How To Avoid The Coming Stock Market Crash – Part 2
Written By: Ike Ikokwu, CFP, CPA, CTC, MSPFP in Atlanta, GA
In Part 1 of this article, I talked about how exciting a time it is to be an investor; that is, assuming you are currently invested in the market (click here to read Part 1). As of that writing, both the DOW and S&P 500 hit major milestones by crossing over 16,000 and 1,800 respectively. Well, the NASDAQ, decided it too would not be left out of the party and during the week of November 25, it crossed over 4,000 for the first time in 13 years. Now that’s something investors across the globe can all be thankful for. The markets are doing their part to ensure you have a Happy Thanksgiving!
The good news as we indicated before is that all metrics seem to show that the party on Wall Street will last a little while longer. How long? No one really knows. But what we do know is the party will come to a crashing end soon. And, if you’re not one that likes to endure the pain of another 30%, 40% or 50% decline in your investment accounts, we concluded the last article by pointing out that there’s a way to secure the return OF your money while still getting some return ON your money.
By that, I mean that there’s a way to enjoy complete safety on your investments while not sacrificing the opportunity for some growth from the stock market, even if you don’t get all of the market’s growth. And when I say some growth, I’d define that as rates of return that, historically, have averaged 1% to 3% higher than bank CDs. Truth be told, investing history has proven that you’d be better off with NONE of the market’s losses and only A PORTION of the market’s gain… even if that portion was just 50%.
Let’s illustrate how this strategy works conceptually by telling a story. Joe, after many years of riding the roller coaster ride of Wall Street, decides he’s had enough and so he pulls all of his money out of the market and parks it somewhere safe. At the time, he found a CD paying 5% per annum so he parks his $100,000 in that CD. At the end of year one, while he’s earned $5,000 in interest and maintained safety on his principal, he starts to fantasize of days past when he’d earn 10%, 15% or even 20% when invested in the markets.
Discontent with his 5% safe return, he decides he’ll take the interest he just earned in the CD, and take a weekend trip to Vegas to go gambling. He asks his wife Sue if she’ll go with him and she says sure. While at Vegas, he plays his hand at Blackjack and what do you know, Lady Luck is on his side and after the weekend, he realizes he made an additional $5,000 in winnings, so he and the wife are headed home on Sunday with $10,000 in their pocket book.
Upon returning home, the first thing Joe does is drive to his bank on Monday and adds the $10,000 to his CD, raising his balance to $110,000. He’s beaming with pride that he in essence made 10% on his money for that year. At the end of year 2, he’s made 5% on his $110,000 CD at the bank. Upon receiving his statement, he turns to Sue and goes, “you thinking what I’m thinking?” She says no, but agrees to take another weekend trip with him to Vegas. He leaves his $110,000 in principal behind and takes his year 2 interest of $5,500 on the trip to Vegas and yet again, Lady Luck is on his side and he doubles what he came to Vegas with. On their ride home on Sunday, they’ve got $11,000 in their pocket book and a big smile on their face.
Upon returning home, you guessed right. Joe makes that same trip to his bank and deposits his $11,000 into his CD which raises his balance from $110,000 to $121,000. Now, it’s the end of year 3 and he’s just earned 5% on his $121,000 CD. Looking at his statement, he sees they earned $6,050 and before he can even utter the words from his mouth, Sue says YES Joe, I’ll take the trip with you to Vegas again!
This time at Vegas, Lady Luck is not on their side and they lose the entire $6,050. At that point, they call it quits and head back home. Monday morning, Joe makes his usual trip to the bank and his manager says, Joe, I’ll bet you’ve got some more money to add to your CD. Joe goes NO. I didn’t do so well in Vegas this past weekend. I just wanted to pop in and check on my account. The manager checks and says well Joe, at least you still have $121,000 that’s safe and secure here at the bank.
Now here’s the million dollar question to answer. If you were in Joe’s shoes, would you have taken the $5,000 in interest from year one along with your original principal of $100,000 to go for a weekend gambling trip at Vegas? If you said NO, I’d like to know why? Chances are you said, because that’s too risky. Well, what about what you are doing with the money you have invested directly in the stock market? That’s kind of like putting all of your chips in Vegas and that’s clearly something you’ve admitted is too risky. The goal with investing is to appropriate as many strategies as possible to protect the “Golden Retirement Goose” (Your Retirement Savings) so it can continue laying “Golden Retirement Income Nest Eggs!” (Your Retirement Income).
My point is this: There are actually smarter and more efficient ways to be invested in the stock market and not lose your shirt, but time and space will not allow a full discussion of those strategies in this article. However, if you are one that said, you don’t like it when it gets too hot in the “stock market kitchen” and you want out, what I’ve described here with Joe’s story is exactly how a Fixed Indexed Annuity works in principle. The only difference is the insurance companies would replace the “CD” with a “Safe Bond Portfolio” and they’d replace “Vegas” with actually linking interest earned on your annuity to the performance of an external index like the “S&P 500.” Through the industry’s use of caps and participation rates, you may end up getting just A PORTION of the S&P 500’s return for the year.
If you are flat out greedy and are looking for a strategy that guarantees complete SAFETY on your money while getting ALL of the market’s return, then this strategy isn’t for you and I’d simply wish you well in your search for that strategy. However, for those that are looking for a way to guarantee the return OF their money while benefiting from SOME gains from the markets, then perhaps a fixed indexed annuity could be an asset class that you would consider for a portion of your investment portfolio. It’s certainly one of many strategies you can appropriate to get what you want.
There are more bells and whistles to how this fixed indexed annuity works but for now, it’s suffice to say that we’ve laid a good foundation for understanding the basics of a fixed indexed annuity. Now, you’ve got one bright idea on how you can actually have the safety that’s comparable to your local bank CD, while earning rates over the long term that will most likely be 1% to 3% higher than what your CD might offer. And, if celebrities like Ben Stein think that this is a good strategy, perhaps you should take another look at the fixed indexed annuity. Happy investing!
About the Author:
Best Selling Author and Financial Strategist Ike Ikokwu gets it. He’s walked through the same fire that most of us are walking through right now – the disappearing nest egg, the investment returns that never happen, and the house with the white picket fence that’s worth less now than it was when we bought it. Through experience, education, and a lot of hard work, Ikokwu has survived the American Dream turned financial nightmare. He has discovered that most of us are following 9 specific financial myths he calls the “Mom and Dad Plan,” and these inadvisable, yet staple, beliefs have us on a collision course with financial disaster. For access to his best-selling book and other financial products to help you avoid the collision course with financial disaster, visit him on the web at www.ikeikokwu.com.
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