Investment Roadmap for the Risk Averse and Cautious Working Class Investors


  • There are simply three major components in a retirement strategy – insurance, retirement plans such as a 401K or Roth IRA, and your own discretionary investments.
  • The insurance decision is of vital importance. If you deem yourself ultimately worth millions of dollars as a result of your hard work and intellectual capability or want your children to benefit from you materially at your demise, then life insurance is a necessity.
  • Discretionary investments vary tremendously based on individual preferences and comfort. If you have the bandwidth in time as well as the brain power to conduct sound investigational research, put as much discretionary investment money as possible into shares of stocks. An allocation of traditional risky assets like venture capital or private equity investments is also recommended.  If you are consciously aware of your limitation to make sound judgments, or you can’t take any market sting psychologically, then stay away from equities.  You should consider putting money in bonds or real estate.

Until very recently for a long time, I didn’t do any thinking at all about my own financial budgeting or retirement strategy.  I was still young and, up to that point, I had been deeply influenced by some popular themes and well-known personalities in the media.  The advice was that we should all try to be entrepreneurs, earning profits from business created, rather than counting on salaries.  It’s not wrong to encourage entrepreneurship, but to some extent, it overly misguided some ambitious and hard-working people do not plan out their finances safely and soundly.  The result was that many would end up miserable when their efforts failed.  After all, not everyone is made to be great a business leader like Steve Jobs.  The harsh reality is that most of us have to work hard, live on a stable income, and still somehow manage to retire happily.

So instead of dreaming of great business success as the only outlet, we should put heads down, dig deep, conduct all the necessary investigation and lay out a solid retirement plan.  Only after that can we sleep well every night.  And then maybe we may also able to arduously pursue our entrepreneurship dreams.

Qualified Plans

Because of existing tax benefits, utilizing qualified plans such as 401Ks and Roth IRAs are no-brainers. Actually, even though the government set a ceiling regarding how much we can deposit into these two accounts, they take a large chunk of our monthly take-home income.

Insurance Plans

What took me a while to be clear and conclusive about is the insurance plans.

Those who are of the largest proportion of the population live healthily and safely.  But we feel we are ripped off when looking back, finding a considerable amount of our money is entirely given to the insurance company.  What’s more, the fact that a hefty commission is taken out by the insurance agent makes it more loathable.

However, we do need an insurance plan to soothe the worry of an unpredictable future, particularly when salaries, not capital gains or interest and dividends are the chief income source for a family with dependents.  So we should set aside a portion for insurance purposes.

There are two broad options – term life insurance and cash value life insurance.  It is always fiercely debated that term policy is better because the premium paid is almost one-tenth the amount of the whole life policy.  Is it really true though?  Let’s divide into two perspectives – death and living – benefits to analyze the pros and cons.

First, secure feelings can be derived from knowing the death benefits your heirs will receive upon your demise.  If you have to pay drastically increasing annual premiums when in most cases you outlive each term, the death benefits are forfeited and the secure feeling does not exist upon the end of the term. Anxiety will haunt you again.

Secondly, is there living benefit, and if so, is there easy access to this benefit?  A term policy, which is much less expensive compared with its counterpart whole life, contains no living benefits.  You simply pay the premium.  Whole life policies, however, provides so, meaning you will have a cash value account, which grows considerably as time goes by.

The key point those dissidents of cash value policies hold is that the return you can attain with that same amount of money over the same time frame from investing in other channels should be much higher than if you put in the life policy bucket.  For instance, if a whole life policy brings you a 4% annual return, while, alternatively they say you can earn 8% elsewhere.  For a $10,000 regular annual deposit, after 30 years, the policy reaps $560, 849.4, while another choice gives you $1, 132,832.  It seems very attractive and clear-cut to put money in the latter one.

However, how many people are able to find these “channels” with 4% consistent return every year?  A manager who can beat the market is hard to find.  In addition, that 8% calculation is premised on ‘no tax, no commission fee or transaction expense’.   Taking into expenses into account, the actual return from other channels would be lower and lack the initial luster.

Why can asset managers at insurance companies easily beat out other brilliant peers?  And what about retail investors who lack professional training and resources?  I think it is reasonable – not because they are more brilliant, but simply because they have a large asset base and special tax code and regulatory advantages.  For instance, holding a bond for 70 years or even 100 years is not possible for any investors except those at insurance companies; as a result, a high yield originally set in the past can be enjoyed by policy purchasers at present.

Another great feature of whole life insurance is the tax benefits.  It is commonly seen as a must-have product for wealthy people.  No wonder, the government set a maximum threshold – the largest amount a client can contribute in premium to prevent the richest from escaping taxes.

Since it looks like a good asset growing scheme, people wonder whether they have access to the account when the time comes for distributing not accumulating any longer.  Theoretically, you cannot touch it to death. However, this account services a role as your own banker allowing you to take a loan against the cash value.  Since it’s a loan, you wonder whether you have to pay it back by depleting other financial sources.  This, I think is a critical point that actually you can simply default to yourself.  You will be penalized by reducing the amount of death benefit.  But when you reach a certain age, figuring out a good trading-off point is not difficult.  Assume an extreme case to illustrate my point here.  If your benefits are $2 million when you reach age 90, the cash value balance reaches $2 million too, taking out a full $2 million loan without paying it back is a preferable way to pay for a big project or there is no need to transfer wealth onto the next generation.

Discretionary investment

It is the third vital component in a solid retirement plan.  The stock market is full of risk and return.  Blended with the human nature of greed, it behaves like a Vegas gambling site – even the coolest, most brilliant investors can be slaughtered brutally.  The bond market is relatively safe but the low risk comes with very low returns also.  Real estate is more commonly played by mass investors but comes with the big issues of illiquidity or management and ownership costs.  I don’t want to discuss commodities as it is an asset class not commonly used by most people.

Now it boils down to the individual’s risk profile or psychological capacity when it comes down to finding the right capital allocation in this bucket.

If you are extremely risk-averse, or you reach an old age or have a big family to support, you shall play it safe by gearing toward a larger proportion of bonds.  More specifically, tax-free municipal bonds.  Another safe play is to invest dividend generating stocks, especially when you are approaching retirement age, needing to draw on dividend on a regular basis as life-supporting income.  With the irresistible trend of ETF growth, I highly recommend to purchase dividend ETF rather than hold a handful stocks. DLN offered by WisdomTree is a good choice.  There are three features of DLN. Firstly, the large AUM (1.73billion) and daily volume means a good liquidity for investors; secondly, the performance since its inception in 2007 is splendid, as shown in the price chart below; third, 2.76 average dividend  yield along with 0.29% expense ratio also keep DLN a good pick; lastly, the DLN portfolio is well diversified with an emphasis on Consumer Staples, next with Energy, Telecommunication and less reliance on Utilities,  this more balanced combination caters to safety consideration too.

If you are risk seeking, or you are just very young and no one is dependent on you, please set a larger chunk of your capital to PE/VC like equities (I detailed my thoughts on why so in another blog). Real State, from my perspective, is definitely a must-to-have asset firstly because of tax benefits and secondly it’s where anyhow you need to dwell and enjoy life.  For some people who are very allergic to the stock market, I suggest they purchase a second property, third property or more if they have sufficient cash in the discretionary investment bucket.  Make sure the rental income more than offsets the cost base.  And develop the skillsets to fix plumbing and landscaping etc.   This is a great channel for a merry retirement.

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