A recent comment made by a reader of this blog inspired this post. I’ve never gone into detail on the question of how the rate of return on a Bank On Yourself policy compares with investing in stock market and mutual funds.

And is it really true that if you simply hold on long enough, investing in stocks and mutual funds will out-perform just about anything else?

So, I’ve decided to lay those questions to rest – once and for all – right here. Here’s the comment by a reader who calls himself “Tob” that sparked this post:

This is a ridiculous attempt to compare whole life insurance to the “stock market” after the worst decade. I can show you how investing blows the pants off whole life using investing basics. Balanced Funds. How many funds do you want that have produce 10% per year compounding average to convince you?”

So, has “Tob” *really* found that elusive investment that gives you a 10% average return, and still lets you sleep at night?

We’ll get to the answer to that question in a moment.

First, let me address the question,

### “What the heck *is* the rate of return on a typical Bank On Yourself policy?”

*is*

And the answer is that you would have to get a 7 – 8% annual return in a taxable account to equal the average net return in a typical and properly designed Bank On Yourself-type policy (assuming you’re in the 35% tax bracket).

Keep in mind that you receive a guaranteed and predictable cash value increase ** every single year** – in both good times

*and*bad.

In addition, you have the potential to receive dividends. While not guaranteed, the companies used by Bank On Yourself Authorized Advisors have paid dividends every year for more than 100 years.

The growth in a whole life insurance policy is not only guaranteed, it’s *exponential*.

The chart below shows you the exponential nature of the growth in a properly designed Bank On Yourself policy. These policies are designed to get better (more efficient) every single year, *simply because you stick with it*, rather than jumping from one investment to another. *Notice how this gives you some built-in protection against inflation:*

This chart is based on one of my own Bank On Yourself policies, showing the actual growth I’ve received so far in the policy, and the projected future growth, based on the current dividend scale (dividends are not guaranteed and are subject to change).

However, no two Bank On Yourself plans are alike – each one is custom tailored to the client’s unique situation. To find out how much *your* financial picture could improve if you added Bank On Yourself to your financial plan, and to get a referral to a Bank On Yourself Authorized Advisor (a life insurance agent with advanced training in this method), request a free, no-obligation Analysis.

Unlike stocks, real estate, and other traditional investments, both your annual guaranteed cash value increase and any dividends you may receive are ** locked in**, once credited to your policy. They do not vanish due to a market correction or crash.

### Imagine if you *still* had *every penny* of gains you’d received on your investments!

How much brighter do you think your financial picture might look right now?

To give you an idea of just how much of a difference having your gains locked in can make, here’s a fascinating little quiz…

Do you think it’s possible to invest $50,000, get a 25% average annual return on your money every year for four years… and end up with only the $50,000 you started with?

If you answered “no,” you’re in for a real surprise!

Let’s assume your money increases by 100% the first year, and then goes down by 50% in the second year. But you do really well in the third year, because your money increases by 100% again. Unfortunately, however, you take a 50% hit in the fourth year.

If you add those four annual percentages together and divide by four, you have a 25% annual return.

Not bad, huh?

But let’s see how much money you actually *have* in your account…

You started with $50,000 and your 100% increase in the first year doubled your money to $100,000. Then you lost 50% in year two, giving you a balance of $50,000.

You did great in year three, when your 100% increase doubled your balance to $100,000. But the 50% decline in the fourth year leaves you with… the same $50,000 you started with four years earlier!

* So what good did getting a 25% average annual return do you?*

That and a quarter won’t even buy you a cup of coffee, let alone a mocha latte!

You have *nothing* to show for this roller-coaster ride other than heartburn and a stomach ache.

But this is the kind of smoke and mirrors the Wall Street illusionists have been using to pull the wool over your eyes for decades!

*You* take all the risk, and *they* get the rewards, *whether you make money or not!*

But the myths and lies perpetuated by the Wall Street propaganda machine don’t stop there. Here are three shocking facts about the long-term returns people are *really* getting in the stock market:

### Shocking Fact #1:

** ** A recent study^{1} revealed that, for the past 190 years, American stocks have averaged a REAL annual return of only 1.4 percent!

Are you wondering how that could possibly be?

As the study’s author pointed out, the popular charts of stocks, bonds, bills and inflation that line the walls of brokerage offices assume full reinvestment of dividends, no commissions and no taxes.

Is that how *you* invest?

This study didn’t even adjust for commissions and taxes, because they vary so widely. It only accounted for inflation and the fact that investors typically don’t reinvest all their dividends.

Is a paltry 1.4 percent real return worth the risk and sleepless nights to you?

And remember, that figure doesn’t even take into account commissions or taxes!

### Shocking Fact #2:

For the ** last forty years**, ordinary long-term treasury bonds have outpaced investing in the stock market.

^{2}

Long-term treasury bonds are what *grandma* buys so she can sleep at night!

Which means the *only* rewards investors have received for taking the extra risk of stocks and mutual funds for the past *four decades* are sleepless nights and broken retirement dreams!

### Shocking Fact #3:

The typical equity mutual fund investor** has only earned 3.49% annually for the past 20 years, beating inflation for that period by only a hair**. Asset allocation and fixed income investors haven’t even managed to outpace inflation for the last twenty years!

^{3}

### So, what about that 10% annual return “Tob” was talking about?

In your dreams, my friend!

A so-called “balanced fund” is a mutual fund that “buys a combination of stocks and bonds to provide income and capital appreciation, while avoiding excessive risk.”

However, these funds have averaged only a 2.74% annual return for the last ten years, lagging inflation. The 15-year average is a little better – 4.85%. And the 20-year average has been 6.18% (see Wall Street smoke and mirrors revelation above), however, the fees charged by mutual fund companies for this type of fund are around 1.3% What’s left barely outpaced inflation during that period.

Oh yeah – in 2008, the average balanced fund lost 28%, according to Morningstar.

Woohoo! Where can I get me some of that stuff!?!

Let me let you in on a little secret…

One of the many advantages of a properly structured Bank On Yourself-type policy is that you can borrow the equity in your policy, use it to invest elsewhere, and your money in the policy continues growing as though you hadn’t touched a dime of it! (Note – not all companies offer this feature.)

I explain exactly how and why this happens on pages 68-69 of my best-selling book.

So, if you found a great investment, you could borrow money from your policy to put into that investment.

Result: You could be receiving the 7 – 8% after-tax equivalent return I talked about at the beginning of this post… PLUS the return of the investment you put the money into!

This allows you to have your money working for you in two ways at the same time!

Chapters 8 and 11 of my book give real-life examples of people doing just that, from the Arizona couple using the money in their Bank On Yourself policy to fund a horse breeding business, to the surgeon who used his equity to purchase shares in a very profitable surgical center.

The bottom line is that the rate of return on a Bank On Yourself policy will put just about any traditional investment to shame, and it will do that without the risk or volatility of stocks, real estate, gold, commodities and other investments.

### Haven’t we learned that return *of* our money is at least as important as the return *on* our money?

Financial security comes from knowing you have a solid financial foundation and that you have a nice chunk of your savings in a plan that only goes in *one* direction – UP.

So, if you haven’t started to Bank On Yourself, why not find out what it could do for you and your family?

Take the first step now by requesting your free Analysis. You have nothing to lose and everything to gain.

1. “Stock market’s real return? Paltry,” by Anthony Mirhaydari, MSN Money, February 1, 2010

2. “Bonds Why Bother?” by Robert Arnott, *Journal of Indexes*, May/June 2009 Issue

3. DALBAR’s *2012* *Quantitative Analysis of Investor Behavior*

“…have to get 7-8% in a taxable account…(assuming you’re in the 35% tax bracket)… This appears to be the eqvalent of somewhere in the range of 4% or so in tax-free munis. A more realistic tax rate to use would be in the neighborhood of 18-20%. If the “returns” on a BOY are ‘tax-free’, then it is nothing more that a return of premium.

Depends what direction you think tax rates will go over the long haul. We may all long for the “good old days” of 18-35% tax rates!

The principal and growth in a Bank On Yourself policy can be accessed by withdrawing dividends up to your “cost basis” (the amount of premium you paid in), and then switching to policy loans which aren’t taxed either.

Thanks for the prompt reply!

I am 45 and left the Marine Corps after 16 yrs because I was a single Dad of four young children and could not deploy. I have no retirement of any kind. Were I to start now with a solid monthly premium would I have a reasonable retirement fund say by 65? Thank you in advance

Sorry I didn’t see your comment until now, Rob. Age 45 is actually right in the “sweet spot” for efficient policy growth!

I encourage you to request your free Analysis and get a referral to one of the Bank On Yourself Authorized Advisors today. They’ll show you how a custom tailored plan would look for you and you can decide for yourself. Many of the people who start Bank On Yourself plans are around your age and have little savings thanks to the Wall Street roller coaster!

I am 59 year old still working with a DB Plan at work that is maxed out. I will have a known monthly amount in retirement. My wife just retired with about 400K in a 401K Plan that we havent rolled over or touched…..is it too late for us to take advantage of the BOY program?

It’s absolutely not too late, Gary. You definitely should speak with one of the Authorized Advisors who can look at your situation and make some recommendations that fit your situation and your goals.

You’ll get a referral when you request your free Analysis here. Hope this helps!

Talk about smoke and mirrors. Your playing on people’s fears just like everyone else. Shame, shame. your 25% annual return doesn’t take into account the fact that you are making contributions leading to retirement and doesn’t take into account dividends which you erroneously say that most people don’t reinvest. Hello!

This study didn’t even adjust for commissions and taxes, because they vary so widely. It only accounted for inflation and the fact that investors typically don’t reinvest all their dividends.

This is really sad, but however you can sleep at night leading people down this path. Truth is that investors need to be educated and if they aren’t, then they fall prey to people like you as well as investment firms and the like.

You missed the whole point of this post. And if we had accounted for commissions and taxes, it would be even more clear how Wall Street has pulled the wool over your eyes.

I don’t know where to begin.

First, I suppose I’ll give you props. As a financial professional, I agree 100% that stock returns have been incredibly underwhelming in the last 15 years. That said, the bond market has done unbelievably well. And commodities have had their moments in the sun as well. It’s a matter doing fundamental research that gives investors their sleep factor. Over the last 40 years, a blend of 40/60 (stocks/bonds) have yielded over 8.5% growth on average. Sure, quote only stocks if you want. But who recommends buying into only stocks?!

And to the point of ‘Average Returns’. If you have a portfolio that was up 100%, down 50%, up 100% then down 50%, the average return on that portfolio is 0%. Any financial professional would tell you that. You don’t simply average together the returns of the individual years. You take the ending amount, less the beginning amount and divide by the years it was invested. And even then, that’s an ‘average’ return, not an annualized return, which would be a more accurate description of return to reality, given that returns compound and the ‘average’ return usually overstates the actual return annually. Again, any good financial profession would explain it this way, but no financial professional would calculate average return as you did above.

That’s simply intentionally misleading those who don’t know better. What you should ask yourself now is, if you need to intentionally mislead them in order to get them to ‘buy-in’ to your strategy, is your strategy really what’s best for them? If it were, why wouldn’t you be able to prove it on real calculations?

For many they need a ‘guarantee’. They likely will not keep up with inflation with that guarantee, or if they do, it will be minimally above. However, the sleep factor always needs to be the number one priority in any investment. If you’re losing sleep over an investment, you’re taking too much risk. There are many good ‘guaranteed’ strategies out there, but be cautious. That word ‘guaranteed’ is thrown around generously. There is counter-party risk (should the company go bankrupt). Find out if they are insured. Find out their rating. Find out their insurer’s rating. Please know that even in the best case scenario, there is no guarantee. And never put all your eggs in one basket.

I came to this site with an open mind because I’m always trying to find new and better strategies for my clients. This is not something I’ll be recommending, even though the commission rate on insurance is very high.

You are accusing me of being misleading. However, the confusion between compound annual returns and cumulative returns has been discussed by none other than John Bogle, the founder of Vanguard Mutual Funds. Here is an excerpt from one of his books where he discusses how mutual funds can mislead consumers by the way they report returns. I didn’t make this up!

Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 61-63

Total return is the percentage change – over a specified period of time – in a mutual fund’s net asset value, with the ending net asset value adjusted to take into account the reinvestment of all income dividends and any capital gains distributions made by the fund. It is almost always calculated before the deduction of sales charges and taxes payable by the shareholder on the income dividends and capital gains distributions.

Total returns can be presented on a cumulative basis or as an average annual compound rate. I strongly caution you against relying solely on cumulative total returns. While the miracle of compounding indeed takes place as the holding period of your investment lengthens, it is simply impossible for most investors to easily compare cumulative total returns in a sensible way. For example, did a fund with a ten-year cumulative return of +100% earn an average annual compound return of +10%? (Answer: No. The annual return, reflecting the yearly compounding effect, was +7.2%.) Did a fund with a five-year cumulative return of +93% do better or worse than one with a ten-year cumulative return of +271%? (Answer: Their annual compound rates of return were identical, +14%.) Has a fund with a seemingly staggering gain of +1,602% over the 30 years ended December 31, 1992, been singularly successful? (Answer: The annual rate of return was +10%. During the same period, however, the stock market’s annual return was +11%, for a total of +2,107%.) Be sure to focus on annual rates of total return rather than cumulative returns.

It might be useful to consider the difference between compound rates of return and simple rates of return. The former figure is derived from linking each year’s return through multiplication; the latter figure is derived from adding each year’s return. For example, consider a fund with annual returns of +20%, +25%, and -15% over three years. The value of an initial investment of $100 in the fund would be calculated as follows: $100 x 1.20 x 1.25 x 0.85, or $128, equivalent to an average annual compound rate of +8.3%. However, when the returns are simply added, the final value of the investment would be $130, a simple average rate of +10% annually.

To do full justice to the difference between the two methodologies, consider an investment that provides a return of +100% in the first year and -50% in the next, or vice versa. The average return would be +25% (100 – 50 2), but the average compound return would be zero. Since the reality is that you would have seen your initial $100 double to $200, only to fall back to $100, it is clear that zero is the appropriate figure. So you should rely on what is called the geometric rate of return – which is annualized on a compound basis and will precisely reflect the total return that you would have actually received – rather than the simple arithmetic rate.

To be sure, the use of average annual compound rates of return tends to reduce sharply the apparent gaps among good performers, mediocre performers, and bad performers. But seemingly small differences in annual rates of return can result in enormous differences in total return over long periods of time. For example, a +12% rate of return from a good performer produces a +211% cumulative return over ten years. For a mediocre performer, an +11% rate produces a +184% total return. And for a poor performer, a +10% rate produces a +159% total return. Even as you use annual rates of return as your standard of choice, then, do not ignore the magic of compounding. http://biz.yahoo.com/funds/b14.html

The problem is that if mutual fund report returns confuses consumers – you can bet it confuses financial advisors, too.

If this is your reason for not working with this concept, that’s your loss and your client’s loss.

But again, I didn’t make this up. I know from experience that many financial advisors don’t understand the difference between compound annual returns and cumulative returns.

My name is Bob and I work offshore as a Captian. I am 24 years old and make a little over 110,000 a year. I am married and my wife has two kids. I have been looking at all different kinds of investments for my future as well as my family. I have a 401k plan and have a Roth IRA account. I am interested in the BOY method because of the ease to take money out before I “come of age.” My only concern is that when something seems to good to be true, it usually is. Would a whole life policy be a good investment for someone of my age or is this for people a bit older?

Bob, you couldn’t be in a better position to benefit from the long-term power of Bank On Yourself!

We have profiled many real people who talk about the ways they’ve used the policy to make it grow.

For starters, check out these stories of Bank On Yourself clients. Notice how many of them say many of them say their only regret is that they didn’t know about Bank On Yourself sooner!

Although some skepticism is healthy, given recent events, the Bank On Yourself product and method has been around for hundreds of years! If it was a scheme or scam, don’t you think it would have come crashing down by now if it was a “house of cards”? These policies have increased in value every year for over 100 years! Learn about the safety of Bank On Yourself here.

I encourage you to request your free Analysis and get a referral to one of the Bank On Yourself Authorized Advisors today. They’ll show you how a custom tailored plan would look for you and then you can decide for yourself.

Umm… dude… your math is wrong. That is not how you calculate the average rate of return. Investments, just like mortgages, etc. are compounded. You calculate the rate of return based on an investment’s lifetime.

In your example, the average rate of return is 0.0%. If it went up 100% the first year, and then did nothing for the remaining years, your math would have THAT as 25% average return, too. But that’s wrong as well. In that case, the average return would be 18.92%, because an 18.92% increase compounded 4 times is a 100% increase.

However, I don’t think you’re just bad at math. I think you know this, and you are carefully presenting the numbers to try to prove a lie. I think you’re a con man trying to swindle people who are bad at math.

Can I invest or fund or hold Silver in the insurance company as a hedge against inflation?

Insurance companies do not invest in currency for a number of reasons, so if you wish to hold silver, you should do it outside of your policy. Remember that life insurance companies have a more than 160 year history of investing successfully and conservatively, and have done so in every period of economic boom and bust, including in periods of high inflation.

I suggest you also read this blog post before making decisions about where to invest in the event of a period of high inflation.