Going Broke Safely!!!

Every day we hear, see, read something generated by the Wall Street bullies attempting, many times successfully, to stir our emotions and move our money. The predictions keep coming, ie, ‘the market will crash’ ‘interest rates will soar and bonds will be devastated’ ‘equities are dead’ ……..Each of these predictors has a solution or product to protect you. These predictors might say:

  • Seek the safety of cash or CDs or market time.
    Federal Reserve Bank of NY, 33 Liberty Street
    Federal Reserve Bank of NY, 33 Liberty Street (Photo credit: Wikipedia)
  • Buy fixed annuities.
  • Buy gold or the next ‘hot commodity’.

These are great examples 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 of your purchasing power.

Short term gain for long term pain.

There has been abundance of brokers/agent and ads for annuities touting the ‘guaranteed’ income for life. Or enjoy a secure retirement without worrying about the market. What they don’t tell you is that in order to receive the ‘guaranteed’ rate net of fees you will earn nothing more than the guaranteed rate. This income, net of inflation and taxes, will guarantee that your purchasing power will decrease.

It’s the safest way to go broke.

In addition, you give complete control of YOUR money to the insurance company in exchange for a monthly income for life. Do you recall the TV ads on structured settlements or annuities? The ad promises to buy your structured settlement or annuity because you ‘want your money NOW’. Do you think this company will do this for free? In fact, you will pay a substantial penalty for this service.

Finally, these products pay the broker a 5 to 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/agent wins and you lose.

Last year at this time the bullies were predicting a market crash and to save your investments you need to buy gold. Well since then gold dropped nearly 30% and the S&P 500 gained 30%. How many 60% oops can your portfolio withstand? Of course, this may reverse at any time.

We must ignore the short term volatility, because there will be bad markets in the future, that is undeniable. The problem is no one can tell you when they will occur. If they could predict crashes, why would they tell you? There are tools on the market to make huge returns when the market crashes.

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.  There will be bad markets in the future but they always recover. Of course, past performance is no indication of future results. I believe if we build prudent portfolios at YOUR level of risk and remain disciplined we will succeed long term.

Because hopefully, you will be retired for a very long time.

To succeed, fire your broker/agent and hire an investor coach.

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Indexed Annuities – Da Coach Likes Them Should You?

NASD executive office on K Street in downtown ...
Image via Wikipedia

The Equity Index Annuity EIA may sound like a great way to deal with market volatility but beware. In the long run this product will cost you big. When you control one risk you may add another. Inflation risk is perhaps your worst enemy going forward. Financial institutions will promote products that deal with consumer fear rather than advising investors on what is right for them. Finally the additional fees and the foregone dividends will cost you returns in the long term.

Should you pick up the phone and say that Coach sent you?  Let’s examine a few issues.What is an Indexed Annuity? Per the FINRA website, EIAs (Equity Indexed Annuities) are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIAs give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn returns better than traditional fixed annuities when the stock market is rising.

Reuters recently ran a piece on these products. A few points raised in the article:

— Hidden fees and commissions. Commissions typically run between 5 percent and 10 percent of the contract amount, but can sometimes be more. These and other expenses are taken out of returns, so it’s hard for buyers to determine exactly how much they’re paying.  

— Complex formulas and changing terms. The formulas used to determine how much annuity owners earn are so complex that even sales people have a hard time understanding them, and they can change during the life of the contract.

— Limited access to funds. Buyers who try to cash out early will incur a surrender charge that typically starts at 10 percent and decreases gradually each year until it stops after a decade or more.

–Limited upside. An annuity’s “participation rate” specifies how much of the increase in the index is counted for index-linked interest. For example, if the change in the index is 8 percent, an annuity with a 70 percent participation rate could earn 5.6 percent. However, many annuities place upside caps on the index-linked interest, which limits returns in strong bull markets. If the market rose 15 percent, for example, an annuity with a cap rate of 6 percent would only be credited with that amount.

If it sounds too good to be true it probably isn’t. In addition to the following tips the EIA does not pay you the dividends earned by the index. These funds go to the insurance company.

Please comment or call to discuss.

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