Tuesday, April 28, 2015

The Wealthy Family by B. Chase Chandler (Book Review #35 of 2015)

The Wealthy Family
I received this book from the publisher in exchange for my "willingness to provide an honest and thoughtful review."

Up front, the reader should know that the core of Chandler's financial strategy is to invest in mutual company whole life insurance. This is called "infinite banking" by R. Nelson Nash from whom Chandler got the strategy (a term Chandler doesn't use). I will critique that at the end of this review. While presenting this idea to the reader, Chandler also provides a critique of Dave Ramsey and other financial advisors/gurus' common advice.

I have read (and written reviews for) a large number of the books Chandler draws wisdom from in the book. He and I might have been friends in another life. Taleb, Kahneman, Gladwell, Ariely, Thiel, and others have also impacted my thinking. I even keep the "Eisenhower productivity matrix" (which Chandler incorrectly attributes to Steven Covey) visible in my office. But I have also read Austrian "economists" Murray Rothbard and Gary North and found their "blind spots" glaring. I give credit to Chandler's tone, he largely does not engage in the polemics that those authors frequently do, but he still can't avoid making grandiose statements like  "if we want to change the world, we need people to read my writings" (65). Given his offense at one reviewer's critique of a previous book on Amazon, I suppose I'm setting myself up for future vilification by writing this. Chandler also can't avoid the Austrian script of "Over the past forty years, they have seen the value of their dollar take a massive decline. Simply put, money does not buy what it used to buy (think in terms of college, cars, housing, and medicine). Today, the Fed is printing money like it's going out of style" (p. 20). In real terms (like average hours worked to obtain the item), many medicines, medical services, home appliances, cars, etc. have never been cheaper. (See Mark Perry's post at AEI for some examples between 1959, 1973, and 2013.)

I often play the "Peter Schiff is right" YouTube videos for undergraduates to remind them that conventional wisdom is often wrong and to debunk the hindsight bias of "everyone knew housing prices would go down." But Austrian economists, whether Peter Schiff or others, are always "proven right" when the cyclical economy turns downward-- it doesn't matter if they predicted it would happen years ago or not. Chandler neglects to mention they are always predicting hyperinflation just around the corner that never seems to materialize and that Schiff and others have lost money recently betting heavily on gold. Nobody is perfect.

The first half of the book is a critique of thinking and sort of an overview of behavioral economics and productivity. There are some good quotes you would expect from a life coach: "Failure is not and never has been analogous to defeat...failure is the price to pay for future success--the trade-off now for eventual victory" (41). He has a step-by-step process for making decisions that I endorse (p. 98). His guide to productivity at the end is similar to many others-- exercise four times a week, pray/meditate 10 minutes/day, etc. (Aside: I am surprised Tim Ferriss isn't on Chandler's reading list.) A lot of this is really just fluff that one could take out of a book related to financial planning. In fact, unless you're already familiar with Fooled by Randomness, Antifragile, and other books he cites you should read those first or you won't really grasp what he's talking about.

Most helpful is his critique of Dave Ramsey's frequent assumption of 12% average annual growth in a mutual fund. I have taught Financial Peace before and it's always something that bothers me. Actively-managed funds do not beat index funds in performance and they charge higher fees. I have not met a financial advisor who actually knows or admits that. I disagree, however, that Ramsey "failed to learn the most valuable: that wealth cannot be created by playing it safe" (p. 275). Ramsey advocates building wealth through real estate, something in his sphere of expertise, which involves plenty of risk. He also encourages entrepreneurship (see the podcast EntreLeadership) and highlights risk-takers. Chandler gives credit to Ramsey on personal debt: "However intensely I disagree with Dave Ramsey on investing and insurance, he is indeed dead-on on debt," but later writes that debt is a useful tool in buying a house, particularly if your savings can earn a greater return than your cost of borrowing (207).

He does help the lay reader understand the difference between a compound annual growth rate and average annual rate of return, how to use a discount rate, calculate future and present values, etc.

Finally, he unveils the foundational strategy of using whole life insurance as your primary savings vehicle. "Mutual Company Permanent Life Insurance (MCPLI) is probably the least understood asset, especially by financial “gurus” and the general public" (320). "MCPLI is bar none one of the most effective assets in the U.S. today and why you should make it the foundation of your aggregate plan," (302). If that's the case, why doesn't everyone do it? Because "they" don't want you to know about it: "the Street has a vested interest in keeping things the way they are. If word were to get out about the cost of their strategies contrasted with the cost of other more valuable strategies, they'd be in a world of hurt" (323). This might be so, but it's also worth pointing out that none of the non-Austrian school unconventional thinkers (Kahneman, Taleb, etc.) that Chandler cites are known to advocate or use this strategy.

While I had heard of infinite banking before, Chandler's is the first explanation of how it works with a case study written for a specific small business that is utilizing it as part of their cash management plan. I was disappointed that he did not address known criticisms, that makes me more skeptical of his motives. First, in the book, he avoids much discussion of Roth IRAs and their advantages over tax-deferred IRAs. That seems to be a glaring omission. Chandler sets out to show that the CAGR with an MCPLI plan is competitive with an IRA after you factor in fees (321). His chart on page 322 shows fees ranging from 0.5% to 3%. If he was really out to help the investor, he'd point out that funds like Vanguard don't charge anywhere near 3%. The 457 plan my employer offers has a cap on what fees can be, and it shrinks as a percentage over time. There are other various tax avoidance strategies associated with Roth IRAs that make them more attractive to the MCPLI plan, all else equal, that Chandler neglects to mention.

Secondly, Chandler never mentions that most people do not stick with whole life policies as long as they set out to. Unemployment and other events happen. Insurance companies love selling these policies for this reason. In his discussion of term life insurance, he also neglects to include return-of-premium policies in the analysis.

Third, in Chandler's "private economic system," the saver has to put a relatively large amount of money into the MCPLI plan to make it work (and yet it's "not expensive"). His example on page 310 of a 35 year old putting away $24,000/year for 25 years into a MCPLI seems a bit unrealistic. I'm 35 years old and $24,000/year is greater than 1/3 of my AGI-- that's not going to happen for my family. I assume his target audience are people earning too much money to be able to contribute fully to a Roth IRA or other vehicles. Perhaps if you've fully funded your Roth IRA or your Roth 401(k), 529 college savings plan, and other vehicles and have $24,000 left over then his plan works for you. The case study he presents (p. 327) is for a firm which is able to put away $750,000 every year (p.336-337) into the MCPLI. If you're a company that's extremely confident of your ability to generate that much revenue over that sustained a period, then sign up. Chandler should have stated outright: This is for high income individuals looking for some place else to put their money.

Lastly, Chandler writes that mutual insurance companies have been around for 150 years and are therefore safe. But this goes back to Taleb's turkey problem-- with 364 days of data, the turkey believes the farmer is his friend who is going to feed him; he finds out otherwise on Thanksgiving. In other words, there are some fat tails (Taleb's Antifragile philosophy has all kinds of practical flimsiness, as much as I appreciate using it for theoretical analysis) the reader should beware of. If you've put your money in the bank, it's FDIC insured up to $250,000. You're not getting the favorable tax treatment and growth you might get in a MCPLI, but it's worth mentioning. Some Austrians warn of the day the government can't afford to bail out all the banks in a large economic catastrophe. But how likely do you think it is that the insurance companies would be unaffected relative to the banks enough to make you whole?

His neglect of the above points leads me to think he's hiding the ball intentionally.

There is always a bit of shallowness to these types of financial planning books. My family's goal is admittedly a bit different than other readers. I could not afford to sustain the whole life policy perpetually as I've chosen to forego an amount of income and savings in order to better provide for a special-needs child and pursue a career path that takes me outside the U.S.

With all of the above considered, I give the book 2.5 stars out of 5. Again, I agree with his reading list and productivity hacks, but I think they could be left out of a book on financial advice seemingly written to the layperson (explaining time value of money and such). If you have fully explored all of your tax-favorable savings options (and looked at details he leaves out of this book) and still want to put money into a whole life plan, then I'm sure you'll have no trouble finding someone willing to sell it to you.

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