One day Little Red Riding Hood was walking across town to her Grandma’s house. She was carrying her favorite basket which she always used when bringing things to Grandma’s, except today in the basket she would be carrying something very, very valuable and important—in the basket would be Grandma’s life savings.
Grandma was retiring after many years of working at the cookie factory. She had a nice 401k accumulated over the years. Together with Social Security, a small pension from the cookie factory and her 401k, (the three legs of the “retirement stool”) Grandma figured to be quite comfortable in her retirement years and would be able to do lots of fun things with her friends and with Red.
Grandma wanted to keep her money safe, but also get some reasonable interest on those funds that would grow her nest egg without needing to worry about inflation. Grandma had heard that she could turn her money into a lifetime income stream—a nice paycheck every month that she couldn’t outlive. And the best part was that this money would be safe and guaranteed against any loss from the stock market. Grandma liked that part the best!
When Red stopped by to see the nice man at the local bank and told him that Grandma wanted to withdraw all her money, the man stopped smiling and became very serious. “Why, Red, doesn’t your Grandma realize how dangerous that is?” the man said. “In the bank, her money will be safe and secure, and besides, she’ll get 1.25 interest.”
Red thought about this a minute and replied with a frown “Hmm, 1.25%—that doesn’t seem like much. It sounds like that wouldn’t even keep up with inflation…and Grandma is always talking about inflation.”
The nice man at the bank, now getting impatient with this little “know it all,” sternly responds, “Look, kid, the old lady’s money is safe here, OK. Those free pens and coffee we give out cost money, and those class-action lawsuits are playing hell with our bottom line. People are lucky to be getting 1.25% on their lousy savings!”
Now it was Red’s turn to get serious. After all, she had dealt with wolves in the past, and she didn’t like the way the conversation was going. It reminded her of a fairy tale she heard. “No Sir, Grandma wanted me to withdraw her life savings, and that’s what I need to do, please,” Red said standing her ground. “Fine,” said the nice man at the bank, no longer sounding very nice now that Red was withdrawing a hefty amount from the bank’s deposits on hand. “I’ll get your Grandma’s money. There will be $25.00 charge for the cashier’s check”.
Red just smiled. “What a putz,” she thought but didn’t say aloud.
With the contents of Grandma’s 401k withdrawn from the bank, and now safely in her basket, Red Riding Hood continued her journey across town to Grandma’s house. It took longer at the bank than she was planning. It always seems to take longer when you want to withdraw money, she thought.
Red soon came to that dangerous part of town that Grandma had warned her about. There were tall buildings that cast long shadows over the street. It seemed that everywhere people seemed to be so serious, talking on cell phones and hollering at each other about “the market.” But Red couldn’t find a market anywhere—just lots of tall buildings. Besides these people didn’t look like they worked in markets. They were all dressed in nice clothes and were driving very nice cars. And everybody seemed to be in a hurry. Red was confused, and just a little frightened. It was then that she heard a voice, “Hey little girl, are you lost? Do you need some help?”
Red turned and saw a nice man in a nice suit holding a nice briefcase, leaning against a tall building that was casting shadows on the sidewalk. Something about him looked familiar, but Red couldn’t place it. “Why yes,” Red replied, “I do need some help. I’m on my way to Grandma’s house, and I don’t want to get lost. I’ve never been here before, and I’m a little scared to tell you the truth”.
The stranger in the nice suit arched his back, yawned and said, “Well now, honey, don’t you worry about a thing, I can help you. I help lots of people around here. There’s nothing to worry about. I can solve all your problems and get you to Grandma’s house in no time at all. My car is right over here; I can take you for a ride to Grandma’s house. I take people for rides all the time. By the way, what’s in the basket?”
Well, Red wasn’t stupid and wasn’t about to get in a stranger’s car. Besides, she had heard about people getting robbed in this part of town. But the man was so nice and was trying to be so helpful. Red thought it wouldn’t hurt to talk to him. “Well, in the basket is my Grandma’s life savings. I just picked up a check at the bank and am bringing it to her now. She’s going to turn all that money into a safe, retirement income that will help her for the rest of her life”.
“You don’t say,” said the nice man in the nice suit, silently licking his chops. “That’s just what I do. I help people make a lot more money with their savings. They can become millionaires with my help. Heck, the sky is the limit I always say”. “Gosh, that’s exciting,” Red admitted, now very curious. Wouldn’t it be nice if she could take Grandma’s life savings and double or triple it, in a short amount of time? Maybe even make Grandma a millionaire? Grandma would like that!
“So, Mister, just how do you do that? How do you help people make so much money on their life savings that they become millionaires? My Grandma would like that”, Red thought out loud.
The nice man in the nice suit seemed to be sniffing at Red’s basket, “Well, you see honey, I take people’s money and invest it in things like stocks and mutual funds and variable annuities. It’s all very complicated, you see, there’s lots of paperwork, and things called a prospectus, and disclosures from the Securities and Exchange Commission, and more paperwork with quarterly statements and lots of things that your Grandma won’t understand, but never mind all that. She’ll be fine. And she’ll make lots of money with my help”.
“Gee, it sure sounds complicated.”
“Oh, yes, it’s very complicated. That’s where I come in. I take care of everything. Your Grandma has nothing to worry about. By the way, how much is in your basket?”
“Wow,” Red squealed. “That’s fantastic. But will Grandma’ money be safe? She’s serious about keeping her money safe—it’s all she has, you know.” “Yes, yes. Your Grandma’s money will be pretty safe. I use things called “portfolio diversification,” and “dollar cost averaging.” That way, when the market goes down, your Grandma only loses SOME of her money, and the other part hopefully makes money. Some go up—some go down. It’s just the way it works, OK? It all AVERAGES OUT. Your Grandma’s money will be as safe as we can make it in the market. How much does Grandma have?”
Red, starting to get the hang of things, replies, “Oh, it sounds then like she can lose money on that part that goes down, right? And what if all the parts go down at the same time? Does that ever happen? And if everything averages out to be “zero,” then Grandma didn’t make anything at all, right? Why should she take the risk?”
“Now, now, just hold on. It hardly ever happens that everything goes down at the same time. Heck, that usually happens only every 7 to 8 years, and the market comes back. The market ALWAYS comes back. So, Grandma may take it in the shorts for a bit, but you gotta’ take the “long view,” see the ‘big picture.’ When the market goes down, Grandma needs to stay the course, be patient, buy more stocks and mutual funds while they’re a real bargain…that’s what I always tell my customers. When the market eventually comes back, Grandma will be rich. How much is the old lady worth, anyways?”
“How long will that take for the market to come back? And everybody around here talks about “the market”—I don’t see any markets here. What market? “It’s the stock market. Equities. Securities. You put your money in and hope that it goes up. Usually, it does over time, and people get rich. Oh sure, sometimes it takes longer than anticipated, but most people come out OK after expenses and my fees. How big is the check you got in that basket?”
Red, now seeing the big picture” says, “It’s funny they should call these things “securities”—sure doesn’t sound very SECURE to me. In fact, it really sounds like when Grandma goes to the casino with her friends on those buses. They’re all excited and HOPING to win, but usually, they come back with less than what they started out with. This is a just a big gamble, isn’t it? And what’s this about expenses and fees? What are those for?”
“Look, kid,” the man growled, “I don’t do this for nothing, got it. I mean I got to pay for that nice car and this nice suit. When I get my hands on your Grandma’s stash of cash, I take 5-6% right off the top. Then each year, there are expense and fees—lots of fees. I usually rake in another 3-6% each year off my clients’ accounts …whether they make money or not, whether the market is up or down, I still get paid. Ya’ got a problem with that kid?”, he snarled.
It all clicked into place for Red as she suddenly realizes that this guy is beginning to look a little too familiar—like she somehow has seen him before.
“Hey Mister, tell me if I got this right: Grandma hands over to you her retirement nest egg which has taken her entire lifetime to accumulate. Then you take it and gamble it on something nobody has any control over– hoping it will grow. Like any gamble, it can go up or down. There are no guarantees and Grandma may lose money, and if she does, it could take years for her to earn it back. Meanwhile, you continue to earn a nice annual fee on Grandma’s money no matter whether she had gained or lost money. And Grandma’s dreams of a safe, secure income for life are gone. Do I have that right, Mister?”
“Yeah, kid…you got it right,” he hissed
The nice man in the nice suit didn’t look so nice anymore, and as he turned and walked away, Red couldn’t help but notice the tail hanging out under the suit jacket and the paws that protruded from the cuffs of his pants.
Red Riding Hood quickly walked the next block and called Uber. She arrived at Grandma’s just in time for an early supper. She thanked the Uber driver, and as she walked up the front steps, she noticed the fragrant aroma of Grandma’s homemade chicken pot pie. There were also voices coming from the kitchen. Red stepped through the front door and into the waiting arms of Grandma. “It’s so good to see you, my dear, how was your day, did you have any trouble?”
Red explained the confrontation at the bank where Grandma had been a customer for 30 years, then sat down to tell Grandma all about the familiar-looking man who would make Grandma rich by investing her money in stocks and mutual funds. Red was confused. She wanted to help but figured the gamble with her Grandma’s money was not worth the risk. “Oh, my dear child, you did the right thing. Don’t worry or be confused. There will always be people who want to make fast-buck by taking an unnecessary risk. I don’t need to do that.”
Grandma turned toward the kitchen table where a handsome, older gentleman was seated.
“Red, this is Mr. Mayfield. He is an insurance agent whom I’ve been talking to about a safe and secure place to put my retirement money. It’s called a Fixed Index Annuity, and it can guarantee me a nice big check every month for the rest of my life. It’s a kind of insurance policy, so my money is always safe and protected whether the stock market is up or down…and I still get the same monthly payment. My money is protected three different ways, and I get a nice return each year from the interest. You protected my money this afternoon, dear, you did the right thing. And now Mr. Mayfield is just finishing up this insurance contract, and I’ll be comfortable and not have any financial worries for the rest of my days.”
Grandma, Mr. Mayfield, and Red all sat down to nice dinner of homemade chicken pot pie while Red provided the details of her encounter with the curious man in the nice suit. Mr. Mayfield smiled and thought to himself, “saved another one.”