“People should be more concerned with the return OF their principal than the return ON their principal.” (Often attributed to Will Rogers, probably mistakenly.)
Saving and Investing in a Volatile Market

Investing in a volatile stock market presents some big challenges—as many have recently learned! The last couple of weeks, we have seen tremendous uncertainty and volatility on Wall Street. This included the fastest 10%+ drop in the history of the stock market… followed by a “circuit breaking” dive this morning.

Tech stocks have been hard hit. Travel industry stocks have plummeted. Retail and restaurants fell as well. Nearly all stocks lost value. The price of gold rose, then gold mining stocks crashed. The price of oil fell, and financial stocks crashed along with it. We’ve seen rallies in between the valleys, but virtually every corner of the stock market has suffered losses.

What now!?

Today, we’ll look at what’s happening in the markets—and what YOU can do to protect your money—and your peace of mind!

Is the Bubble Finally Popping!?

There have been signs of trouble for some time now. By any measurement—average price-to-earnings ratios, the ratio of total market cap to US GDP—the stock market is over-valued. Combine that with the current supply chain interruptions, and it’s not exactly a recipe for a quick bounce back and more gains.

The bull market has lasted 18 months longer than any other bull market in history. It’s been an impressive run! The S&P 500 rose a whopping 395% from March of 2009 to February of 2020—an annualized return of 16.67% before the recent modest correction. Some analysts expect we are overdue for an even larger “market reset” followed by a return to value investing.

Is the Bubble Finally Popping!?

And it’s not just the stock market. Student loan debt, real estate, corporate bonds and consumer debt are all at historic highs. U.S. Credit card debt just reached $930 billion in February—an increase of $46 billion and higher than the previous peak hit just ahead of the 2008 financial crisis of 2008, according to data from the Federal Reserve.

It’s not hard to predict that stock market corrections and pandemics will affect the housing sector, too. Many savvy real estate investors have already been holding onto their cash waiting for a real estate downturn, and their patience may soon pay off.

Coined “the everything bubble,” it’s what happens when monetary policy tries to fix every problem with cheaper credit and quantitative easing. The coronavirus is only the latest issue the Fed hopes to solve with a little more money.

But the latest surprise rate drop by the Fed seemed to be ignored by the market. “Investor fears over the coronavirus” were blamed, but perhaps the real trouble is that investors know the jig is up!

If you have money in the stock market right now, perhaps you SHOULD be afraid for your dollars.

This is not the time to “buy on the dip” or to recite slogans your broker taught you about the importance of “staying the course.” It’s time to reduce risk and reposition assets vulnerable to stock market volatility and economic upheaval.

So how can you succeed investing in a volatile market—or even a falling one? Here are four strategies to protect yourself now.

#1: Go to cash.

Cash is an asset class—and right now is a good time to have more of it! This could be T-bills, bank CDs, high yield savings accounts or other cash equivalents.

You might think, “But I don’t want to get stuck earning 1-2 percent!” We understand. But this is not a time to speculate; it’s a good time to conserve and protect existing assets for future investments! A guaranteed 1 or 2 percent may be much preferred to large losses.

And there are potentially large upsides to building liquidity. As we discussed in a recent article, “Cash on Demand,” cash allows you to position yourself for tremendous opportunities!

The other important reason to have greater liquidity is to prepare for potentially significant disruptions in your industry or business. Now is an excellent time to shore up your emergency fund!

In the Great Recession, many people who had cash for 3 to 6 months of expenses discovered it wasn’t enough. As unemployment rose and the recession lingered, nearly 5 million Americans raided their retirement accounts in 2010 alone, paying nearly $6 billion in early withdrawal penalties!

#2: Save more money… but not in a bank!

Save more money… but not in a bank!

Do you wish you had more cash? Do you have money locked up in investments that aren’t easily liquidated? Many people could benefit from saving more—and investing less. The recent trend to be “fully invested” in volatile markets is dangerous. You always want a portion of your portfolio to remain safe—regardless of economic circumstances.

If you already have whole life policies, check and see if you are maximizing your paid-up additions. Doing so will increase your cash value almost instantly.

If it’s time to commit to a more robust long-term savings plan, take a fresh look at dividend-paying whole life insurance. Not only is it an excellent risk management tool, it also has distinct advantages as a place to build, grow, store and protect cash. This type of life insurance is also a “savings plan that shows up like a bill,” providing structure and motivation to save regularly.

There are MANY excellent reasons to save money outside of the typical banking environment, such as privacy, safety, tax treatment, asset protection, and better returns! Measured long term, such as 20+ years (remember, an insurance policy stays with you for a lifetime), the cash value of life insurance also typically outperforms the best of bank savings accounts by a margin of about 2% annually. Plus it is a tax-advantaged environment!

Banks are currently paying a maximum of around 1.5% on savings—taxable. Whole life policy growth is hovering between 3.5 and 4%–tax-deferred or tax-free if the policy stays in force. (This is a calculation of internal rate of return and does not include the additional value of the full death benefit, which is only partly represented by cash value.)

It’s also important to save money you can access when needed. If you “save” in a 401(k), you’ll pay taxes plus fees (unless you are over age 59-1/2) to access “your” money. You cannot borrow against an IRA and you can only borrow against a 401(k) for approved reasons. And keep in mind—the worst time to liquidate assets is after a stock market crash!

That’s why we suggest a banking alternative for long-term saving. This alternative locks in gains that can never be lost. For generations, people have used cash value life insurance to increase their liquidity and privacy while building generational wealth and earning higher returns over the long haul.

#3: Invest in non-correlated assets.

Invest in non-correlated assets.

A non-correlated asset is one that is not correlated with the stock market. It does not rise and fall along with the Wall Street roller coaster ride.

Our favorite non-correlated investment is life settlements. They offer asset growth without the stock market risk. There is perhaps no asset so immune to market swings as a life settlement fund!

Many people have never heard of life settlements, although more seniors are becoming aware that life insurance policies can sometimes be sold. A life settlement fund is a fund that owns life insurance policies that seniors (generally in their 80’s or beyond) have decided to sell.

A Supreme Court ruling in 1911 judged that life insurance policies are private property that can be assigned or sold to others at the will of the policy owner. Life settlement funds purchase policies that have become unwanted, unneeded, or unaffordable to elderly policyholders. In this way, they represent a “win-win” scenario. Policy owners nearing life expectancy are able to turn a death benefit into a living benefit they can use now. At the same time, investors can purchase an asset with a sure future value, rather than grow an asset with an unknown, perhaps even lower future value.

Life settlements have been used in institutional investing for decades. Some of the reasons life settlements have grown in popularity include:

Non-correlated returns. Life settlement investments are not correlated to interest rates, housing prices, stock prices, political events, or any outside influences.

Managed risk. Life settlements are based on actuarial math, not stock market speculation. As policies are purchased for a discount and costs such as future premiums are factored in, losses in properly managed funds are unusual.

Healthy returns. The London Business School found that investors may see annualized returns in the low double digits, though results vary according to many factors.

You’re in good company. Berkshire Hathaway has invested hundreds of millions in life settlement portfolios, confirms the Life Insurance Settlement Association.

High Safety. Life insurance companies are among the strongest financial institutions in existence. Only seasoned and vetted policies are purchased for life settlements, and eventual benefits are literally “insured.”

Formerly for institutional investors only, there are now options for accredited investors (with a net worth of 1 million or steady income of $200k or $300k for couples) to purchase private equity funds that hold life settlements.

As with any investment, it is important to understand how it works and who it is best suited for. Life settlements are not liquid and the investment time frame and exact rate of return fluctuate. Required minimum investment with our life settlement partners currently begins at $100,000, and money is typically invested for 7-10 years. You can hold them in an IRA.

For more information, contact Partners for Prosperity and request details on life settlement funds. You’ll also find more details in this article, “Life Settlements: Pros, Cons and Facts” and in this episode of The Prosperity Podcast: “An Introduction to Life Settlements.”

#4: Increase your cash flow.

Increase your cash flow.

One of the BEST ways to prepare for any economic reality is to develop multiple streams of income and increase your cash flow. Having just one source of income makes you financially vulnerable. Having many sources can make you wealthy!

If you have a job, consider a business on the side. If you have a hobby, consider monetizing it. If you own your home, start thinking about rental property—or perhaps renting out a room, if you have the space. Perhaps there is something you can do online—start a YouTube channel or offer your skills on Fiverr or Upwork. Those platforms offer flexibility and a new ways to capitalize on skills and knowledge you already have such as web or graphic design. Or perhaps you can freelance as a tutor, nanny, handyperson or caregiver.

It’s possible we could see businesses or employment rates affected in future months. If so, see it as an invitation to get creative! There are always needs to be met and money to be made for those willing to try something new.

In conclusion… we may be entering uncharted waters in terms of economic circumstances. It’s possible that financial markets have never been so inflated. It’s possible that the coronavirus will profoundly disrupt our lives and our economy. It’s possible that investing in a volatile market (or a falling market) will be the “new normal” for awhile.

However, there is ALWAYS a way to thrive and prosper. Unlike typical financial advice, Prosperity Economics thinking and strategies work in ALL economic circumstances. If you are new to us, we invite you to see what Partners for Prosperity has to offer!

—By Kim Butler and Kate Phillips