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I want feedback on IF this "diversification" of my portfolio seems to be a smart idea. Basically, I have split it into 3 parts:
Real Estate, 401k, and Whole Life Policy. I pay an equal amount into each on a monthly basis.
Real Estate is a separate investment then my primary residence, it is a condo in another state.
401k (and small mutual funds from another 401k roll over) are a 5% match from an employer and rather aggressive.
Whole Life ($500k through Guardian) is combined with additional term to make up my total coverage.
I am in my mid 30's, wife is also and is working and have 1 small child we will need to put through school in about 15 years. I "beleive" this is a good strategy, just wanted some other thoughts.
While in general there is merit in viewing your home as a part of your total assets, and I suppose it would also make sense to consider the ultimate value of an insurance policy as a potential asset I would be very concerned that it you are literally sending the SAME amount to each you are massively underweighting the area that has the most potential for GROWTH.
There is no way that the historic returns of about 9% on equities can be consistently over long periods of time by large numbers of funds. You won't get a return anywhere near that on any kind of insurance product if you live to your actuarial age. You house will similarly not appreciate in normal circumstances at at rate approaching that either...
9% is pretty nice. It sounds like peanuts, especially as we've been conditioned to thing in terms of "percentage of retail" by promotional pricing at shopping malls, but in terms of compound returns a return of 9% will result in your money DOUBLING about every 8 year. In you mid 30s you have to work until 67 before social security kicks in -- 8x4 = 32, so you should expect the money you save today to double 4 times at 9% by retirement. $10,000 is $20,000 in 8 years, $40,000 in 16, $80,000 in 24, $160,000 at retirement...
The investment property is not my primary. It is a condo, that we also use as a vacation spot in a high retirment area in Florida. We got it through family, so price was good and potential (due to location in large marina) for increased value as well as being able to use it over the years was a draw.
I went with the whole life to provide A. life insurance ad well as B. a steady rate of return as well ad dividens. Then, the 401K and mutual funds i have invested more aggressively.
Qdog - Can you elaborate on why the 529 over the whole life (cash value) specifically?
The 529 vs whole life thing was popular once upon a time when 529s were new and old school insurance agents were plentiful. My guess is that one of the major life insurance companies worked up the hypotheticals of using the cash value to finance college and/or compared the effects of borrowing from a whole life policy to pay for tuition. I think that when stocks were roaring those kinds of arguments were hard for folks to accept. Now that many people have seen that 529s can have major negative turns right when you need them to be going strong more people may realize that a guaranteed sum and/or below market rate loans are a nice option. Conversely if you do have the skill and fortitude to use the difference between the low cost of term to fund a low fee 529 with good returns you might be able to outpace the growth of whole life cash value / borrowable amount, though without any guarantees... Eighteen year olds typically don't want to wait around until "the market comes back" if their classmates are already enrolled
The 529 vs whole life thing was popular once upon a time when 529s were new and old school insurance agents were plentiful. My guess is that one of the major life insurance companies worked up the hypotheticals of using the cash value to finance college and/or compared the effects of borrowing from a whole life policy to pay for tuition. I think that when stocks were roaring those kinds of arguments were hard for folks to accept. Now that many people have seen that 529s can have major negative turns right when you need them to be going strong more people may realize that a guaranteed sum and/or below market rate loans are a nice option. Conversely if you do have the skill and fortitude to use the difference between the low cost of term to fund a low fee 529 with good returns you might be able to outpace the growth of whole life cash value / borrowable amount, though without any guarantees... Eighteen year olds typically don't want to wait around until "the market comes back" if their classmates are already enrolled
I would have to agree with this. The other pro/con is that with the whole life you don't have to report that as funds available for college money unless you surrender the policy (but it probably has a loan provision and that is not reported as money for college) vs a 529 where 100% has to be reported as money for college. It could affect scholarship money, etc. your child might get. If you live in a state with a good matching fund for a 529 though, you are missing out on free money there. Our state doesn't have a good match so for us, the whole life makes more sense AND if we don't need it for college, we just don't use it where as the 529 you have to use it for education or you pay penalties.
I would consider getting your whole life from a better company than Guardian though--switch to a top mutual company for better returns (Northwestern Mutual, New York Life and Mass Mutual are the top three, in that order). They will pay better dividends and your cash value will accumulate faster--and they are MUCH more stable financially.
Golf, thanks for the info. I will take a look. I did do research on Guardian, they seemed very strong with very good ratings. Here are their latest:
AM Best - A++ (superior)
Standard and Poors - A++
moodys - Aa2
Fitch AA+
Weiss - A
Comdex - 98
All are high ratings.
The ratings are decent, the other companies I mentioned were better and they pay better dividends (Northwestern paid 4.6 BILLION in dividends compared to 171 million at Guardian-for example). Just something to investigate. We have had Northwestern for about 20 years and our rate of return on our cash value is about 9% over that time--not a bad deal if you ask me.
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