How does Wall Street turn a zero percent growth into a 25 percent average growth deception?
People love to talk about their amazing run of success in the market, the new hot stock, or the latest info on a new Silicon Valley Startup Tech Company that is poised to deliver a home run. However, the actual underlying reality might tell a different story when the dust settles. Let’s take a deeper look.
Let’s use Bill as an example: Bill starts his investment journey with $100,000 and earns a 100% rate of return in year one, bringing his portfolio balance to $200,000. Next year, the market drops by 50%, bringing his account balance back to his original $100,000. In year three, luck would have it that Bill’s portfolio increases by another 100% and brings his account back up to $200,000. Then in year four, the market experiences another 50% drop, bringing Bill back to his original $100,000.
In this illustration, the market showed a 25% average return rate; however, how much additional cash does Bill have with this 25% average rate of return? Zero!! And most likely some annual fees from his custodian managers on his accounts.
How would Bill’s portfolio have performed had his money been invested into a Fixed Indexed Annuity, even with a 12% cap product? Bill would start with $100,000 for year one with 100% growth; however, it capped at 12%. Bill’s account balance on year one is now $112,000. The market drops by 50% in year two, and Bill has no gain; however, he has no losses either.
In year three, the market increases another 100%, and again Bill’s account, being capped at 12%, will now see an increase of his account to $125,440. As the story goes, the market in year four drops by 50%. Since Bill invested his money into a Fixed Indexed Annuity, he experienced zero gain, but more importantly, zero losses. His four-year market run with his Fixed Indexed Annuity averaged 6.36%, with zero managing fees to his account.
A “deceptive” 25% return in the market provided Bill with zero gains over four years on Wall Street. He would have the same $100,000 he invested minus fees. However, in a Fixed Indexed Annuity, Bill would have experienced an average 6.36% rate, compounding every year, with zero downside market risk providing Bill with $125,440. It is very easy to see why many people are confused about where they should place their money, the Illusion of Wall Street, or the “No-Thrill” Fixed Indexed Annuity.
As people start to enter the “Red Zone,” defined by the five years prior to their retirement and five years into their retirement years, it is often time to re-evaluate strategy. Shifting their focus from wealth accumulation into wealth preservation is often a wise move to mitigate risk and ensure that their retirement accounts will last the entire duration of their lives.
We are currently living in challenging times with record-high inflation numbers and the overall cost of goods running sky-high. At the same time, we have seen a record high Bull Market, where according to any normality, the market should correct every 5 – 6 years. Yet, we have entered year 13 without any significant correction. Now might be the best time to evaluate your strategy and play it safe.
To find out if a Fixed Indexed Annuity is the right solution for you, I would advise consulting with a professional advisor. An advisor can guide you through the best options that line up with your retirement goals and be sensitive to any specific requirements or timelines that you have.