with any investment. Nor are there any guarantees. What we have shown over the course of nearly a year now, is that by taking a proactive approach, and investing in mega cap, blue chip, dividend paying stocks, such as the mix we have been tracking right here for "Team Alpha", an investor can generate returns that far exceed those of any insurance products or "loans".

Not only that, we are in charge of our financial future, not an outside agency which is concerned only with their own profitability.

Our "Team Alpha" portfolio now consists of; ExxonMobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC).

Just take a look at our most recent results:

stock #Shares 7-30 PPS TotValue
XOM 100 88/shr 8800
JNJ 100 70/shr 7000
T 100 37/shr 3700
GE 100 21/shr 2100
NLY 110 18/shr 1980
BAC 300 7/shr 2100
PG 100 65/shr 6500
KO 50 80/shr 4000
SO 200 49/shr 9800
INTC 200 26/shr 5200
O 100 42/shr 4200
Cash Rsv 0 68569
Total x x 123949

A 24% increase, or just about $24,000 in 9 months. That equates to about $2,500/per month to withdraw if needed. On a $100,000 initial portfolio, that is what I consider a solid investment.

Oh, and we still have the original $100,000 to do whatever we want with, we save fees and charges, and we are in charge of our own financial destiny.

My Opinion

In a world where investors are looking for income during retirement, these products are compelling, and for some people, a must have instrument.

Do not confuse them with investments, however. Just remember that the folks selling these products will more than likely be following our strategies with your money.

Well, we can do that right here!

Disclosure: I am long XOM, JNJ, GE, T, NLY, O, SO, KO, BAC, PG.