Realized and Unrealized Gains (Investment Risk)
Investment Retirement FundingThis topic deserves far more attention than it gets. Your exposure to unrealized gains in the investment world can and most likely will have a great impact on your future financially! Understanding how this can affect you will allow you to protect yourself as you build your financial portfolio. A plan for preparation today will save you from potential hardship in the future. Let’s get started.
What are unrealized gains?
Unrealized gains are financial investments where you now have more value than what you paid to start. The reason it is unrealized is because that value changes with the market. It doesn’t only move up, but down as well. Here’s 2 quick examples.
- Imagine you bought a stock for $50 for 1 share 5 years ago. Today it is worth $100. This is an unrealized gain unless you choose to sell at the $100 price. Stock values move both up and down.
- You bought a house for $50,000 10 years ago and haven’t done any work to improve it. Today the appraised value is $100,000. Real estate values also move up and down. Unless you sell the house, you haven’t realized the gain.
Some or all of the value can be lost in these 2 examples. They both still have the ability to move higher in price as well.
What are realized gains?
A realized gains value cannot be lost. This could be because you sold the stock or house in the above examples, or you were participating in a financial vehicle that only moves up in value.
Dividend paying whole life insurance is a vehicle that only moves up in value. The longer the contract is in force, the more it is worth. This is because your cash value is contractually guaranteed to be equal to the death benefit at age 121 (the time of endowment). The cash value only moves up to reach that point, NEVER DOWN with whole life insurance (Values could move down if premiums aren’t paid in the early years of a contract, depending on design).
This fact is not given enough value when people look at owning whole life insurance.
What impact does this have on you?
What is your exposure to unrealized gains currently?
For many individuals who participate in qualified plans, you likely own stocks, bonds and mutual funds. All, yes, all 3 of these asset classes can decline in value.
For stocks, it’s easy to understand, the value goes up or down per share.
For bonds it’s a little more complicated. In a rising interest rate environment, the amount someone will pay you for an old issue bond paying a lesser interest rate is lower than the face value of the bond (the risk of loss here would be not holding your bond to maturity, and selling your bond for less than the face amount). In a lowering interest rate environment, the amount someone will pay you for an old issue bond paying a higher interest rate is higher than the face value of the bond (because it is yielding more). You can avoid this fluctuation in what someone pays you by holding the bond to maturity.
Mutual funds are just a pool of stocks, or bonds, or a combination of the two with target date mutual funds, making it easy to see they can also decline in value.
When you are nearing passive income time (retirement some say), you may not want to have high exposure to unrealized gains. If the market tanks, your portfolio can lose significant value, and could take years to recover. If you need to take withdrawals in down markets, it can cause portfolio ruin.
A good strategy is to have a pool of money that is liquid, which can never lose value, to protect against potential downside exposure to unrealized gains.
Everything’s fine until it isn’t.
I know it’s easy to put off building this pool of money. I talk with people daily about implementing the Infinite Banking Concept with dividend paying whole life insurance. Many people have current debts or large expenses coming up which keep them from starting today.
Remember what Nelson said when he found himself upside down in real estate debt because of drastic changes to the lending environment, “honest introspection revealed that I could revise my spending pattern.”
YOU CAN START TODAY, BUT IT MAY REQUIRE SOME UP-FRONT SACRIFICE. It may also just be a smaller policy to get you moving in the right direction.
I realize that was a situation of debt and not account values falling drastically, but everything was fine until it wasn’t. Market crashes happen quickly and, in some cases, have taken years to recover, so you want to be prepared ahead of time.
A solution that solves 2 problems, the Infinite Banking Concept!
When you take action and implement the IBC to take control of the banking function in your life you will solve 2 problems.
- You won’t have to rely on outside institutions capital to finance large purchases in your life. This is the biggest problem in the world today, people abdicating their role to perform the banking function in their life. It’s so easy to do yourself though, and you will have access to capital to use how you see fit in your life without any penalties!
- You will be protecting yourself from downside exposure to unrealized gains. You will have a pool of money that is growing every single day, without the risk of loss. The closer people come to a time of wanting to take passive income, the more apparent this NEED becomes to them.
Can you lose 20% or more of your portfolio in 2 months and be okay?
The IBC solves many problems you face in today’s financial environment. You can start a plan at nearly any age. At Cash Value Solutions we have setup plans for newborns, all the way to people in their 70’s. Every person has their own goals they want to achieve with their own IBC policy, and we help you reach them.
A popular Chinese proverb reads “the best time to plant a tree was 20 years ago. The second-best time is now.” Take the steps necessary to protect you, your business and family today.
Here is a link to a short video explaining how a permanent life insurance policy can be used throughout life and provide more than just death benefit protection.