Wednesday, December 01, 2004
Equity Index Annuity www.legacyannuities.com
How Can I Protect My Financial And Retirement Security…
In This Time Of Great Uncertainty?
In this report, we’re going to explain the different factors that can affect your retirement security, so you’ll be fully aware of the potential dangers and mistakes most people make…and what to do about them.
Things like:
q A stock market that could have a huge downward correction…or possibly even crash!
q High risk decisions that most people aren’t aware of.
q Why what’s happening on the other side of the world could effect you right here in your own backyard.
q The real rate of return on your investments… and how to REALLY figure it out.
q How investments can affect your taxes in little-known ways. And how your taxes can affect your investments in sneaky, costly little ways, you might not know about until it’s too late.
See, I have a very important question to ask you. Do you know, I mean really know…if you’ve done all that you could to protect your retirement security? Be honest with yourself. Do you know if you’re getting the
best possible after tax rate of return on your savings…with the minimum risk possible?
The purpose of this report is to inform you of the different financial areas that could really impact your financial future, so that you will be aware of them and be able to protect yourself. To give you a sense of REAL security!
This is world we are all living in today is very different than the world we all grew up in.
Imagine if time travel was possible! If someone from twenty years ago landed in this time! They would be shocked at $1.50 gallons of gas, $20,000 for an average car, a Dow over 10,000, a thing called the NASDAQ, (it didn’t exist back then) and so on!
Peoples investment choices were so much more limited compared to today. In 1958 the highest number of shares of stock traded for a single day was 5,368. By 1998 that number was an astonishing 1,216,326! And that is just the New York Stock Exchange!
With your choices being so limited, diversification was easily attained.
People would stay in one job for a lifetime. It was almost unheard of to switch jobs or heaven forbid, change careers!
It was common for people to put most of their savings in the local bank and feel secure that this nest egg would be enough for their retirement.
Think about all the things I’ve just mentioned, and compare them to today’s world.
Today’s world leaders are not believed or trusted. Their every move and comment is dissected by a scandal hungry media, that in turn feeds this information to the public in the form of 20 second sound bites. Politicians take polls before taking any action, and sway in the political winds, changing their minds every day. Laws are so complicated, many members of Congress admit to not reading bills before voting.
Common Sense Is Not So Common Anymore!
In the old days, good old horse sense worked when picking investments. The value and potential of an investment was much easier to figure out. There was some basic business reasoning to the value placed on a stock. Nowadays, value is much more difficult to figure out, and often has nothing to with what’s going on in the real world.
The value placed on securities can go up and down like a yo-yo…without any tie to how the company is performing! With the new Internet stocks first driving up prices like a space shuttle, and then crashing down like the Hindenberg, people are waking up to the fact that the stock market doesn’t always go up.
People seemed to have lost any semblance of common sense! They buy stocks in companies that lose money on every sale, and ignore solid, well run companies. Then, when one investor gets nervous, everyone starts selling and the prices plummet like a hot rock.
See, the real driving force behind the stock market is the emotions all of us project upon it from our hearts, as well as our brains. Often, when the first group of people take action, the rest of the herd will follow just like dominoes; with pure emotion as the driving force. The reality is opposite to the supposedly, calm, cool, analytical approach many people think is involved in stock market prices.
The most misunderstood element of the stock market is that an investor’s perception of general business conditions, or an investor’s perception of other investors’ perceptions dictate stock market price movements.
As with anything in life, it’s all a matter of perception. If people perceive that things are going well in the economy, and the government has a firm grip on the country, the stock market may move up, even though the real economy is not as good as measured by economist or number crunchers.
The real facts of what the economy is doing is not the issue. It’s the public perception of the economy that matters.
Also, people’s perception of other’s views is a major factor in stock market movements. If people think that others think the market is fine, they will jump in, which will lead to a huge band wagon effect. We’ve seen a lot of this happening this past decade, with people just buying into the market based on the fact that everyone else is doing it.
The same occurs with a sell-off in the market. If people hear that, for whatever reason, that others are, for example taking their money out of mutual funds, you will see them doing the same, which results in an even bigger fall in the market.
Government conditions can also lead to stock market fluctuation. We’ve all seen some disturbing news about the government lead to a drop in stock market prices, even though this news doesn’t really affect the performance of the companies whose price has been lowered.
We all saw this happen when the Presidential election couldn’t be decided right away, and prices fell even more.
Similarly, international events and conditions can lead people to buying in or selling out of the markets. Even tough these events will not really affect the performance of the company whose prices have been affected.
Finally the media’s reporting of facts or news can have a big influence on stock market prices, even though most people know that media reports are often unfounded, or mere speculation.
Let’s go over some reasons why the market has risen so steadily during the 90’s.
Many people believe the price increases are the result of the huge surge of money coming from people saving through their 401(k), plans at work, creating more buyers than sellers. Billions of dollars each year are poured into the market through the 401(k)’s or similar retirement plans, creating a greater demand for stocks. Also, many senior citizens are transferring their wealth to their children, who are not as conservative with their money as their parents had been. They are investing in stocks, and causing prices to go up.
Many people feel that corporations are learning to run much leaner and safer, causing more people to want to buy stocks in these companies.
There is also the factor of companies consolidating and merging, which many times end up with a bidding war, which in turn, drives up the price of a stock. This sometimes results in a ripple effect raising prices on stock, in general.
An interesting phenomenon, is the fact of how many people are now buying into the stock market, because the prices are so high, they feel safer to jump in. This is kind of goofy, but millions of people will wait to see how high the market is going before they decide to buy in.
It’s a curious thing, how the stock market is one of the only places where people want to wait until prices go up before they buy, instead of waiting for them stay flat or even go down before they buy!
Although this line of thinking may be faulty from a fundamental standpoint, this type of thinking during an up market can drive the prices of stock even higher, as the “jump on the band wagon” crowd continues to buy stock, no matter what the price.
The surge of baby boomers hitting their forties and fifties, along with their need to save money for retirement, has caused a lot of them to get serious about saving. Much of these savings, are being poured into stock market investments. So, as baby boomers continue to age and get to retirement, they will be saving more, and therefore more money will be directed into the market. This would have the effect of a continued upward trend in the prices.
See, if the truth be told, the market merely reflects people’s opinions. If prices are stagnant, surging or falling in panic, it’s all caused by a form of mob psychology. Individual companies get caught up in the mob’s action even if the firm’s individual circumstances do not correlate.
For years now, most people believed that things are basically okay right now, and as a result they’re willing to buy more stocks, creating an upward boom in prices. But recently we’ve begun to see a little slowing to our economy and the forward movement of the stock market.
You may remember the recent drop of several hundred points in the fall of 2000. For whatever reason, many people did not feel good about things that day, and started bailing out, sending prices dropping.
Fortunately, the market recovered quickly. If that negative opinion had continued, the market could have just as easily gone south. (slang for down)
There are two basic ways to make decisions about stocks. Fundamental Analysis is where one studies an individual company’s sales, expenses, profits, outlook for the future and so forth, and makes buying or selling decision according to those parameters. It’s a method of investing that’s more individual, company focused.
On the other hand, Technical Analysis, basically ignores the operating results of individual companies and uses segments of the market or the market as a whole, from a more global, top-down perspective. Technical analysts look at the market as a big ocean, and try to determine what the waves are going to do based on what the waves have done in the past.
People who study fundamental analysis, look at a teaspoon of water from the ocean and only pay attention to what the teaspoon of water might do based on its past.
Another method people follow is technically known as Merlin’s method. This is where you obtain a magic wand, wave it over a magic hat, and see what the spirits tell you.
Just kidding! Although, the way we see many people have invested before they become clients, we’re not too sure that Merlin’s Method isn’t what they use.
Which method is best? No one really knows. Any or all of these methods can work… or not work!
Let’s go over the different ways you can invest in the market, from our perspective.
There are really only two normal ways you can buy into the stock market. One is buying an individual security. The other is using pooled funds, whereby lots of individuals pool their money together, and let professional managers manage the money based on whatever philosophies or approaches the managers use.
The most common pooled fund is a mutual fund; they can have many variations, such as taxable funds, or tax-deferred funds, variable products, etc. You can also have funds inside profit sharing or pension plans, 401(k) and 403(b) plans, your IRA, and so forth.
Privately managed funds usually do not charge commissions, but charge fees based on the amount of money under management. It may be easier to arrange for tax management with privately managed funds than it would be with a large mutual fund. Tax management means that the fund structures its activity to maximize tax savings, and minimize tax costs.
Other pooled funds are held inside all kinds of qualified retirement plans, where you can invest in the same kind of funds as mutual funds or variable annuities held under the wrapper of the retirement plan.
As you probably know, retirement plans are tax-deferred, so tax management of the underlying funds is not as important as money being held outside of retirement plans.
One of the best solutions to the dilemma of investing in the market’s upside…and avoiding the downside is a program called Indexed Annuities, issued by large, highly rated insurance companies.
You can participate in the market’s upward movements…and have a guaranteed return on your savings, even if the market plummets! Your money is safe, and all your earnings are tax deferred, so you never pay taxes on money you don’t take out!
These programs have been around a long time, but not many people would listen to us when we recommended them because in the 90’s, all you had to do was buy stocks, and they went up. But…now that reality has set in.
Now that your retirement picture can look scary when you think about money being in the market in the market at the worst time for you…people are listening to us very closely about these savings alternatives!
See, the way it works can vary from company to company, but basically, you invest in an annuity contract with the insurance carrier, and they give you a choice of stock market indexes you can pick from. (Or, if you want, you can use this just like a common fixed annuity, where your money gets a stated rate of interest each year, and your principal grows by that amount, tax deferred.)
Once you pick the index you want to use (like the Dow, or S & P 500, etc.), the insurance company will give you a certain percentage of the growth of that index (somewhere around 75%, for example) if the index goes up over the year. So, as an example, if you chose the S & P 500 index, and it went up 15% that year, you’d earn 11.25%, tax deferred on your money that year.
But…if the S & P 500 tanked, and went down 15%…you would earn the minimum rate in the policy, right now between 3-4%, tax deferred! Do you see how awesome this is?
You get a guaranteed contract, backed by a giant insurance company, and other provisions that make annuities a very low, low risk investment for your retirement savings.
You get to participate in the market if it goes up. And, if the market goes down…you still earn a positive return instead of losing principal like everyone else in stocks and mutual funds will do!
The Indexed Annuity is the smartest savings vehicle to park some of your money you won’t be touching for a while. No doubt about it.
It’s very important that you know about different types of funds, so you’ll be able to make educated decisions on where is the best place to invest your money.
I’m not exaggerating when I say that within these general classifications, there are literally hundreds of different theories, styles, philosophies and styles of management. It would be impossible to go into them all here.
However, I do want you to be aware of the fact that there are many different strategies and concepts, and before you can make your decisions, you need to know what they are and how they might fit your personal situation.
The most important thing is for you to understand how to quantify your goals and objectives, and build a plan based on those goals and objectives. And remember you must be careful, because what may seem obvious or apparent isn’t always the case.
It’s very important to look at your investment goals in the market as long range plans. There are plenty of people out there today who will tell you about the killing they made in the market overnight. The reason these stories are so remarkable is because they are so rare. However, if you were to look at the long-range performance of the stock market the results can be no less astounding.
Let’s just take a look at one example.
In the period from 1926 to 1996 investing in small company stocks, returned 12.6 percent annual growth. Long-term government bonds in the same time period yielded only 5.1 percent. So, in 1926 if you had invested ten dollars in small companies stocks it would be worth almost $45,000 today as opposed to only $337 if you had invested in long-term government bonds.!
Pretty amazing huh?
Now that doesn’t mean you should never invest in long-term bonds. All it means is that in the long run, certain classes of assets perform much better than others.
Now, you might be thinking, “Why wouldn’t everyone just go into the stock market instead of bonds? Well, that ‘s a very good question.
Let’s take a look at the real rate of return on these investments we just mentioned and try to get a clear understanding of how they can best be taken advantage of.
The real rate of return is defined as gross earnings, less inflation, less taxes.
For the purpose of this explanation, we’ll assume that the investor is in the 28 percent tax bracket.
Now let’s say that the same stocks market performance we just spoke about had a gross return of 12.6 percent. This would be reduced to 9.0 percent after taxes were subtracted, and brought down to 5.9 percent real rate of return after subtracting the compound annual rate of inflation of 3.1 percent.
Use the same formula to calculate the real rate of return on long-term government bonds, and you would end up with a return of less than one percent!
This is an astounding analysis that most people do not take the trouble to understand. However, this is the most important analysis you could ever make. For what difference does it make what your gross rate of return is, when you can only keep the net real rate of return after inflation and after taxes?
Again, we are not suggesting that you shouldn’t have some money in low-risk low-return investments.
All we’re saying is that you must know the true net rate return. You must know what actually will keep money in your pocket. When all is said and done, what else matters?
Now, we can’t talk about long-term performance without going into the area of market volatility. (The ups and downs of the market)
The incredible volatility of the market is fueled by many factors. The first two, greed and fear are probably the strongest forces driving the market.
Greed comes into play when people buy in, and fear arises when people sell because they are scared.
These human emotions, in my opinion, are the most dominant forces of the market. For example, political scandals or situations, can drive prices up or down.
The market dropped 271 points when rumors of Clinton’s impeachment surfaced.
Program trading, which is the computerized methods many traders and large investors use to assist them, create situations where events are made momentous by the computers kicking in pre-programmed trading instructions.
This was a big factor in the crash of October 1987.
In the recent past the market has seesawed on news and rumors concerning everything from this year crazy election, crisis in the Mideast and soaring oil prices. Many times, the jumps up, or down are impossible to predict.
The key to safety and security, no matter what happens with any of the variables that creates volatility in the markets, is to have proper diversification! You have to spread out the risk appropriately, so that you are safe as possible. It’s critical not to put all your eggs into one or two baskets.
There are many choices to make depending on your own unique situation.
Timing of your investments is also another form of diversification. For example, you can invest money all at one time.
Or spread the money being invested over a span of time.
You can use investment options with different timing elements, to protect your investments.
You can also invest in either individual stocks or pooled investments such as mutual funds, variable products, privately managed funds, partnerships, the list is truly endless.
All of these are elements that should be considered when diversifying your portfolio.
Let me share a story with you about some clients of ours from long ago.
Paul and Janice came into our office for their yearly review not too long ago.
Paul and Janice have been married for 28 years. Paul is an electronics engineer with a large corporation. Janice had been a stay at home Mom while the kids were younger, but for the last seven years has been teaching a few art classes at the local junior college.
We’ve helped them with everything from preparing their yearly tax return, fixing their messed up insurance, to a college savings plan for their kids.
For the purpose of this report we will only go into the investment portion of Paul and Janice's total financial plan.
Several years ago, Paul’s parents died within a few months of each other and Paul was left $100,000 from his parent’s estate. His parents had invested this money very conservatively in simple low rate CD’s.
When they came to us we advised them about the benefits of diversifying and they agreed to go along with the following plan we developed for them.
We advised them to split the money they wanted to be in the market into some Indexed Annuities. Against our advice, they wanted to buy some stocks they and their broker picked themselves.
So we put $50,000 into Indexed Annuities, and they bought a bunch of stocks.
At the end of their seventh year, the Indexed Annuities had averaged an annual compound rate of return of 11.2%, tax deferred! Their annuities grew to $105,124 in the seven years…without a nickel of taxes paid!
On the other hand, the $50,000 they put into the stocks they and their broker picked, originally had done well, and the $50,000 had grown to $90,000 or so. (Plus, they had to pay just shy of $10,000 in taxes, because they sold some of the early winners, and got hit with capital gains and ordinary income tax!)
But…when the market tanked in 2000… they lost their rear ends!
The portfolio dropped to $61,500 as of the last time we saw them. (We think it’s lower yet.) if you take the $11,500 in profit they made, less the $10,000 in taxes they wasted…their net return was only $1,500 over seven years! This compounds out to an after tax rate of return of les than 1/2 of one percent per year!
And they are the lucky ones, because they got in seven years ago!
We see absolute horror stories every day of retirees or soon to be retirees who bought into the stock market in 1998 or 1999…and have lost over half of their money as of the date of this report! (Granted, those are paper losses, but they still sting and could end up being real losses if the retirees are forced to cash the stocks in because they need money!)
This illustrates a point we need to make here, and that you need to consider very strongly, in our opinion.
Here’s my point. Here’s the question you MUST ask yourself:
If I Were To Take Paper Or Actual Losses Of 10, 15, 20 Or Even 25% Out Of My Retirement Money…Would That Kill My Financial Security??
Please be brutally honest with yourself!
Please try to imagining yourself needing money for retirement, and seeing that 25% (or more) has disappeared. Maybe for a month.
Maybe forever.
See, here’s an interesting mathematical equation you need to be aware of.
If you have $100,000 in stocks in the spring of 2000, and the portfolio drops 50% (which many have), you would have $50,000 left. Right? With me so far?
OK. In order for that $50,000 to grow back to $100,000…your portfolio would have to grow 100% just to get to break even!
See, gravity works in investments as well as on earth!
It takes twice of growth to overcome losses.
What if this happened to you? How would you feel knowing you had to make 100% on your money…just to get even?
Could you handle it?
If this scares you a bit, well, it should. These are very scary times, and no place for amateur night.
The time of the never ending stock boom has ended. It’s over.
Now I’m not saying the market won’t go up, because over time, it probably will. It’s just that the ridiculously easy money days are history.
Since the market is likely to go up over the long haul, and is likely to be very choppy and volatile for a while…why not get the best of both worlds using Indexed Annuities?
If things in the market go up, your account goes up!
If the market crashes and burns, your account still goes up!
And you won’t pay a penny indexes until you actually take out any gains! If you leave the money sit in the annuity, it keeps growing at a higher rate because there’s no money coming out of the account to pay taxes with…so the entire amount of principal grows even faster!
How Can I Protect My Financial And Retirement Security…
In This Time Of Great Uncertainty?
In this report, we’re going to explain the different factors that can affect your retirement security, so you’ll be fully aware of the potential dangers and mistakes most people make…and what to do about them.
Things like:
q A stock market that could have a huge downward correction…or possibly even crash!
q High risk decisions that most people aren’t aware of.
q Why what’s happening on the other side of the world could effect you right here in your own backyard.
q The real rate of return on your investments… and how to REALLY figure it out.
q How investments can affect your taxes in little-known ways. And how your taxes can affect your investments in sneaky, costly little ways, you might not know about until it’s too late.
See, I have a very important question to ask you. Do you know, I mean really know…if you’ve done all that you could to protect your retirement security? Be honest with yourself. Do you know if you’re getting the
best possible after tax rate of return on your savings…with the minimum risk possible?
The purpose of this report is to inform you of the different financial areas that could really impact your financial future, so that you will be aware of them and be able to protect yourself. To give you a sense of REAL security!
This is world we are all living in today is very different than the world we all grew up in.
Imagine if time travel was possible! If someone from twenty years ago landed in this time! They would be shocked at $1.50 gallons of gas, $20,000 for an average car, a Dow over 10,000, a thing called the NASDAQ, (it didn’t exist back then) and so on!
Peoples investment choices were so much more limited compared to today. In 1958 the highest number of shares of stock traded for a single day was 5,368. By 1998 that number was an astonishing 1,216,326! And that is just the New York Stock Exchange!
With your choices being so limited, diversification was easily attained.
People would stay in one job for a lifetime. It was almost unheard of to switch jobs or heaven forbid, change careers!
It was common for people to put most of their savings in the local bank and feel secure that this nest egg would be enough for their retirement.
Think about all the things I’ve just mentioned, and compare them to today’s world.
Today’s world leaders are not believed or trusted. Their every move and comment is dissected by a scandal hungry media, that in turn feeds this information to the public in the form of 20 second sound bites. Politicians take polls before taking any action, and sway in the political winds, changing their minds every day. Laws are so complicated, many members of Congress admit to not reading bills before voting.
Common Sense Is Not So Common Anymore!
In the old days, good old horse sense worked when picking investments. The value and potential of an investment was much easier to figure out. There was some basic business reasoning to the value placed on a stock. Nowadays, value is much more difficult to figure out, and often has nothing to with what’s going on in the real world.
The value placed on securities can go up and down like a yo-yo…without any tie to how the company is performing! With the new Internet stocks first driving up prices like a space shuttle, and then crashing down like the Hindenberg, people are waking up to the fact that the stock market doesn’t always go up.
People seemed to have lost any semblance of common sense! They buy stocks in companies that lose money on every sale, and ignore solid, well run companies. Then, when one investor gets nervous, everyone starts selling and the prices plummet like a hot rock.
See, the real driving force behind the stock market is the emotions all of us project upon it from our hearts, as well as our brains. Often, when the first group of people take action, the rest of the herd will follow just like dominoes; with pure emotion as the driving force. The reality is opposite to the supposedly, calm, cool, analytical approach many people think is involved in stock market prices.
The most misunderstood element of the stock market is that an investor’s perception of general business conditions, or an investor’s perception of other investors’ perceptions dictate stock market price movements.
As with anything in life, it’s all a matter of perception. If people perceive that things are going well in the economy, and the government has a firm grip on the country, the stock market may move up, even though the real economy is not as good as measured by economist or number crunchers.
The real facts of what the economy is doing is not the issue. It’s the public perception of the economy that matters.
Also, people’s perception of other’s views is a major factor in stock market movements. If people think that others think the market is fine, they will jump in, which will lead to a huge band wagon effect. We’ve seen a lot of this happening this past decade, with people just buying into the market based on the fact that everyone else is doing it.
The same occurs with a sell-off in the market. If people hear that, for whatever reason, that others are, for example taking their money out of mutual funds, you will see them doing the same, which results in an even bigger fall in the market.
Government conditions can also lead to stock market fluctuation. We’ve all seen some disturbing news about the government lead to a drop in stock market prices, even though this news doesn’t really affect the performance of the companies whose price has been lowered.
We all saw this happen when the Presidential election couldn’t be decided right away, and prices fell even more.
Similarly, international events and conditions can lead people to buying in or selling out of the markets. Even tough these events will not really affect the performance of the company whose prices have been affected.
Finally the media’s reporting of facts or news can have a big influence on stock market prices, even though most people know that media reports are often unfounded, or mere speculation.
Let’s go over some reasons why the market has risen so steadily during the 90’s.
Many people believe the price increases are the result of the huge surge of money coming from people saving through their 401(k), plans at work, creating more buyers than sellers. Billions of dollars each year are poured into the market through the 401(k)’s or similar retirement plans, creating a greater demand for stocks. Also, many senior citizens are transferring their wealth to their children, who are not as conservative with their money as their parents had been. They are investing in stocks, and causing prices to go up.
Many people feel that corporations are learning to run much leaner and safer, causing more people to want to buy stocks in these companies.
There is also the factor of companies consolidating and merging, which many times end up with a bidding war, which in turn, drives up the price of a stock. This sometimes results in a ripple effect raising prices on stock, in general.
An interesting phenomenon, is the fact of how many people are now buying into the stock market, because the prices are so high, they feel safer to jump in. This is kind of goofy, but millions of people will wait to see how high the market is going before they decide to buy in.
It’s a curious thing, how the stock market is one of the only places where people want to wait until prices go up before they buy, instead of waiting for them stay flat or even go down before they buy!
Although this line of thinking may be faulty from a fundamental standpoint, this type of thinking during an up market can drive the prices of stock even higher, as the “jump on the band wagon” crowd continues to buy stock, no matter what the price.
The surge of baby boomers hitting their forties and fifties, along with their need to save money for retirement, has caused a lot of them to get serious about saving. Much of these savings, are being poured into stock market investments. So, as baby boomers continue to age and get to retirement, they will be saving more, and therefore more money will be directed into the market. This would have the effect of a continued upward trend in the prices.
See, if the truth be told, the market merely reflects people’s opinions. If prices are stagnant, surging or falling in panic, it’s all caused by a form of mob psychology. Individual companies get caught up in the mob’s action even if the firm’s individual circumstances do not correlate.
For years now, most people believed that things are basically okay right now, and as a result they’re willing to buy more stocks, creating an upward boom in prices. But recently we’ve begun to see a little slowing to our economy and the forward movement of the stock market.
You may remember the recent drop of several hundred points in the fall of 2000. For whatever reason, many people did not feel good about things that day, and started bailing out, sending prices dropping.
Fortunately, the market recovered quickly. If that negative opinion had continued, the market could have just as easily gone south. (slang for down)
There are two basic ways to make decisions about stocks. Fundamental Analysis is where one studies an individual company’s sales, expenses, profits, outlook for the future and so forth, and makes buying or selling decision according to those parameters. It’s a method of investing that’s more individual, company focused.
On the other hand, Technical Analysis, basically ignores the operating results of individual companies and uses segments of the market or the market as a whole, from a more global, top-down perspective. Technical analysts look at the market as a big ocean, and try to determine what the waves are going to do based on what the waves have done in the past.
People who study fundamental analysis, look at a teaspoon of water from the ocean and only pay attention to what the teaspoon of water might do based on its past.
Another method people follow is technically known as Merlin’s method. This is where you obtain a magic wand, wave it over a magic hat, and see what the spirits tell you.
Just kidding! Although, the way we see many people have invested before they become clients, we’re not too sure that Merlin’s Method isn’t what they use.
Which method is best? No one really knows. Any or all of these methods can work… or not work!
Let’s go over the different ways you can invest in the market, from our perspective.
There are really only two normal ways you can buy into the stock market. One is buying an individual security. The other is using pooled funds, whereby lots of individuals pool their money together, and let professional managers manage the money based on whatever philosophies or approaches the managers use.
The most common pooled fund is a mutual fund; they can have many variations, such as taxable funds, or tax-deferred funds, variable products, etc. You can also have funds inside profit sharing or pension plans, 401(k) and 403(b) plans, your IRA, and so forth.
Privately managed funds usually do not charge commissions, but charge fees based on the amount of money under management. It may be easier to arrange for tax management with privately managed funds than it would be with a large mutual fund. Tax management means that the fund structures its activity to maximize tax savings, and minimize tax costs.
Other pooled funds are held inside all kinds of qualified retirement plans, where you can invest in the same kind of funds as mutual funds or variable annuities held under the wrapper of the retirement plan.
As you probably know, retirement plans are tax-deferred, so tax management of the underlying funds is not as important as money being held outside of retirement plans.
One of the best solutions to the dilemma of investing in the market’s upside…and avoiding the downside is a program called Indexed Annuities, issued by large, highly rated insurance companies.
You can participate in the market’s upward movements…and have a guaranteed return on your savings, even if the market plummets! Your money is safe, and all your earnings are tax deferred, so you never pay taxes on money you don’t take out!
These programs have been around a long time, but not many people would listen to us when we recommended them because in the 90’s, all you had to do was buy stocks, and they went up. But…now that reality has set in.
Now that your retirement picture can look scary when you think about money being in the market in the market at the worst time for you…people are listening to us very closely about these savings alternatives!
See, the way it works can vary from company to company, but basically, you invest in an annuity contract with the insurance carrier, and they give you a choice of stock market indexes you can pick from. (Or, if you want, you can use this just like a common fixed annuity, where your money gets a stated rate of interest each year, and your principal grows by that amount, tax deferred.)
Once you pick the index you want to use (like the Dow, or S & P 500, etc.), the insurance company will give you a certain percentage of the growth of that index (somewhere around 75%, for example) if the index goes up over the year. So, as an example, if you chose the S & P 500 index, and it went up 15% that year, you’d earn 11.25%, tax deferred on your money that year.
But…if the S & P 500 tanked, and went down 15%…you would earn the minimum rate in the policy, right now between 3-4%, tax deferred! Do you see how awesome this is?
You get a guaranteed contract, backed by a giant insurance company, and other provisions that make annuities a very low, low risk investment for your retirement savings.
You get to participate in the market if it goes up. And, if the market goes down…you still earn a positive return instead of losing principal like everyone else in stocks and mutual funds will do!
The Indexed Annuity is the smartest savings vehicle to park some of your money you won’t be touching for a while. No doubt about it.
It’s very important that you know about different types of funds, so you’ll be able to make educated decisions on where is the best place to invest your money.
I’m not exaggerating when I say that within these general classifications, there are literally hundreds of different theories, styles, philosophies and styles of management. It would be impossible to go into them all here.
However, I do want you to be aware of the fact that there are many different strategies and concepts, and before you can make your decisions, you need to know what they are and how they might fit your personal situation.
The most important thing is for you to understand how to quantify your goals and objectives, and build a plan based on those goals and objectives. And remember you must be careful, because what may seem obvious or apparent isn’t always the case.
It’s very important to look at your investment goals in the market as long range plans. There are plenty of people out there today who will tell you about the killing they made in the market overnight. The reason these stories are so remarkable is because they are so rare. However, if you were to look at the long-range performance of the stock market the results can be no less astounding.
Let’s just take a look at one example.
In the period from 1926 to 1996 investing in small company stocks, returned 12.6 percent annual growth. Long-term government bonds in the same time period yielded only 5.1 percent. So, in 1926 if you had invested ten dollars in small companies stocks it would be worth almost $45,000 today as opposed to only $337 if you had invested in long-term government bonds.!
Pretty amazing huh?
Now that doesn’t mean you should never invest in long-term bonds. All it means is that in the long run, certain classes of assets perform much better than others.
Now, you might be thinking, “Why wouldn’t everyone just go into the stock market instead of bonds? Well, that ‘s a very good question.
Let’s take a look at the real rate of return on these investments we just mentioned and try to get a clear understanding of how they can best be taken advantage of.
The real rate of return is defined as gross earnings, less inflation, less taxes.
For the purpose of this explanation, we’ll assume that the investor is in the 28 percent tax bracket.
Now let’s say that the same stocks market performance we just spoke about had a gross return of 12.6 percent. This would be reduced to 9.0 percent after taxes were subtracted, and brought down to 5.9 percent real rate of return after subtracting the compound annual rate of inflation of 3.1 percent.
Use the same formula to calculate the real rate of return on long-term government bonds, and you would end up with a return of less than one percent!
This is an astounding analysis that most people do not take the trouble to understand. However, this is the most important analysis you could ever make. For what difference does it make what your gross rate of return is, when you can only keep the net real rate of return after inflation and after taxes?
Again, we are not suggesting that you shouldn’t have some money in low-risk low-return investments.
All we’re saying is that you must know the true net rate return. You must know what actually will keep money in your pocket. When all is said and done, what else matters?
Now, we can’t talk about long-term performance without going into the area of market volatility. (The ups and downs of the market)
The incredible volatility of the market is fueled by many factors. The first two, greed and fear are probably the strongest forces driving the market.
Greed comes into play when people buy in, and fear arises when people sell because they are scared.
These human emotions, in my opinion, are the most dominant forces of the market. For example, political scandals or situations, can drive prices up or down.
The market dropped 271 points when rumors of Clinton’s impeachment surfaced.
Program trading, which is the computerized methods many traders and large investors use to assist them, create situations where events are made momentous by the computers kicking in pre-programmed trading instructions.
This was a big factor in the crash of October 1987.
In the recent past the market has seesawed on news and rumors concerning everything from this year crazy election, crisis in the Mideast and soaring oil prices. Many times, the jumps up, or down are impossible to predict.
The key to safety and security, no matter what happens with any of the variables that creates volatility in the markets, is to have proper diversification! You have to spread out the risk appropriately, so that you are safe as possible. It’s critical not to put all your eggs into one or two baskets.
There are many choices to make depending on your own unique situation.
Timing of your investments is also another form of diversification. For example, you can invest money all at one time.
Or spread the money being invested over a span of time.
You can use investment options with different timing elements, to protect your investments.
You can also invest in either individual stocks or pooled investments such as mutual funds, variable products, privately managed funds, partnerships, the list is truly endless.
All of these are elements that should be considered when diversifying your portfolio.
Let me share a story with you about some clients of ours from long ago.
Paul and Janice came into our office for their yearly review not too long ago.
Paul and Janice have been married for 28 years. Paul is an electronics engineer with a large corporation. Janice had been a stay at home Mom while the kids were younger, but for the last seven years has been teaching a few art classes at the local junior college.
We’ve helped them with everything from preparing their yearly tax return, fixing their messed up insurance, to a college savings plan for their kids.
For the purpose of this report we will only go into the investment portion of Paul and Janice's total financial plan.
Several years ago, Paul’s parents died within a few months of each other and Paul was left $100,000 from his parent’s estate. His parents had invested this money very conservatively in simple low rate CD’s.
When they came to us we advised them about the benefits of diversifying and they agreed to go along with the following plan we developed for them.
We advised them to split the money they wanted to be in the market into some Indexed Annuities. Against our advice, they wanted to buy some stocks they and their broker picked themselves.
So we put $50,000 into Indexed Annuities, and they bought a bunch of stocks.
At the end of their seventh year, the Indexed Annuities had averaged an annual compound rate of return of 11.2%, tax deferred! Their annuities grew to $105,124 in the seven years…without a nickel of taxes paid!
On the other hand, the $50,000 they put into the stocks they and their broker picked, originally had done well, and the $50,000 had grown to $90,000 or so. (Plus, they had to pay just shy of $10,000 in taxes, because they sold some of the early winners, and got hit with capital gains and ordinary income tax!)
But…when the market tanked in 2000… they lost their rear ends!
The portfolio dropped to $61,500 as of the last time we saw them. (We think it’s lower yet.) if you take the $11,500 in profit they made, less the $10,000 in taxes they wasted…their net return was only $1,500 over seven years! This compounds out to an after tax rate of return of les than 1/2 of one percent per year!
And they are the lucky ones, because they got in seven years ago!
We see absolute horror stories every day of retirees or soon to be retirees who bought into the stock market in 1998 or 1999…and have lost over half of their money as of the date of this report! (Granted, those are paper losses, but they still sting and could end up being real losses if the retirees are forced to cash the stocks in because they need money!)
This illustrates a point we need to make here, and that you need to consider very strongly, in our opinion.
Here’s my point. Here’s the question you MUST ask yourself:
If I Were To Take Paper Or Actual Losses Of 10, 15, 20 Or Even 25% Out Of My Retirement Money…Would That Kill My Financial Security??
Please be brutally honest with yourself!
Please try to imagining yourself needing money for retirement, and seeing that 25% (or more) has disappeared. Maybe for a month.
Maybe forever.
See, here’s an interesting mathematical equation you need to be aware of.
If you have $100,000 in stocks in the spring of 2000, and the portfolio drops 50% (which many have), you would have $50,000 left. Right? With me so far?
OK. In order for that $50,000 to grow back to $100,000…your portfolio would have to grow 100% just to get to break even!
See, gravity works in investments as well as on earth!
It takes twice of growth to overcome losses.
What if this happened to you? How would you feel knowing you had to make 100% on your money…just to get even?
Could you handle it?
If this scares you a bit, well, it should. These are very scary times, and no place for amateur night.
The time of the never ending stock boom has ended. It’s over.
Now I’m not saying the market won’t go up, because over time, it probably will. It’s just that the ridiculously easy money days are history.
Since the market is likely to go up over the long haul, and is likely to be very choppy and volatile for a while…why not get the best of both worlds using Indexed Annuities?
If things in the market go up, your account goes up!
If the market crashes and burns, your account still goes up!
And you won’t pay a penny indexes until you actually take out any gains! If you leave the money sit in the annuity, it keeps growing at a higher rate because there’s no money coming out of the account to pay taxes with…so the entire amount of principal grows even faster!
Subscribe to Posts [Atom]