The market turmoil over the Europe crisis and the weaker than expected economic indicators here in the U.S. has investors seeking safety.
- Many will seek the safety of cash or CDs.
- Many will turn to insurance annuities.
- Some will turn to gold or the next ‘hot commodity’.
This is a great example of people making an emotional decision during short term volatility.
The historic “Risk Free Rate” is about 4%. The risk free rate is the historic return on government guaranteed T-bills. Think of them as the CDs issued by Uncle Sam. They have a very low return but virtually no volatility. They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long term losses. It’s the safest way to go broke.
There has been abundance of ads for annuities touting the ‘guaranteed’ return of as much as 5.0%. What they don’t tell you is that in order to receive the ‘guaranteed’ rate you need to annuitize after a 5 to 10 year holding period.
This means you give complete control of YOUR money to the insurance company in exchange for a monthly income for life.
They also neglect to tell you that once annuitized the ‘guarantee’ is turned off. You could run out of money. Finally, these products pay the broker a 8 to 10% commission.
When you consider all the fees you pay, you will not keep up with the inflation. The insurance company and the broker wins and you lose.
We must ignore the short term volatility and be adults about our finances. We should realize there is no free lunch. Risk is risk, live with it. We might look at this as an opportunity to rebalance our portfolio. Buy low and sell high.
Remember, free markets work, capitalism while not perfect works.
To succeed, we must own equities….globally diversify….rebalance.
Consider working with an investor coach/fiduciary adviser to help you build your prudent portfolio. Once built your coach will help you deal with the volatility along the way.
Do you remember the phrase ‘no pain…no gain’? It refers to the pain you experience after doing exercise or working at a hard physical task.
But in this case if you want the great returns equities provide over the long term. We need to deal with the pain of short term volatility. More specifically ‘bad’ volatility. The kind experienced during downturns. There is also ‘good’ volatility experienced during the inevitable up markets.
Since 1946 the average recovery of a down market of 10% or more is 111 days. I couldn’t resist using ‘some’ statistics.
If you haven’t noticed there is a common theme of these writings. In that, no one can consistently predict the future.
So listen to your coach and ignore the short term volatility. Even during a prolonged ‘bear’ market you need to remain calm and disciplined.
Your journey to financial success is a marathon not a sprint.