The No Exposure To Loss Gambling Machine
Gamble in Las Vegas with a guarantee to never lose? To good to be true?
If you had the opportunity to gamble in Las Vegas but were guaranteed that you would never lose, would you go? Can you imagine the chaos that would envelop Las Vegas’s casinos if everyone won?
Of course, we know that is only fiction and to make Las Vegas work there has to be both winners and also losers. The fun of being in a casino is the hope of winning when we all know the house has the odds stacked in their favor. Sure, a lot of people win, but over time, the casino is the only real winner.
The tradeoff is the vacation, the shows, the gambling and the fun of the excitement surrounding the place. Losing is accepted as part of the deal. With all of the entertainment and excitement that goes along with the gambling, it usually turns into a great time even if they do not win at the tables. The goal of the trip is to have fun and maybe win some money, but most visitors expect to return home with a little less money. Still, everyone wants to be a winner and hopes that they will beat the odds.
Las Vegas is a fantasy for most of us if we were to adopt the same philosophy in our real lives, the results could be disastrous. What would happen if we were to gamble our significant money on investments that were exposed to market risk? How would we survive a long and volatile losing streak?
Every time we chose an asset allocation that is exposed to market risk we are at some level gambling. What is the other option? We could put our money in the bank and make sure it was always safe, but what happens when the yield on safe bank deposits is less than increases in inflation? Do we not still expose ourselves to inflationary risk?
What if there was an asset that did both? What if there was a place we could invest our important money and only participates in increases and never decreases? Would that make sense? There is, but like all too good to be true things in life, there are details.
The main detail is this: In years of increases in the stock market you do not get ALL of the increase, you only get a portion. If the market were to grow 15% in a year, your share might just be 5%. BUT in years where the market lost value, you were never exposed to any loss of account value.
Would that make sense? Only increases and never decreases?
Let’s go back to the casino and see how it would apply in that environment.
Let me introduce you to “The No Exposure To Loss Gambling Machine.”
Like most casinos, there are many types of games that you can play. At one table the “game” is stocks, at another, it is mutual funds, at another its bonds, at another it is commodities, and so on. Like all casinos, you can make or lose a lot of money at these tables. But this “casino” has something unique. It has a table that guarantees that you cannot lose. Let’s look at how this works:
If you walked into a casino with $100, 000 the dealer at this table would give you the rules to play at his table. First of all, he would guarantee that you could not lose any of your money even if you lost every hand, providing you played by the rules. The first rule would be that you agree to play at least ten hands. For agreeing to stay in the game that long he would give you a 10% bonus to play with, so you would be starting with $110,000. At the end of the ten hands the worst case is you lose every hand and walk away with $110,000.
The second rule is that you cannot bet all your money on any one hand, but every hand you win you keep your winnings, and any hand that you lose you hold on to your winnings and the dealer does not take any money back. You cannot lose unless you decide to leave the table early, in which case the dealer will ask for some of his bonus money back and for you to pay a fine depending on how many hands you played.
This dealer has a side bet that he wants you to look at also. He says that he will guarantee that you will win $7,000 each hand on this side bet, regardless of how you do on the main table. That means that after ten hands, you will have at least $180,000 in your account: your original $100,000, the $10,000 bonus, and the $70,000 from the side bets. If you do better at the main table, then you can walk away with that amount instead. Who in their right mind would not want to put some of their retirement money at this table?
You may think that such a table does not exist, that it sounds “too good to be true.” However, it does exist and is called a Fixed Index Annuity (FIA) with an Income Rider. And using Compound Interest, you would have more than doubled the money in your Income Account in ten years! Obviously, the dealers at the other tables are not going to tell you about it because they want you to play at their tables. But the reality is even better than this little analogy.
The Government Accounting Office suggests that people look at Annuities as part of their retirement planning because they are the only financial instruments that can guarantee an income for life.
Here is the link to the Government Accounting Office study on annuities, see for yourself: https://www.gao.gov/products/GAO-13-75