Protecting the Purchasing Power of your Assets

Asset Protection Beyond just Protecting from Lawsuits

Over the past year I have been getting at least as many questions about protecting the “value” of the assets of my clients as I have in protecting the assets themselves.  And this is perhaps one of the most rational questions any of my clients can be asking right now.  Keeping your assets safe from loss in a lawsuit is important. However, even if you succeed in keeping them safe, if you also do not protect the purchasing power of these assets, the net effect is the same – you are losing your money.

Let’s take a look at how the effect is the same. Let’s say you have $1 million dollars in savings which you plan on using for retirement, and we are looking at this amount over a 10 year period of time. Then imagine in year 6, you get involved in an employee lawsuit, which is not covered by insurance and takes about 2 years to get through. The direct costs of your lawyer (not including the indirect costs of your loss of focus or time away from your business) are about $94,000 (this is the average before a trial for this type of case).  On top of that you then end up settling with your employee for an additional $212,000. Add to that the final wrap up fees and costs of the courts and shared expenses of another $25,000 and in total you have reduced your million bucks by $331,000 – Leaving you with about 2/3rds of what you expected.

That would be a bad situation, and although it happens every day, solid asset protection can virtually guarantee that you can avoid the worst case scenario. But what if you never get sued at all. What if you have all your money sitting safely in a diversified basket of investments waiting for your retirement. Or better yet, you have them all sitting in the safest investment you can think of, Municipal Bonds. There is no risk there is there?

Well this is where the financial world is getting just a bit more complicated than most of us are use to dealing with in the past few years.  Let’s take a look at what happens in that same $1 Million account and the real purchasing power of those dollars.

If you were in the S & P 500 over the past 10 years, your total return is approximating a whopping ZERO (0%)( the chart above is accurate).   That means that you went up and you went down and in the end you went nowhere.

What about your Municipal bond Portfolio? Well average Muni bond returns over the period have gone from over 5% to under 4% during that time.  Overall your portfolio also likely increased in its underlying value as rates dropped and a premium was placed on your bonds.  Throw on top of that the tax free nature of the bonds, and you may have an average yield approaching 6%. Pretty darn good, especially compared to ZERO!

Let’s Take a Look at Inflation

So what about the power of your million bucks to actually buy something? This is where it gets tricky.  Since inflation has been so low for most of our lives, we don’t really consider it when we think about our money. We kind of assume that a dollar today will buy about the same amount of stuff as a dollar tomorrow.  And with electronics like TV’s and computers always getting cheaper sometimes it seems like it’s actually better to wait to spend our money.

But if we look at what really is going on, the story is different. Over the period of 2000 to 2010 the Consumer Price Index increased by 26.6%. If we look at the period of 1990 to 2010 it was a whopping 66.8%. What this means is that if you had your million bucks in the S&P in 2000, by 2010 your account would still be about $1 million, but your buying power would only be about $790,000. THAT IS EXACTLY LIKE GETTING SUED IN THE ABOVE EXAMPLE!

And if you happened to have a million bucks in 1990 and were able to get a return of zero, your money would only get you $332,000 worth of “stuff”.

So what’s the point of this post? Doug we have all heard the inflation argument before. Have you turned into an insurance salesman trying to sell us a whole life policy? NO, but I will say that of all the concepts which I speak about with my clients, the power of inflation to destroy your wealth is probably the least understood.  And it is not the last 10, or 20 years that I am really worried about you getting a handle on – its the next 20.

Never before in the history of the modern world have we been more set up for massively out of control inflation, deflation, devaluation and destruction.  The rules of the game are about to change in a way that few of us can comprehend.  This post is an all out alert that if you are about to retire and have your $1 or $2 or even $4 or $5 million bucks socked away and think all is well, please revisit this assumption.

I am not an investment advisor and am not going to tell you what to do. What I am telling you is that if you happen to have your money in the stock market and think you can expect a 10% annual return over the next 10 years, you may want to check that. It wasn’t true for the last, and all indicators actually point to the possibility (or probability) that it may be a -10% annual return over the next.

Ask yourself what you would do if your portfolio went down by 50%? Would you still retire when you planned, or how you planned. Would it really make a difference to you if you lost it through a lawsuit, a market crash, or because inflation wiped it out?  The effect would be the same yes?

My point is that it is time to ask yourself and anyone who advises you on your financial affairs some tough questions. And if this blog brought up more questions that answers for you, then it has achieved my goal.  And I hope you are now asking yourself what I am talking about. If you are then I recommend that you visit my other (yes I have a dual life) blog at www.mindofmoney.com and view the reference videos I have posted there.

This topic is frankly too far reaching to complete in a single post, but I hope you are curious enough to find out for yourself what the risks to your wealth really are in the decade to come.

Douglass Lodmell