Thursday, June 4, 2020

Mutual Funds and VUL (Insurance).. are they better than personally doing stocks?

New investors (young and old) are often easy targets of scheming sales people. And when I say "salespeople", those who hide under the guise of "investors", "financial advisors" and "gurus" but are actually "sacrificing" their time more on hunting for someone like you (so that you will become rich and smart just like them?). Strange... very strange...

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I am not saying everyone as there are several honest and good willed people out there. But I will arm you to be defensive and cautious as I have seen a lot of these snake-oil salesmen misrepresenting their products for the sake of getting sales more than wanting you to truly understand their products and see if it fits your needs. These products have their own PROs and CONs but most of the time, it limits your opportunities because these products feed on your potential gains more than they can amplify.

Mutual Funds 
Lets say you do not want to bother trading stocks everyday. you find it hectic and you don't care of learning it. You want to put your money in and let it just grow by itself. If the market is falling, then it will just balance itself out and on average, it should average at 12% Well then this is probably for you might say but NO! first do not be fooled when the show you some BS chart and idea that the stock market on average returns 10-12%. That is old recycled sales talk as now it moves around 6-8%. It changes with the times. Most mutual funds also are just eating your money and you are better off trading on the PSE index! trust me! if you expect them to trade on your best interest you are fooling yourself. 

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On average they are just pretty much blind traders putting in money on an index or a portfolio mix and let it ride for life. when a bear market happens you will see that their units follow suit. Wait? did they not exit the market before it happened? I thought they are "experts"??? what are those monthly "professional fees" I pay them for then? Pretty sure they did, they will just show you what the market is doing and say "Oh... the market went sour so the value of units went down". but highly likely they have "shorted" these already (sold at high price and aim to buy later). 

So if your mutual fund just follows the market, you know its a sham and its like me taking 2% cut of your potential earnings if you had just invested blindly in the PSE index. If a mutual fund "expert" shows you their performance chart and they just follow the market (PSEI), leave! because he is just basically putting your money on the index and sleep. All that while charging you thousands a month on "professional fee". You should only pay professional fees on true traders who beat the market, those who can sell before the crash and buy before the boom which makes your investment grow continuously, thus beating the market for more than what he charges. 

VUL (Variable Unit Link Insurance) 
This is a very common offer in the insurance industry. Insurance is good if you have beneficiaries, but if you don't have one why are you buying these for? Insurance is like a lottery where you hope that you can die today so you or your family will become rich for a fraction of that "investment". This is something you renew and pay every year until the day they claim you are no longer insurable. That time the relationship is like "Thanks for your years of paying us for nothing... but at least you should be happy because turns out you are rewarded with a longer life than the average :)".

Now what is VUL. They may sell you this product under a different name (VLL, HoneyPot, Pikachuchu or Wachamacallit) but as long as you see "insurance" + "investment" or "pay periodically until X years" and they claim "you will no longer need to pay insurance after that" then chances are its a VUL. A VUL is basically a product sold as one but is actually two products. An "Insurance" and a "Mutual Fund". 

Amazing so I have a mutual fund that also gives me free insurance after 10 years? or was it an insurance that I paid in advanced that gives me free mutual fund units? Close but you gotta remove the free part most of these "salesmen" try to hide from you. Nothing is free coz if it was, the insurance industry would not had become one of the richest businesses specially in fear driven economies. Now with that said, as it has a mutual fund portion, that means the same rules apply. What agents will not tell you unless you ask is that they will eat your fund using the "professional fee" for their in-house expert who is just as good as falling along with the index. if the market crashes, so will their units. No hedge strategy? no cut-loss? Nope! just pure incompetence from "financial experts" who fare worst than average traders.
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The reality is that you are buying 2 things at the same time for X years. an insurance and a mutual fund. let me give you a sample. lets simplify and say you only need 5 years of paying 5k a month or 60K a year. lets also assume the market grows at a constant rate of 6%  annually for its previous value. Do not believe their sales talk by the way that the market grows at 10-12% on average. You are not talking to investors but sales people living off on selling products. They do not know what they are saying except for the sales pitch they recycle. The average is 6-8% and it changes depending on several factors. But they will claim 10-12 is average when its not because most buyers who get lured only get to learn this after they decided to claim and complain (or not because yes! they freaking DEAD!) :D

The chart below shows that your annual payments get split into 2 pools. Insurance and the "investment". The first years would be higher because usually they use it as payment for the premium of the insurance. It gradually decreases until after 5 years, congrats! you no longer need to pay it! But wait??? why did you put some deductions for the succeeding years and who is paying for that? Some will claim "oh! its the company who is now paying for the insurance"... wow! how nice of them right? nope!

Mutual Fund
 Total MF Unit Value Unit growth @6%
 1 60k  40K 20K 20K 1,200
 2 60k 20K 40K 61,200 3,672
 3 60k 10K 50K 107,570.86‬ 3,672
 4 60k 5K 55K 169,025.11 6,454.25
 5 60k 5K 55K 234,166.62 10,141.51
 6 0 5K 0 239,308.13 14,358.49
 7 0 10K 0 243,666.62 14,620.00
 8 0 10K 0 248,286.62 14,897.20
 9 0 20K 0 243,183.82 14,591.03
 10 0 20K 0 237,774.85 14,266.50

If you do the math you will see that it actually "leeches" of your mutual fund account. Imagine having a bank account with an interest rate of 6% (Nice!) but then there is this auto-debit account from your gym membership that can control their monthly fee and just keep raising it each year? 

This is how the scheme works and is where people who claimed the insurance get shocked that after X years have passed, they discovered that they paid more than what they will receive which is too different from the sales pitch given. because unlike normal insurance, only you have access to your bank account and can decide if you will still get an insurance for the year or just accept nature and not bother with it. A VUL however means that the insurance company has access to a "bank account" which you had with them and can eat into its fund value by forcing the insurance portion to auto pay premium priced insurance annually, specially if when you are older. Notice in the exaggerated sample, the value of the fund, even with the constant growth of 6%, can no longer sustain the insurance feeding off of it. Year 9 and 10, the value is decreasing and with that, the 6% growth value. This is how the insurance makes money. But you won't need to worry about that much because by the time you realized it... you DEAD man! :D

If you are young and is starting to learn investment, play the stock market. Get some bruises and lose some! That is what investors call "tuition fee". what you will learn will be better than what you pay monthly to a mutual fund trader. If you are however not in any way interested in learning and bother with stocks and would prefer finding someone who will trade your money seriously. Find a good mutual fund trader like me (joke!). You need to find a serious investment firm that has a track record of beating the market and not listen to salesmen who do not even buy or use their own product.

If insurance is already something truly desire, then the VUL is better than plain insurance as it enforces you to pay now for something that you might not be able to in the future. A security for your loved ones left behind. Also note that it is harder for your dependents to claim your stock portfolio (when you suddenly blink out of existence). Stock brokerages do not have an option for you to specify who will claim your shares and thus, once you are gone, it is basically theirs... and thus, that is where the insurance becomes quite a bit useful. 

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