Do you have investments that make you poorer?

By | March 23, 2007

I’m revisiting a topic I started last October with a similar title. The original post is linked here with a link to Rich Dad Poor Dad guru, Robert Kiyosaki.
Learn to Invest Like a Pro: Why the Rich Get Richer – Yahoo! Finance

The lesson my rich dad was drumming into my head, and I mean to drum into yours, is that investing should make me richer every month, not poorer. It should put money in my pocket every month, not take money out. To him, it was a miracle that so many financial services salespeople could convince financially naive people that it was smart to pay money to invest.

What a wonderful quotation this is! It has been in the back of my mind for a long time… But I tried to articulate it, however, it wasn’t convincing to other people… I’m glad that you wrote it that way, Robert.

Do you have investments that make you poorer? No? Are you sure? Let’s see.

About 2 years ago, my wife signed us both up for an invesment/insurance product from Cigna. The initial payments were small, and the whole policy was supplementary to our primary life insurance policies.

The deal with Cigna was this: Pay about US$30 each per month. 50% will be for additional life insurance, 50% for mutual funds. The money was deducted from our credit card each money for the life of the policy. Is this a smart or dumb move?

To many in the mutual fund or life insurance industry, they would say smart, because you are getting an investment and life insurance thrown in. To me, I would now say dumb. Here’s why:

1. you’ve added an extra $60 expenses to your credit card each month.
2. you are paying THROUGH THE NOSE for this service in commissions and expenses: the list starts – credit card expenses, upfront commissions, mutual fund expenses, management fees on the mutual funds, (since we’re buying in a second currency) currency exchange fees and currency exchange. I’m not sure what other expenses there are as the documents are all in Chinese.

3. Risk: there are additional risk factors posed by such an agreement.

  • currency exchange risk: it’s denominated in US$ and Euros, but both of these currencies are expensive relative to ours.
  • mutual fund risk, will it do well or not over the life of the policy.
  • risk of not fulfilling contract payments, so policy becomes void.
  • country risk (where we live now has a country risk factor that is higher than the Western world).

Overall, right now it’s looking like a dumb decision, because we are the investors who are taking the risks, but it looks like we are the ones paying for it. One of the rules of investing is that to invest well, you need to be rewarded for those risks. If you are not, then why invest. Moreover, because the policy is early in its life, the returns are well under water, compared to even just the amount of money invested in the mutual funds.

Would you purchase such a mixed vehicle for a policy? How would you look at this investment? Comment away, please.

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