The Projects of My Life ® addresses investors’ critical financial concerns during the two most critical wealth phases of their lives: wealth making the (accumulation phase) and wealth keeping (the preservation phase).
PROJECT WEALTH KEEP
Overview: Project Wealth Keep is dedicated to preserving assets, employing protected growth strategies, creating dependable income that you can’t outlive and ensuring lasting legacies for retired individuals.
Winning by Not Losing
Passive investing with Exchange Traded Funds can deliver on two guarantees:
You will make money when the market makes money, and
You will never earn less than the market.
That second of the two guarantees, “never earn less than the market,” is very comforting to a long term investor who understands that in the long run they will do well just to stay invested. An abundance of historical positive performance provides comfort and guidance to lower risk investors. “Never less than the market” also implies when the market goes down, so does your portfolio. This is still an attractive approach for most long-term investors, but still may not be a good enough approach for others, namely people approaching retirement or already retired, who still want to participate in the equities markets but can’t afford the down strokes.
What if there was a way to win at investing, but not lose? “Annuity” has become a bad word in the financial press, and with large money managers with even bigger egos who write articles and manage stock and bond portfolios for an annual fee. No axe to grind there! Right. But these “sophisticated” financial journalists and “sophisticated” money managers know that all annuities are junk. Right? And you, a “sophisticated” investor, are also convinced that all annuities are junk. Right? As it happens, the insurance industry offers a way for retirees, or any risk averse investor, to win, but not lose. The financial press and those big headed money managers cannot make the same claims, so they attack the evil annuities that can. And do. And deliver.
Do yourself a favor: cut through the clutter and open your mind.
Annuities were developed to be a “personal pension,” a retirement solution that promised to deliver a lifetime income to the retiree. In that space, they have worked remarkably well. A defined benefit pension plan is actually a big group annuity. If you retired from a company, a union, a municipality or the federal government, and you get a check every month, you have an annuity.
Annuities come in lots of flavors and they’re universally reviled in the financial press. Why? What the press gets right is that some commercial annuities are oversold by overzealous salesmen, whether they fit or not, whether they are the right solution or not, or whether the investor needs it or not. So, on that point, we are agreed. Annuities are oversold.
Annuities come in many flavors and they’re universally reviled in the financial press. Why? What the press gets right is that some commercial annuities are oversold by overzealous salesmen, whether they fit the investor’s objective or not, whether they are the right solution or not, or whether the investor needs it or not. So, on that point, we are agreed. Annuities are oversold.
So are actively managed, high commission mutual funds.
So are IPOs.
So are…fill in the blank.
Its true, too many insurance agents, banks and brokerage firms have become narrowly focused when it comes to making “objective” recommendations. That is, they often recommend products that offer the highest payday or the ones that their firms selectively put on their short list, often void of relative value to the client. Annuities and many other products are oversold. But just like stocks and bonds, annuities are financial instruments.They are designed to fill a very specific need. They either work for you, or they don’t. Period.
What if there was a way to win at investing, but not lose?
According to banking sales figures across the industry, annuities account for 8 in 10 investment sales. Nothing in God’s green universe should account for 80% of any broker’s recommendations, but banks’ customers are especially easy marks. They’re loyal to the bank and are generally open to the pitch.
A MarketWatch article a few years back called it the “bank branch annuity dance.” To be fair, bank savers have been yield-starved for many years, and the higher returns and bonus rates offered by the insurance companies that the banks represent are generally two to three times higher than a bank deposit product or CD. Some annuities, like fixed rate annuities, are simple and have few moving parts. They deliver a guaranteed rate of return and a guarantee of principal return, making them a very low risk choice for investors seeking income and stability.
But what if you don’t need the income and you are still actively seeking growth? How do pull that off at the tail end of a ten year old bull market that continually tests its historical highs and then falls back with the volatility of a two year old?
Enter the Fixed Index Annuity
For growth-minded investors there is one form of annuity that is especially attractive during peak markets: The Fixed Index Annuity. The Fixed Index Annuity, FIA for short, is one type of annuity that at its heart is a passive investment, but with a twist. Once investors make the overarching decision to go “passive make,” they generally fall in love with ETFs and indexing in general. And what’s not to love? They’re cheap to buy, offer instant diversification, perfect for asset allocation models, and offer tax-efficiency due to low or no internal portfolio turnover, which is especially important in non-retirement accounts.
Exchange Traded Funds may be the perfect all weather investment construct for investors interested in building long term wealth. Using index investing at its core, the FIA is a fairly new animal, constructed and refined by the largest and most financially sound insurance companies. The FIA is not an investment; it is an insured instrument that offers investors positive returns by way of interest crediting methods that are based on index performance. The majority of an investor’s funds are actually held in a low-yielding cash or equivalent positions for safety and stability, with a minority stake dedicated to buying futures contracts on stock indices.
…you’re retired, fear losing money in a declining stock market and have less time to earn back the losses you’d suffer on a direct equity portfolio…
The S&P 500 is the most prevalent, but indices from other sectors of the market are also used to construct smart portfolios that can be allocated to stocks (domestic, international, small, medium and large) and fixed income (corporate and government bonds from around the planet). The FIA investor never owns these stocks and bonds; rather, along with the ownership of their big cash equivalent position, they participate in the performance of varied futures contracts that make money when returns on the underlying indices are positive.
If you’re retired, fear losing money in a declining stock market and have less time to earn back the losses you’d suffer on a direct equity portfolio, the FIA may be a solution, IF you can withstand a 0% return when markets fall. You read that right. Remember the main promise of the FIA is that you will not lose money in a down market, so if the market corrects 20% downward, you would be flush with a 0% return. Meaning no loss. These specialized financial instruments offer investors a safer way to participate in the upside of the market move, sometimes “capped,” (that is, you get a stated percentage of the upward move), and sometimes “uncapped” (you get the entire upward move) depending on the issuer and specific contract features. But what is nearly universal to these FIA contracts is they guarantee the downside.
That is, you are guaranteed to not lose original principal in a market downturn.
0% is nothing to write home about, but when your friends are losing 10% or 20% in a market correction, you are going to feel pretty damn smart! Investors ready to retire, for instance, who want or need to continue to have portfolio growth, understand these contracts are some of the very few ways to win by not losing.
One smart move that new retirees are now making is transferring mature 401k balances into a personal IRA Rollover account, liquidating their current positions in which they’ve earned positive returns over the years, thus freezing the gains and reinvesting their funds into an FIA and reducing market risk. For instance, an investor with a $400,000 401k that has earned great returns over the years, but wants to reduce risks in this very mature bull market, can freeze the value and invest the funds in a Fixed Index Annuity. If the market goes up, he wins. If the market goes down, he doesn’t lose.
If the market goes up, he wins. If the market goes down, he doesn’t lose.
Generating income in retirement is Job One, so this is a solid strategy for retirees who have already nailed down their income requirements. For assets that do not need to generate income, elder investors can have the best of both worlds by using a Fixed Index Annuity.
John Bogle told us long ago to buy the market, stay invested, keep expenses low and be tax efficient. ETFs check all the boxes.
WealthKeep will never argue with Mr. Bogle, and we further emphasize that investors should not chase returns by trying to follow some fancy stock picking scheme. Passive investing is arguably the superior strategy for most investors, in both long term taxable accounts and qualified retirement accounts.
Some investors, however, may need to sidestep the market’s vagaries without fully bailing out. This is where Fixed Index Annuities can satisfy that need.