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Fear and Greed on Wall Street

Written by: Cal Burgess, Retirement Servicing Group

A recent article on titled “Fear and Greed Index” illustrates an accurate description of what is happening on Wall Street. Because of the recent volatility stemming around Greece and the Euro, and unemployment domestically, the fear gage for investors is all the way in the red. This means that investors as a whole do not put much faith in the outcome of their investments. Bottom line, volatility is becoming a normal event investors are unwilling to tolerate moving forward. Why now? It’s simple, most investors’ retirement and financial goals have been severely disrupted over the last 10 – 12 years. They have to make up the losses and know that a volatile marketplace will not get them where they need for a secure retirement. Unfortunately, this trend is likely to continue and many portfolios will continue to suffer losses like we have seen over the last few years.

The fear and index gage pinpoints extreme fear for investors in every category. Every aspect of investing is being marked as red, from junk bond investing to safe money havens. However, Wall Street’s safe money havens are quite different from other Safe Money Vehicles (non-Wall Street affiliated products). On Wall Street, a safe money haven usually refers to either commodities such as gold and silver, which can be volatile, or FDIC insured accounts (i.e. money market accounts) that will usually earn 1/10th of 1% interest. Because Wall Street designs their business model around non-guaranteed leveraged assets, their safe money havens are either susceptible to loss of value (exposed to market volatility) or are accounts that basically break even (usually FDIC insured), exposing your money to inflation risk.

Make no mistake about it, the reason the fear gage is so high is because in the market, investors have no guarantees in place in order to achieve their long term goals. With non-leveraged assets (assets with a minimum leverage ratio of 1:1) you can provide a moderate return without subjecting your money to volatility through a unique concept known as annual reset. Annual reset is a regulated concept (financial products protected by law) that will ensure you will never take a step backwards due to excessive volatility.

There are millions of investors who have taken advantage of annual reset in order to protect their money from volatility. Those who implemented this philosophy prior to 2008 never lost a penny in the financial crisis when Lehman Brothers fell (at that time Lehman Brothers was leveraging their assets on a ratio of 33:1), and have experienced moderate returns since that point in time. These investors understand that regardless of how the market performs they have underlying guarantees that offer lifetime income or tax advantaged withdrawals (for those who qualify) that will avoid volatility and allow for moderate returns.

Never heard of these financial products? There is likely a good reason why. Financial planners often fail to make recommendations to products that use annual reset (offering financial guarantees) because they deem it a conflict of interest. Financial planners are in the business of hedging against risk, not proving total protection from risk. These philosophies differ by the way the planning phase (usually based on how institutions leverage their assets) is approached in both long term and short term goals. Annual reset is tied to products that do not offer securities, which is often interpreted as a lack of control by financial planners. Furthermore, there are many planners that do not buy into eliminating the downside of the market in exchange for financial guarantees that come with capped earnings. They feel their market driven products can yield a favorable return over a period of 30 plus years, as the market has done historically. I disagree with this philosophy. The “traditional diversified portfolio” flew out the window when the Fed pumped trillions of dollars into the market in order to offset the financial crisis of 2008, an event that has never happened in US history. Not to mention many investors do not have 30 plus years to wait the market out, especially with zero guarantees.

Until investors explore alternatives to Wall Street based products, the fear gage will continue to fall into the red and their financial woes will not be behind them. The question to ask yourself is how much time and money are you willing to lose before the market corrects itself? In other words, what is your contingency plan? Exploring financial alternatives that are designed to protect your money from volatility is key to protecting and preserving your future financial goals.

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