Filed Under:Life Insurance, Life Planning Strategies

The investment edge - History lesson: Investing trumps gold

In 1979, the U.S. had a president who seemed to frighten investors; some felt the country was moving too far toward big government and away from capitalism. The stock market was near the end of a lost decade with flat returns. Many thought the stock market dead; fear was the dominant emotion. Gold was at $850 an ounce.

In 2009, the U.S. elected a president who seems to frighten investors; some feel the country is moving too far toward big government and away from capitalism. Many think the stock market dead; the past decade has had flat or negative returns. Fear is the dominant emotion. Gold was, at the end of 2009, about $1,150 an ounce.

During the 30 years in between 1979 and 2009, inflation averaged about 3% yearly.

In the same 30 years, gold averaged 1.05% yearly appreciation, or roughly 1.95% yearly less than inflation. A $100,000 investment in gold in 1979 became $137,000 at the end of 2009. To keep up with average yearly inflation, it would have to have hit a $242,726 target. It didn't even come close.

If one bought the S&P index on the last trading day before Dec. 31, 1979, the price was $107.94. The closing price on the last trading day before Dec. 31, 2009 was $1,115.10. So, $100,000 invested in 1979 became, at the end of 2009, $1,155,825, a compound growth rate of 8.5% yearly, an average of 5.5% above inflation.

During this same 30 years, we have been through horrible down cycles, including October 1987's Black Monday, the Tech Wreck from March 2000 through March 2003, and, of course, the Credit Bubble of 2008. The current decade has been terrible, the worst. Of course, the 1970s equaled a horrible decade, too -- it wasn't only the polyester suits and strange haircuts that were ugly.

History judges all presidents; it's hard to judge one in the heat of battle, while he or she is in office. If any president is really unpopular, he or she will not earn a second term and will, instead, be given a White House eviction notice, losing the right to smell the sweet-scented cherry blossoms, power, cash and greed that fairly swirls all around Washington. As to judging, President Truman at times had extremely discouraging poll results. Now, he is highly rated by historians.

In my lifetime, I've seen World War II, the Cuban Missile Crisis (close to nuclear Armageddon, a global scare that makes today's problems look puny indeed), the Korean War, Vietnam, Iran, Iraq, gas lines, and more (did I mention Afghanistan? The Berlin Wall? The Berlin Airlift? Joan River's plastic surgery? Michael Jackson's glove? And, really, those polyester suits were b-a-a-d).

I know these things:

1. There are more good things than bad things. Although I listed wars and nuclear scares, I didn't write much about the great stuff, products like the iPad and iPhone, personal and small business computers and hybrid automobiles. Have you heard -- as I did on Bloomberg the other day -- that Walmart plans to hire 500,000 new employees in the next five years?

2. Media focuses on bad, shocking stuff, not good news. Media likes to scare the pants off us in order to develop readers or watchers. Most talking heads on TV and radio are basically people who read well; they are more often wrong than right. Many are dumber than wood; even so, they are paid to babble something (anything!) every weekday.

3. Gold is an okay hedge once in awhile, but it does not come close to matching inflation.

4. Investing works: $1,155,825 is more than gold's $137,000. In fact it's lots more -- more than eight times as much.

5. We have nothing to fear but fear itself. According to an investment executive I respect, the 300 million people who live here in the U.S. brush our teeth 500 million times daily; however, in India, there are only 137 million brushings daily (India has one billion people). Colgate is in India now, teaching kids and adults how to brush. Why? Colgate figures to add millions of new customers. Since the U.S. consumer is now conscious of reducing debt and saving money (good things), growth in this country, for the near term, may be fairly tame. (However, the U.S. now has one of the better per-capita birth rates in the world, better than China's, and we are projected to have a population of 350 million by 2050). Still, in the near term, growth is likely to explode in China, India and Asia as middle classes in those countries grow exponentially. And, since the U.S. has more than its share of multi-national companies, there will be profits here. Did I mention Walmart in this message? Apple? Colgate? Toyota (pacesetter in hybrid autos)?

You don't need to be a genius to make money through investing. You only need patience, an advisor to help you over the rough spots, and to always be mindful of Warren Buffett's advice: Be fearful when others are greedy and greedy when others are fearful. Since most of us seem to be frightened out of our wits currently, this may be a great time to invest. And, by the way, had you invested with Mr. Buffett and his Berkshire Hathaway during the same 30 years, you would have averaged more than twice as much return as the S&P 500 index.

I'm not suggesting that gold won't increase in price -- it's at a peak as I write this, but it is not an inflation-adjusted peak. Many think that gold will hit $1,500 in the short term (and it may have done so by the time this column is published). But if you are in investing for the long term, gold won't work. After all, gold just sits there -- it doesn't pay dividends and you can't use it to make phone calls. You can't drive gold or eat gold, and while there is manufacturing use for gold, its utility is slight compared to other metals. Insofar as I can see, it's good for only three things: A hedge against fear; for jewelry; and as a way for the personality newscasters who sell gold to increase their revenues.

This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Evaluation copies of software and review copies of books are sometimes furnished by publishers without charge; however Mr. Hoe only reviews books and programs he feels will of value to LIS readers and avoids writing about books and programs he feels would be of little interest.

History lession review

Gold, always driven by fear in bad times, averaged about 1.05% for the 30 years between 1979 and 2009. If one started with $100,000 in gold in 1979, the value would be about $137,000 at the end of 2009, a rate of 1.05% yearly.

Inflation, for the same 30 years, has averaged about 3%, meaning that the $100,000 would need to be a tad less than $243,000 in order to just keep up.

The market, despite some really horrible times, would have -- during the same 30 years -- turned $100,000 into $1,155,825, a compound growth rate of 8.5% yearly, and an average of 5.5% yearly over inflation.

Broker's Bookcase

Marketing for Financial Advisors by Eric T. Bradlow, Keith E. Niedermeier and Patti Williams (McGraw-Hill, 2010).

This terrific book was given to me by Chad Faucett, a divisional marketing director at SunAmerica. Chad is a good friend, and he plays one heck of a game of golf.

Wharton is, of course, a pinnacle of financial education; Wharton's own Dr. Solomon S. Huebner founded The American College, where I earned many of my designations.

I remember Patti Williams from my 2007 visit to the Wharton School, where I took a course in risk courtesy of Prudential. The Wharton experience was a highlight in my financial planning career -- I'm a sucker for education -- and the faculty there does such a bang-up job that I still remember a great deal of the material, despite being older than dirt and nursing an injury during my stay there. I recommend with gusto Wharton's educational programs to any financial advisor! Dr. Christopher Geczy writes one of the jacket blurbs; I remember his class, too.

Whether you can or can't get to Wharton for a course this year, buy this book pronto. It is written in clear, easy-to-understand, prose and it is based on you, the individual practitioner. How can that be? Because this book goes deep, w-a-y deep, that's why. In other words, it doesn't tell you how to get more customers; instead, it shows you how to find customers who are right for you.

Have you ever considered that you may be focused on the wrong thing -- getting more clients -- instead of the right thing, which would be finding folks who are ideal for you and for your practice? Have you ever wondered why some clients leave you? Maybe they are the wrong people for you.

Witness: "No matter how you categorize it, the goal is to create a marketing strategy that leverages your strengths, mitigates your weaknesses, capitalizes on your opportunities, and diminishes your threats." I like that thought.

Marketing for Financial Advisors does a superlative job of discussing pretty much the whole gamut of marketing -- it not only gets into advertising, it gets into psychological inertia. I have psychological inertia in spades. And how about mental accounting? This to-the-point book even discusses how clients handle math. Run don't walk, and buy a copy of Marketing for Financial Advisors.

It's Not Just Who You Know--Transform Your Life (and Your Organization) by Turning Colleagues and Contacts into Lasting, Genuine Relationships, by Tommy Spaulding (Broadway Books, 2010).

This ties in nicely with the previous book. The founder and CEO of Spaulding Companies and former head of Up With People, knows of what he speaks. Consider: "You can't lead with greatness without genuinely caring about others, and you can't care about others until you can learn to emphasize with them. It's not something you can fake."

After you read Marketing for Financial Advisors to discover how to improve marketing, read It's Not Just Who You Know to polish your networking skills. Tommy Spaulding is clearly sensational at making and keeping relationships. This book helps to slow the world down when meeting new people; it's the how of actually relating to them. It's pretty tough to build and maintain a practice if you can't go one-on-one, right?

Don't worry, though -- all of your relationships don't have to be deeper than the ocean. Mr. Spaulding writes about the five floors of relationships -- the higher the floor, the more meaningful the connection. Many are stuck on the first floor; this wise man will tell you how to deepen associations when you wish.

Get-It-Done Guy's 9 Steps to Work Less and Do More, by Stever Robbins (St. Martin's Griffin, 2010).

Business Week says "Robbins offers tips on how to streamline virtually every task." The magazine, now part of Bloomberg, is correct in the assessment.

If you have trouble with coworkers, Robbins suggests that you spreadsheet people -- make a list with the rows representing the coworkers and the columns for relationship-building tasks. I like the idea of checklist for almost anything and so this idea is appealing. The reason my pool guys -- soon to be fired, by the way -- make a mess of things? No checklist. That's why they keep missing things, year after year (I have too much patience, sometimes).

Make no mistake, this book is about organizing things from soup to nuts. It also is a fit to the first two books reviewed. If you mastered all three, you'd probably have the world by the tail on a downhill pull.

Robbins on filing: "When you're doing the stashing, put things away by keeping in mind how you're going to find them later." An admitted organizational geek, Mr. Robbins learned filing as a boy by reading From the Messed-up Files of Mrs. Basil E. Frankweiler, by E.I. Konigsburg, a book that details how a little girl finds a file, in a room stacked ceiling-high with cabinets, in one hour. Or maybe, from the book, he learned how not to file, eh?

There's good humor in Work Less and Do More, and many readers will identify Robbins as the host of Get-It-Done podcasts, which have had over six million downloads.

Richard Hoe, ChFC, CLU, AEP, has been an investment professional for 40 years, and is a registered
representative and investment advisor representative. He is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University. Readers may e-mail Richard Hoe at
richardhoe@richardhoe.com.

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