During my 21 years in the Financial Planning business, experience has taught me that if you protect the downside, the upside will take care of itself.
I have personally lived through several stock market corrections, downturns and recessions. I have seen the DOW drop over 22 percent in one day on October 19th 1987, aka (Black Monday). I watched Japans? elite Nikkei 225 stock index burst in late 1989 and bottom in early 2003 with over an 80 percent loss from its peak.
As I am writing this article I have witnessed yet another freefall in the markets as economic unrest spreads globally and our own DOW index set a new record for the largest intraday point decline in the history of the index. On Oct 6, 2008, the index declined over 800 points.
Now more people are becoming aware, perhaps for the first time in their investing lives, that the market has more risk than they care to admit. Small investors often begin to throw in the towel after being beaten down by markets like this. Just when you think you have had enough and you sell out of the market, it rebounds, without warning, and your left sitting on the sidelines. We know that over time the market has consistently provided growth opportunity and long-term rewards. So how can you protect the down side and limit your losses and still benefit when the market does well?
How do you find a guaranteed stream of income that will last your entire retirement? The days of relying on a company pension are largely gone. People are living longer and there are more demands on our retirement dollars with every passing day. The equity markets are scary.
Nothing seems safe. Fixed investments are drawing more attention even when the return is very low. The ‘Real? rate of return is so low that fixed investments may not give you enough purchasing power to keep up with taxes and inflation.
There is of course no silver bullet. There isn’t a cure all that works for everyone.
Over the years I have seen many types of products designed to try and satisfy the investing public. One such product designed by the Insurance industry is called an Annuity. There are all sorts of annuities that exist today from simple Fixed annuities, to Indexed Annuities and Variable Annuities.
Despite the negative press that surrounds these types of products, there may be some value that exists beyond what meets the eye.
Some experts say annuities are expensive for what you get, though that seems to be changing as they are becoming aware of the various guarantees Annuity companies are offering.
Take for example the seven percent guarantee that one company is offering on their Variable Annuity. Even in declining markets, their guaranteed withdrawal base increases by seven percent. You can invest in the market and still have the peace of mind that your retirement income portfolio base is growing.
That reminds me of a saying, ‘Cost is only an issue in the absence of value?, and that type of guarantee seems pretty valuable.
So if you want to build a diversified portfolio exposed to various sectors, regions, indexes, and bonds both domestic and foreign, and are looking for a guaranteed stream of income that will last your entire retirement years, a variable annuity may be the answer.
It is worth noting that long-term investment vehicles like variable annuities are one option, and certainly not the only option. Remember there are many types of annuities. Variable annuity benefits and features vary widely, so you will want to consult with a qualified advisor when determining if such a product is right for you.
Capturing gains in an up market and protection in a down market sounds too good to be true. What’s the catch? The benefits being offered by an annuity are only as good as the company that backs it and there is that old adage to remember, ‘There is no free lunch?, and these guarantees come with a cost.
So what’s left? Ask yourself this question, ‘If this type of investing will work for me, what is the benefit to me and my loved ones and is it worth the cost??
Call Loran S. Coffman, founder of Wealth Preservation Strategies, at 248-693-5599.