Professional men in general are notorious for exercising bad business judgment in their personal investments. As compared to business men in the same income brackets, their estates at retirement are commonly woefully small. The reason for this is apparent: their day-by-day experience does not equip them to make wise investment decisions. Very generally they do not take the trouble to make the most perfunctory investigations before committing quite large sums of money.
What is true of doctors, lawyers, dentists, etc., in this respect is doubly true of Army and Navy officers. Not only are the professional concerns of the officer remote from the world of profit and loss; in addition the conditions of his personal life militate against his developing the local contacts which could be valuable to him in choosing an investment plan. Moving about on orders as he does, he is seldom able to stumble on a real estate bargain in a depressed market. Nor does he ordinarily have friends in banking or brokerage circles who can let him in on “a good thing in steel.”
The Army or Navy officer is on all the sucker lists ever compiled. He pays premium prices for rents and uniforms and nearly everything else he buys. Perhaps the wonderful thing is that the officer ever saves anything at all, except the hope of his pension.
Admittedly no one is ever going to get rich on a Service salary. But it ought to be possible for every officer to amass enough to give him a tidy supplement to his retirement pay. It is only possible, however, for the man who will give a little thought to the matter at regular intervals. An estate does not happen. It has to be planned.
Perhaps the one indispensable item in any man’s investment program is his life insurance. Certainly it is indispensable for a married officer. And, in fact, nearly all officers do carry life insurance. It is unfortunately not true, however, that most officers have a carefully planned insurance program tailored to their individual needs. Some carry too little insurance. A few carry too much. Nearly all carry too expensive types. Some insure the wrong people.
Now it is obviously not possible to say, “This and only this is a proper insurance program.” What is proper and reasonable depends on age, marital status, number of children, supplemental income, and temperament. On the other hand, there are cases like that of my friend Lieutenant Commander X, who has straight life and endowment policies for fifty-odd thousands of dollars, on which the annual premiums total well over $1,500. He and his wife have no children. They attempt no other form of saving, and frequently have to borrow money to meet premium-due dates. They have a small supplemental income from a trust fund, but are, and act, miserably poor. It is fairly evident that he is “over-insured.”
What, in general, can safely be said about life insurance for an officer? Most obvious, probably, is the oft-repeated and ever true advice: Take and keep up the maximum amount of National Service Life Insurance that the government will sell you. No commercial company could come close to matching its value and still stay in business. Second, consider your individual needs, discount the advice of insurance salesmen, and shop around for the rest of your insurance.
A good proposition for first consideration after National Service Life is that offered by the Navy Mutual Aid Association, to which Navy and Coast Guard officers only may belong. This in 1948 became a legal reserve company.
Though “Navy Mutual Aid” has a number of ancillary functions (such as liaison between the beneficiaries of a deceased officer’s estate and the government), it is mainly a non-profit insurance company, in effect writing policies for $7,500 only. These are provided at a very low premium rate by virtue of the fact that there are no stockholders’ profits and a negligible overhead.
There is a theoretical objection to an insurance organization with “all its eggs in one basket”—that is, insuring only members of what in time of war is an admittedly hazardous profession. However, the experience of World War II suggests that this objection has little practical validity. And the reserve position of Navy Mutual Aid is now superior to most large companies.
About a quarter of the officers of the Regular Navy are members of Mutual Aid. It is probable that if more of those eligible were better acquainted with the advantages offered, there would be more members.
Navy Mutual Aid' is “paid up” at age 60 or 65 (depending on the plan selected). It has a cash or loan value and a paid-up value. It may, in fact, be regarded as a good type of ordinary (or “straight”) life insurance.
Ordinary life insurance may be thought of as encompassing two features: protection of the beneficiary, and “enforced saving.” The first of these is worth any man’s purchase price. But it’s worth considering whether enforced saving can’t be accomplished more advantageously some other way.
The insurance salesman is likely to stress the fact that straight life policies build up cash reserves, which may actually be cashed in, or upon which the policy-holder may borrow. (“Twenty payment life insurance” is substantially the same, except that the premiums are proportionately higher and the policy is “paid up” in twenty years.)
Now for a much lower premium, a man may purchase “term insurance,” which is written in various forms—the most practical of which for most family heads is “ten year renewable term.” This is insurance which provides protection only, without enforced saving. If the policy-holder outlives the “term,” he gets nothing. There is no cash surrender value at any time.
Many people (sometimes on the advice of agents who naturally prefer to sell the higher-cost types) hate to buy insurance which “you have to die in twenty years to collect on,” but on the basis of common sense, and dollars and cents, term insurance is definitely the best buy for the average officer with a wife and minor children to protect.
Consider that your family would be in greatest need of money if you died before the youngsters are through school. Later on, only your widow would need providing for. And later on, it is to be hoped, you will have acquired other income-earning property (if you haven’t kept yourself “insurance poor”).
Consider that the “cash surrender value” (and the amount you can borrow on your policy) of straight life is the difference between the cost of this type and the less expensive term insurance. If you die, the company pays off the face value of the policy only (as with any type of insurance). The company keeps the cash surrender value in that case.
Hence, even if you can afford, or think you can afford, adequate “straight life,” you’d still be better off paying for protection only (term insurance) and putting the saving in premiums into Series E government bonds. Then in event of your death, your beneficiary would have not only the face value of your policies, but also the bonds.
The value to the policy-holder of the “savings” in straight life insurance is largely mythological, not only because if you die the insurance company keeps them, but also because if you have to borrow on your insurance, the insurance company charges you five or six per cent interest for the use of your own money. (As a matter of fact most commercial banks will lend you money with your insurance as collateral at 4%!)
Insurance companies also write “modified life” (with premiums increasing year by year), “decreasing life” (on which the premiums are constant, but on which the maturity value decreases year by year), which possess some features of both straight life and term insurance. Endowment insurance and annuities are types in which enforced savings is the principal feature, and protection a secondary one. Their premiums are, of course, correspondingly high. As to their value to the average insurance-buyer, this writer’s advice remains, “Buy insurance for protection, not to save money.”
As to where to buy insurance, the best advice is to consult an experienced insurance consultant (who does not himself sell insurance). His small fee is likely to be money well spent. (The Family Insurance Analysis Bureau in New York is one of many such counselling services often recommended.) In New York and Massachusetts, it is possible to buy life insurance, including term insurance, at savings banks at an attractive rate. (In New York, for example, renewable term insurance at age 35 is available at $7.75 per thousand.) The Farm Bureau Life Insurance Company, organized as a cooperative, sells term insurance and other types at exceptionally low premium rates. But as a matter of fact, the Metropolitan and many of the other big, well- known companies will write term policies.
Before leaving the subject of life insurance, it might be noted that it is unwise for an officer to carry substantial policies on his wife or minor children. The protection a family needs is against the death of the breadwinner of the family.
Let us suppose, then, that we have our “typical officer”—age 33, married, with two children, 3 and 5 years old—carrying a $10,000 National Service Life, for which he pays about $80 a year premium, and $20,000 worth of term insurance, on which he pays about $150 a year premium—a total of $230 a year. Or he may instead carry in addition to National Service Life a membership in Navy Mutual Aid ($7,500 of insurance) and $5,000 of term insurance. The premium would be about the same. Can he afford to “save” any more than that? On the rule of thumb that we all should save at least a tenth of our gross income, it would appear that he’s “able” to save considerably more. There was a time when “savings” connoted the savings bank; and when savings accounts drew 4 per cent interest, compounded semi-annually, this was reasonable. Nowadays, it is foolish to keep more than a “rainy day” emergency fund in a savings account because of the very low interest return. Both because of the relatively high interest rate (2 per cent) and because of its convenience, postal savings are an especially attractive substitute for the savings bank. Every post office is your bank. No individual may deposit more than $2,500 in a postal savings account, but a married woman may carry an account in her own name.
For the typical officer, the next important type of investment to think about after insurance is Series E U. S. bonds. If these are held to maturity, they yield very nearly 3 per cent interest (which is as much as top quality industrial and rail bonds bring) with the advantage of complete liquidity. That is to say, they can be cashed in at any time without loss of value if a more attractive investment opportunity presents itself, or if an emergency makes it necessary. And for those who have trouble making themselves save, the payroll deduction plan is as satisfactory a whip-wielder as an insurance company.
For the relatively young naval officer, such as the one we chose to regard as typical, perhaps it would be unrealistic to suppose he can do much more saving than that already discussed, which we may tabulate as follows:
$230 per year Insurance Premiums
$100 per year Postal Savings
$225 per year Series E bonds
(one a month at $18.75)
For those without children, and for those older officers in a higher income bracket, common stocks offer an attraction. Like insurance, stocks are too big a subject for more than a cursory discussion here. It may be said that no amateur (officers included) can hope to make money in the long run speculating on the rise and fall of market prices. Furthermore, not many people have gotten rich because they bought heavily into an issue “recommended by a client of their brother-in-law’s broker.” On the other hand, if a man will give the same thought and attention to a stock purchase that he does to buying an automobile, and “buys for the long pull,” he will generally get more for his money than in any other type of investment. As it happens, ever since the collapse of the bull market in 1946, most dividend-paying stock has been selling at bargain rates, with some issues paying dividends equivalent to 10 per cent on investment.
It may be asked, why, if you can get 6 to 10 per cent on stocks, should one buy government bonds paying only 2.9 per cent? Is the risk element in conservative stocks great enough to warrant that difference? The answer is that the greater risk accounts for a large part of the difference. The rest is premium for liquidity. That is, with government bonds, you know you can receive your money back, plus interest accrued, at any time. Though you can always sell stocks, you may need your capital at just the time the market is low. Hence the insistence of every investment consultant today that you put part of your savings in “governments.”
Most people after reading the Wall Street Journal and the Magazine of Wall Street for a few months begin to feel they know what they are about in buying stocks. Brokers, generally speaking, are chary in proffering advice unless it’s asked for. However, though brokers are far from infallible, it’s well to remember that security-buying is their business, and their views are always more likely to be correct than a layman’s.
Unless an officer makes a hobby of the stock market, and is on a shore station where he can conveniently buy and sell at short notice, he does well to keep to conservative issues—the “blue chips,” some of which have paid dividends annually for fifty years or more. Certain businesses are more or less “depression-proof” (as their performance in the early 1930’s demonstrates). Other businesses are feast-or-famine propositions. In general, consumption-goods industries fluctuate in profits much less than heavy industry. Dividends on the stocks of tobacco companies, chain stores, dairies, and oil refineries tend to be relatively stable. The reverse is true of those companies manufacturing steel, automobiles, building supplies, etc. In general, it is common sense for the long term investor to prefer the first to the second.
It’s fine for an investor to “get in on the ground floor of a company that’s going places.” How often has it been pointed out that if you’d bought $1,000 worth of General Motors in 1920, you’d be rich now, or that the original holders of one share of Coca- Cola stock have a comfortable income now from that source alone? It’s well to remember too, however, how many people lost their shirts in miscellaneous motors stock of companies long since bankrupt. Some investors are going to make a good thing out of television, but it’s impossible to tell now which of the many companies in the field will hit the big bonanza. (And some investors have already lost heavily on at least one company.)
Certain established industries still clearly offer growth possibilities. Chemicals are an example. This, however, is obvious to the investing public at large, and most chemical issues are (as compared to their dividend yield) relatively high-priced in today’s market.
On the whole, the amateur buying for income does well to confine his purchases to established issues which have done well in the past and which will, as far as can be guessed, continue to do as well in the future. In the long run, the man who shops for a safe stock paying 6 per cent does much better than the one who buys into a new company with the hope of doubling his money in six months.
Is there an “ideal common stock” for the average small investor who, like the typical naval officer, has neither the time nor impulse to make himself an expert on the market? Such a stock would have complete price stability and completely steady dividend rate. And there is no such stock. A certain irreducible minimum of risk is inherent in equity investment.
There is a type of. stock which does, in this writer’s opinion, approach that ideal, however. I am merely echoing the opinion of experienced investment counsel when I say that one of the most attractive and safest of all common stock investments at the present time is high grade electricity and natural gas operating companies. These pay from 5 ½ per cent to 7 ½ per cent dividends, and show little fluctuation during a depression. Furthermore the electric utilities are in a period of expansion and growth which should make their stock appreciate in value.
In times of depression their industrial consumers cut down, but this is a low-rate, low-profit business anyhow. Home users of current constitute the cream of the business. And it’s common knowledge that the American home is becoming more and more electrified. (Deep freezers and television and dishwashers are only the most recent electric gadgets.)
Electric utilities enjoy local monopolies and are not subjected to the hazard of “price wars.” Commission control is, from the point of view of the small investor, an advantage, not a liability. It is the policy of public utilities commissions to allow a fair rate of return after taxes. Hence any sizeable increase in corporation taxes would be compensated by higher utility rates.
Since a utility grows with the area it serves, common sense would dictate that there is the greatest possibility of value- appreciation in the stock of utilities serving the central and southwestern parts of the United States—those regions whose population and business are increasing most rapidly.
Brokers make available to prospective investors, on request, prospectuses, detailed financial sheets, engineers’ reports—in fact, all the information they themselves have available. This, plus information gleaned from such publicly published journals as the Magazine of Wall Street and Barron's, should be a sufficient guide to the small investor. The cost of investment counselling service renders it prohibitive to any but the big- time buyer and seller of stocks. Besides which, much professional investment counselling is of no value.
There are those who, concerned over the risk element in common stocks, take naturally to the idea of the increasingly popular “investment trusts”; that is, companies which sell shares to the public, and with the proceeds buy stocks. The idea is that with expert management and wide diversification, they can “insure” against loss on specific issues. Some of these trusts have had a good record, and for a certain type of investor they undoubtedly fulfill a real need. But an individual buying as little as $5,000 worth of stock can achieve ample diversification for himself if he deals in 10- to 25-share odd lots. And the expert management of the trust naturally gets paid for its expert services.
The largest single investment most men make in their lifetimes is the purchase of a home. And even at today’s inflated real estate values, it is frequently good policy for a young man settled in a community to take the plunge of mortgaging his income for years to come to provide himself a permanent abode. He gets a break on his income tax, for one thing, since not only property taxes but interest on his mortgage is deductible. Besides which, there are attractive intangibles in home ownership. However, for a naval officer on active duty, it is definitely not now a wise policy to buy real estate. (Unless, of course, he is only a year or two away from retirement and sees exactly what he wants to retire to.)
It is true that some officers have been buying at every new shore station and selling when they leave—frequently at a profit above and beyond free occupancy for two years. As long as real estate values were rising, this policy was a good risk. All signs point to realty values having passed their peak, however, particularly on old houses. For an officer to buy today in the hope of selling at a profit two years from now is to court financial disaster.
It is true that such a house can ordinarily be rented at a rate sufficient to cover mortgage payments, but, even so, absentee ownership of real estate is never satisfactory. In general, for a naval officer today real estate is the riskiest of all possible investments, hardly excluding Canadian uranium stock.
Up to now I have deliberately omitted mention of industrial and railroad bonds, building and loan shares, preferred stocks, and state and municipal securities. The return on high grade industrial bonds and building and loan shares (2½ to 3 per cent) is not great enough to put them in competition with Series E U. S. bonds, for the small investor. And they have an element of risk (however small) which governments do not have.
As to preferred stocks—in general it may be said that if a company is sound, the investor might as well share its profits without limitation; if it isn’t sound, the investor wants no part of it, whether common stock, preferred stock, or mortgage bonds. On the other hand, certain specific issues at present selling at surprisingly low prices make it necessary to qualify this generalization.
Municipal and state bonds carry a very low rate of interest. They are bought mainly by wealthy investors interested in the fact that they are tax-exempt. They have little special appeal for the man whose income-tax liability is under $10,000.
Even this abbreviated treatment of the subject, “A Naval Officer and His Money,” would not be complete were the subsidiary subject, “Borrowing Money,” to be entirely omitted. What if, instead of seeking to find an outlet for his surplus funds, our “typical naval officer” is trying to buy a car costing three times what he has in a savings account?
There is an easy and obvious answer to that one. Try a bank first. Many commercial banks will lend up to two-thirds of the purchase price of a car with the car itself as security, at 4 or 5 per cent interest. If you let a finance company handle it (and a finance company will, if you allow the dealer to arrange the financing), it will cost you 10 per cent or more. This fact is often concealed from you by calculating the interest charge at, say, 6 per cent, on the full purchase price—including the $800 you have already paid “down”! As a general rule, all forms of installment buying are exorbitantly expensive.
Banks will lend money with stocks, bonds, or some types of life insurance as collateral (Term insurance will not serve as collateral.) Some banks will make small short-term loans to depositors without collateral. Morris Plan banks will make unsecured loans at a moderate interest charge if the borrower can get co-signers for his note. And you can always get a small loan from a personal finance company if you don’t object to paying 36 per cent per year (alias 3 per cent a month!).
It may seem an anomaly that when you lend money, you can get only 3 per cent interest, but when you borrow it, it can cost twelve times as much. But that, after all, is what makes saving enough never to need to borrow such an attractive proposition, for a naval officer as for everybody else.