Bomb Shelter Investing
Posted In: Entrepreneurial Wealth Management

Since the arrival of COVID-19 our world has been in a constant state of uncertainty.

Uncertainty about COVID-19, the stock market, our businesses. Uncertainty is a common catalyst for fear. When making financial decisions, fear clouds our ability to make the ‘rational decision’. So how do the world’s best investors find success during times? One strategy is to invest large sums of capital when markets are down.

How do they do this? Do they keep a large percentage of their net worth in cash? While having a large cash balance may be nice to look at, it is expensive to look at (as you are not getting a rate of return). This is especially true when the markets are performing well.

Instead of money sitting on the sidelines, investors leverage sophisticated financial tools. One tool is part of a “bomb shelter” investing strategy, allowing you to sleep at night, even when the sky is falling.

Where it Fits in Your Portfolio

Portfolio Theory is a fancy term that refers to where you invest your money

For business owners, the business(es) they own will also make up a percentage of their net worth. As a result, their portfolio could look more like this:

A majority of their portfolio may be their business rather than equities, followed by fixed income investments and real estate. Other investors may be more equity focused.

Fixed income is further divided into investments that are tax exposed and tax sheltered (investment life insurance). For our clients, investment life insurance can comprise 20-33% of their capital base. The reasons? These contracts give our clients the ability to be their own bank. Allowing them to access cash to capitalize on market opportunities. Best of all, the investment value cannot go down in value – it’s a bomb shelter!

The Strategy

The investment life insurance we are referring to is Whole Life (WL) insurance. It allows investors to move tax-exposed cash into a tax-sheltered investment strategy.

These contracts are invested over a long-time horizon, which makes them twice as secure as a comparable GIC investment. Due to the stability of these investment life insurance contracts, contract holders can borrow up to 90%, sometimes 100% of the contract’s investment value.

As the low-risk portion of your portfolio, investment insurance will continue to earn a net return of approximately 4-5% after-tax. To earn a comparable net return with a GIC you would need to find one earning 8-10% interest. With investment (WL) insurance, however, you can leverage its investment value to capitalize on market opportunities.

As an investor you face the following options within your fixed income portfolio:

  1. Lock cash in a GIC with ~3% interest, producing a net after-tax return of ~1.5%
  2. Invest in a bond portfolio with a ~4% interest yield, providing a net after tax return of ~2%
  3. Have access to your cash with investment life insurance and earn a net after-tax return of ~4-5%

So why haven’t you heard of this strategy before?

Many advisors don’t discuss it because it isn’t flashy or new. Some don’t because they simply don’t know about it themselves. Whereas we base our advice on time-tested strategies. We have a proven track record of many successful implementations of this strategy: we know it works and we do it for our selves, too.

How do I know if this strategy is for me?

Give us a call. At Elementus Wealth our expertise is advising entrepreneurs to achieve a bigger impact.

We look forward to chatting.

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