E100: How to Avoid Being Tricked By Rates of Return
In this episode, we will discuss how easy it is to get your ears tickled by rates of return. We’ll also share how to focus on the fundamentals behind an investment, and also why the rate of return mentality should not follow you into the world of infinite banking.
We have spoken about today’s topic before: rate of return. We’ve attacked it a couple of different ways, but we wanted to revisit it because it often comes up. We discuss it regularly in our discussions with clients, and it’s just prevalent across the financial sphere in general.
Tune in for an illuminating 100th episode!
Rate of Return Topics Discussed:
- Your 401k and your real rate of return
- Investing mindsets to reveal truth
- The rate of return in whole life insurance policies
- The true rate of return from CDs
- Differences between typical investment and infinite banking
- The basics of compounding interest
- How Warren Buffet avoids getting his ears tickled
- Leveraging infinite banking to pay for things big and small, now and in the future
- Gain access to our Secret Banking Masterclass now FREE to listeners of the podcast here now
- What is Infinite Banking
- E80: How to Stop Being Deceived by Rate of Return
- E40: 401k and Rate of Return
- Credit: Episode art background photo by Matt Palmer
Podcast transcript for episode 154: Avoid Being Tricked By Rates of Return
Nate: In this episode, we will discuss how easy it is to get your ears tickled by rates of return, how to focus on the fundamentals behind an investment, and also why the rate of return mentality should not follow you into the world of infinite banking. She’s Holly and she helps people find financial freedom.
Holly: He’s Nate. He makes sense out of money. This is Dollars & Nonsense. If you follow the herd, you will be slaughtered.
Nate: This is a topic we have spoken about before, Holly, the rate of return. We’ve gone at it a couple of different ways, but we wanted to hit it again because it’s something that comes up quite often in our discussions with clients and it’s just prevalent across the financial sphere in general. People are talking about the water cooler talk of, “Hey, what’d you earn last year in your 401(k), what’s your rate of return? What are you invested in? How much is that paying you?” and so forth, so we wanted to have a podcast just solely devoted to what place does rate of return, does that mentality have in your investing life. Most especially as we’re going to go along with this, we’re going to talk about how it comes into play with policies because that same type of investment rate of return thinking can pervade infinite bankers, though really that was not Nelson Nash’s intent when he created this concept and that really is not the goal of infinite banking by itself, so we need to make sure we see it all in the right light.
Holly: Especially, I feel like lately, everybody wants to know what is that rate of return and it’s the way they’re viewing the life insurance policy instead of understanding what the life insurance policy is, and really, the policy is the bank. It’s not the investment, it’s the policy is literally the bank that allows the process to go forth or take place or occur instead of viewing it as this is an investment. The policy is not an investment.
Nate: Exactly right, I mean, and you mentioned something that Nelson Nash also mentioned in his book quite often when he wrote about this topic and when he created it. Infinite banking is a process. It is not a product, it’s not an investment, it is actually just a new way to work with money and it is a more profitable way to use money than what we’re used to using, so it can be funny. Sometimes, I’ll say, “The rate of return of infinite banking can be infinite to some degree because it’s making money in a new way,” and so we’re going to talk about that actually in a little bit more detail here in just a moment.
But one of the things that rate of return is used for is really you’re dealing in the world of investments, so you’re out there, you’re trying to figure out, “Okay, I’ve got some money, what should I be putting it in?” and you’re scoping out these different types of investments, trying to figure out what’s a good place for money, and rate of return is a discussion in there. What do you think your profit’s going to be in these investments? You’re trying to choose, right? You’re looking along the investing landscape and trying to figure out all these different things and where to put some money, so it’s just one of the characteristics of an investment that help you make a decision.
If you have a CD at a bank paying 1%, well, that rate of return might not be very good if you compared it to a rental property or something like that, but there’s can be value in having some liquid money, too, so in other words, rate of return is just one aspect. It’s not the only aspect. If it was the only aspect, then everybody would only throw money at the riskiest stocks in the world and have 100% of your assets held there all the time. Who needs a bank account? Brokerage accounts allow for distribution. Why don’t you just have all your money in the high-risk stock category? It has the potential for the highest rate of return of any mutual fund out there. You just find the one that’s going crazy and they’re like, “Hey, we might hit it big with some of these IPOs that are coming out.”
Well, obviously, that just doesn’t make any sense. Rate of return fits a specific part of the landscape, fits a certain part of the discussion, it’s part of the process figuring where to put money, but it’s not the only aspect of something that is real or that really matters to you and then especially when you’re talking about infinite banking, and we’re going to talk about that, Holly, in just a minute a lot more, but you really got to get your mentality out of just rate of return because that would imply that you’re going to buy a life insurance policy, put money in, and let it sit there and never use it because that’s what you do for an investment and rate of return. That’s the mentality: “I’m going to send money in here. I’m not going to touch it. What’s the interest? What’s the rate return that’s going to produce for me?” Sure, that’s a decent discussion, but that’s not why you should be doing this process of infinite banking.
Holly: You guys have to differentiate between an investment and infinite banking as your bank and the vehicle and tool. Just like Nate said, the bottom line is in a bank when you make a deposit into your checking or savings account, typically, we don’t just leave that money sitting where an investment is you are leaving your money sitting in something, a vehicle to produce a rate of return for you, where instead what we are trying to do with the infinite bank in the life insurance policy is actually use that as the bank and then be able to access that cash for whatever you want to invest in.
It’s two separate things, but most of the time, our mindset says, “Well, I can earn 11% in a mutual fund,” or, “The average rate of return on the stock market is 5%, so I could do better in that,” but you actually are leaving your money sitting. What we’re trying to get you to do is understand the process that this is a bank where the money resides initially, and then you’re using that money to go and invest it in whatever you want to that is earning you the rate of return you want to see
Nate: One of the things that people do say is they’re like, “Well, why would I put money in the policy if I can earn a higher rate of return elsewhere?” or something like that. You mentioned something like you said, “The stock market, it averages 8% over the last 20 years,” or 30 years or whatever it is. One of the ways rate of return can be deceiving is because many times it’s backward-focused.
In other words, if you were to go find some sort of guy who’s trying to sell you on an investment, he’s got some company that takes your money and invests it, buys property, maybe like a property syndicate doing some syndication, something of that nature, and what he’s going to do, he’s going to say, “Here’s my track record. We bought a couple of deals and they produced 15% rate of return and we think we’re going to get that on this new deal, come put your money into it,” and they use the rate of return, this discussion as their sales pitch, as part of their marketing tool.
That’s why it can be deceiving in a vacuum, because the new property that he’s telling you to pool your money together with other people to buy could be a piece of crap, but if all you’re doing is getting your ears tickled with, “Oh, what if I miss out and I don’t put money in and it does well and I miss out?” and you throw your money in and then the thing goes belly up and you lose half the principal and the guy turned out to be a scam, it’s funny how often that happens.
But what I’m trying to say is rate of return is typically, people talk about the stock market, who cares what the stock market did 10 years ago? I mean, there are some things about it that might be cyclical, but what you need to figure out, is right now a good time to put money in? It doesn’t matter what happened 10 years ago for the last 10 years and what it’s averaged to. It just doesn’t matter. It depends on what are the fundamentals of that investment.
It’s kind of like what Warren Buffet does. He looks at the fundamentals of a company and sees whether it’s priced below what it should be based on its fundamentals. That’s why he’s had so much success over his career, it’s because he just doesn’t get as the ears tickled by, “We think it might earn this amount of rate of return.” No, he’s buying things for value.
I bring that whole discussion in, Holly, just to simply say there’s fundamental reasons why infinite banking as a process will make you more money than doing it the other ways that you could buy something and it has nothing to do with, “Hey, what’s the rate of return on the policy? What’s the dividend percentage?” All these things that people will try to get at, they have a place in the discussion, they really do, but that discussion has nothing to do with whether or not this process works or not.
Holly: Yeah, Nate, it really is a process. It’s about teaching you how to use the infinite banking system that you have created and often, the people in the process are yourself. Rate of return, sometimes I say it’s not part of the discussion because until you understand the process, it doesn’t matter discussing rate of return because if you’re looking for something better or higher or more risky, that’s what you should do because in reality, until you understand the process, you can’t really use it and implement the system like you should in order to get the rate of return that is infinite, like you just said.
There are so many infinite possibilities to be able to use the infinite banking system that your rate of return is infinite, because it depends how you use that process and that’s really what Nate and I’s goal is to get you not only to develop and process that system, but also to be able to implement it for what you want to go to, but I’m just going to say one thing Nate said: It is the fundamentals and if your ears are being tickled with a high rate of return or an average, I think you really have to start questioning what is the actual rate of return going to be versus what you hope or expect it to be.
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Nate: Different types of assets produce return in different ways, so you have some things that produce a set, like a bank account or a CD that just pays a set amount of interest at different intervals, you have things that appreciate or depreciate in value over time, and so rate of return is just a difficult thing. It’s why it’s so deceptive and people just throw it around there, people buy things based on projected rate of returns. I just think that’s dangerous because of all the different ways that rate of return can be done. Which one works for you is dependent, like some people need income now. Well, having an asset appreciate over the next 10 years slowly may not be the type of return that you actually want to be experiencing in that scenario.
That was kind of a side thing, Holly. What I wanted to get to was what Holly and I want you to be able to do is just to have more money, that’s really what infinite banking is about: How can I create more money living life the same way I’m already living it? I don’t have to change my cashflow. I don’t have to earn more money. I don’t have to go chase a high rate of return. How can I end up with more money buying a car? How can I end up having more money after I go on vacation? How can I end up with more money after I pay my tax bill for the year or paying for my kids’ education?
What we’re trying to say is there’s a way to do it normally, it’s called bank accounts. You put money in a bank account and you spend it and it’s a zero-sum game, nobody wins, you just spend money. I mean, well, the bank might win because you have deposits with them, but I mean, you don’t make any money. If we can just show you by changing your process of what you’re doing to, let’s say, buy a car, and at the end of that process, living life the same way, keeping cashflow the same, you’ll end up with just more money. Is that really a rate of return discussion or is that just this process of buying car’s better than the old way you were doing it?
That’s what Nelson was trying to say. He’s not saying you got to buy a whole life insurance policy because it’s some amazing investment and just store all your money in it, though I do think it is great and I do store a lot of money in it, but the real thing is we’re trying to teach the process that if I had paid premiums into a life insurance policy that produces cash value that I borrow against to buy a car and then I repay that loan just like I have been repaying loans to a bank, so I keep my cashflow the same, at the end of that timeframe, I’m going to have a lot more money doing it this way than that way.
If you are listening to this and you know a different process that allows you to make money doing these things in life, whether it’s buying car, vacations, taxes, education, monthly bills, all these sorts of things, if you can find a better way to do it, then just come, let us know, maybe we’ll have to change, but right now, heck, we know that by doing this infinite banking process, we can create more money living life the same way, just by changing, really, where we’re banking at and it’s not a rate of return of the policy discussion. That’s not what comes into play, that’s not what we’re after, it’s the fundamentals that you’re after.
Holly: Once you actually start the process, it’s actually seeing and beginning to understand how it works. You might be saying, “How, honestly, can you say it’s infinite and how can I really earn a profit or money by maintaining my same lifestyle and yet all I’m changing who my bank is?” but it literally is that simple. We talk a lot about we’re changing the direction of your money from constantly away from you back towards you and really, that’s why it’s infinite because Nate and I’ve been able to see how you literally can have infinite money just buying cars and paying yourself back or paying for that family vacation or whatever it is, whether it be… I mean, just the mindset of I could pay my taxes or do charitable giving and if I use the IBC process and the system the way I’m taught, I actually can make money, is unheard of.
Nate: Exactly right. I mean, we’re just not taught how to do it, we’re not taught a way to do it. Maybe there are other ways to do it, I don’t know them yet, but I do know one thing is true: Infinite banking works. The process of building a high-cash-value life insurance policy and using it as a banking tool to leverage it and to fund the things in my life and to repay that tool, I just know that going through life, living it that way, I’ve seen it proven time and time again in my own life and my clients’ lives. It just is a better way. It’s more profitable than doing everything else. I don’t even really care about what the rate of return is. I could say it’s 20%, but it just doesn’t matter. You got to look at the fundamentals behind it.
Even people in the infinite banking world use some of these gimmicky return discussions and I’ve been guilty of it, too talking… Maybe, what do you call it, caving in to the rate-of-return mentality for clients who are interested in it? I’m not here to say that policies don’t offer a rate of return, they do, and they do grow, but if that’s the only reason that you’re buying in is just because you want a safe asset that grows well, I just feel like you’re missing the whole point.
Sure, it can work that way. People own life insurance policies just for the safety and security and growth of that asset, but don’t think to yourself that by buying the policy you’re actually doing what Nelson Nash called “infinite banking.” You just now own a life insurance policy, so there may be value there, but it’s not what we’re really trying to promote, and so the rate of return discussion that we have when we’re trying to compare investments, there’s a place for that, but it needs to be left at the door when you start doing infinite banking because we’re really here to teach you to make money in a new way.
The old way was this, Holly, the old way was take some money out of your earnings, put it aside, probably in a 401(k) or an IRA, that’s what we’re told to do, let it sit there for 40 years, invest that money in mutual funds to hopefully earn a decent rate of return and the other 90% of your income that you had to spend, you just spend it and it’s gone forever. That’s what we were told to do. With infinite banking, a little bit different. We still encourage you to save money, but the question is: Can we start making money on some of the money that we’ve spent?
Holly: The answer is we can. It literally is a shift of your mind, but really, the only difference that you’re doing is using a different vehicle that gives you access to your money and yet still grows tax-free and I think that’s why for Nate and I it is so infinite because I haven’t seen somebody say, “Can I do this?” and it doesn’t work and that mentality, that’s why we say we really shouldn’t be talking about rate of return. Yes, there is a great rate of return, ‘kay, or it’s a good average or whatever you want to say is the rate of return in the policy, but our discussion should really be about the process and then how to actually use your money for what you want it to do.
Nate: Yeah, yeah. Exactly right. As we’ve said many times in this podcast, one of the reasons why Holly and I don’t do a lot of comparisons, some people say, “Well, a policy compared to what if I missed all my money in here and didn’t go about using the policy?” Some people, I mean, I’m not trying to say you’re off-base there, I guess. I mean, I’m not trying to criticize. I’m just simply saying when most people ask those types of questions, “What can you compare a policy to if I did something else with my money?”, we don’t really go there because once again, the whole goal of the policy is not just to have money, sit in it. That’s the old way of thinking, the old investment mentality.
What we would instead like to do is show you how you can use the process of infinite banking to improve the profit that you can make from any investment that you’d like to put your money into and also make a profit on some of the more basic things in life, which we’ve also spoken about, whether that’s as simple as going on a vacation and using the policy to do it as opposed to saving up money in a savings account to do it. If we can show you how to make money in this new way, this banking way that
we’re not taught how to do anywhere else, then we are now creating money that didn’t exist, and once again, it’s not really about the rate of return of anything, it’s really about the process that Nelson Nash taught through infinite banking. That’s really the key.
A whole podcast just saying, “Guys, it’s easy in the infinite banking world or any world in the investment world to get focused on the rate of return,” that mentality has been deceptive and been abused by people in the financial industry for centuries to try to get people to put money in and it can be manipulated, so you have to focus on the fundamentals. Infinite banking doesn’t work because the rate of return or the policy, it works because the fundamentals behind it, because of the process, and there’s many investments that work like that, too. That’s why we say it’s time to get good at something in the financial world and you’ll be well off. Anything else, Holly, before we close down? Any thoughts?
Holly: No, I couldn’t have said it better, Nate. I couldn’t have.
Nate: Okay, that’s great. Well, this one may have been a little bit short and sweet. It is something we’ve hit on a couple of times maybe in different detailed elements at other times in the podcast, but we thought it was worth hitting at again. Don’t be deceived by rate of return, don’t bring that thinking into the infinite banking process. Understand that what we’re trying to do is make money in a different way and in a new way than what we’ve been taught and by focusing on the process, I think it’ll unlock your imagination a little bit for what you can do with the system. This has been Dollars & Nonsense. If you follow the herd, you will get slaughtered
Holly: For free transcripts and resources, please visit livingwealth.com/e100.
Announcer: Dollars & Nonsense podcast listeners, one more thing before you go: Ease your worry and start your journey towards security today. Visit livingwealth.com/secretbanking. You’ll gain instant free access to the special one-hour course Holly and Nate made for you. Again, that’s livingwealth.com/secretbanking.
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