I Should Have Bought Stocks

I own stocks. This shouldn’t be a big revelation to anyone. I think I’ve been pretty transparent about my beliefs that whole life insurance and indexed universal life insurance are complements–not replacements–to equities. Some–a lot actually–of my personal stock picking would likely be deemed a tad exotic–high risk for sure. And it’s worked out pretty well in my favor.

So as a thought exercise I decided to do one of the dumbest things I could do and plug a few of these stock symbols into the Portfolio Visualizer and see what would have happened if I had skipped a whole life insurance purchase I made a decade ago and bought said stocks instead.

The Stocks Performed Better
Get ready for some mind-blowing news…the stocks performed better–in theory. The reported value of the stocks right now is higher than the cash surrender value of the whole life policy I have. So I guess score a point or two for the BTID-ers.

So do I regret my decisions? No.
10 years ago I had no idea what lay ahead regarding the market. It’s super easy to look back on actual performance numbers with money you never invested and fantasize about what could have been if only you’d made that decision; it’s something considerably different to actually do it and manage the consequences of the fluctuation in the meantime. Here’s the historical growth chart of values for the best performing option of the group:


Notice very early on that there was some disappointment. Then a decent period of pretty constant growth, but then in 2019 and during the first half of 2020 a huge drop in value. In fact, the growth chart here is logarithmic so as to adequately capture the magnitude of changes as the overall account balance changes, and that big drop in 2020 represents a 50% reduction in account value. That’s a reduction that took place in roughly a 30 day period. Would I have had the iron will to stay the course? I can’t honestly say yes.

But there’s more to this story than just which hypothetical investments ends the randomly selected period with the highest account balance.

Timing Is Everything
What if somewhere in between I needed some of the money? Keep in mind we’re talking about a general brokerage account and not something like an IRA where access to the money would be a no-go. I’d sell some of the shares and take the cash. But would selling at that particular time be a good or bad idea? If I needed the money in March of 2020, it would have been a horrible time to liquidate the position.

Additionally, liquidating a position in a general brokerage account comes with a capital gains tax liability. This adds further complexity to the simple task of taking my money and using it when I want/need to.

Cash value life insurance doesn’t care about either of these considerations. There’s really never a wrong time to access cash from it. Because it doesn’t fluctuate in value, it doesn’t care what’s going on broader market-wise. Loans generally provide the ability to continue earning both guaranteed interest and dividends or index interest so even if I’ve effectively taken some of my money out by taking a loan against the policy, I’m not forfeiting earnings on the policy.

In addition, I can take money from the policy without tax liability. This allows me to address cash needs without complicating my life with future tax liabilities.

I don’t want to make this a one vs. the other discussion because I seriously don’t believe that’s ever the right way to look at this. Whole life and/or indexed universal life insurance are phenomenal tools that work splendidly as low-risk portfolio diversifiers. In fact, owning what I do gives me the peace of mind I need to pursue extremely risky equity options. Market fluctuation doesn’t really bother me because I know I have a large low-risk position that grows very competitively against its similar risk profile counterparts. The two are don’t just have a low correlation to one another; they have zero correlation to one another. My life insurance cash value balance doesn’t care what the Fed ultimately does to interest rates, how long Vladimir Putin will be a jerk to the Ukrainians, or what happens to the price of fuel oil in the meantime. My stock picks appear to care…a lot.

I’m long-term optimistic about the U.S. economy and stock market. I believe it will continue to expand and I also strongly believe stocks will ultimately out-perform cash value life insurance policies. The problem for me is when specifically stocks will perform well and not well. That’s the critical component of my need for diversification.

It’s easy to overlook the significance of this diversification. It doesn’t really sink in for most people until they experience the pain of what this seeks to avoid or minimize, and by then it’s too late.
I don’t want to pretend that I completely understood all of this 10 plus years ago when I began buying life insurance policies for myself. But I am sure glad I at least had some of this understanding sorted out and made the decisions that I did.

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