The dangerous W

By Karlan Tucker

Tucker Advisors


According to certain economists, the economy appears to be on track to produce a "W" shaped recovery. The first "V" of the "W" is about to come to an end. According to Harry Dent, Jr., founder of HS Dent Investment Management, an investment firm based in Tampa, Florida, the market should run out of steam by the end of summer and begin a precipitous decline into the fall, which could take the Dow as low as 3,000. The second "V" of the "W" is likely to look much more like a "U" or possibly even an "L."

Below I will tell you how to use this information to create the motivation for folks to safely preserve their nest egg in an indexed annuity or in a traditional fixed annuity. But first, let's look at what's happening in our economy right now.

The national jobless rate is around 9.5 percent and rising. Some states, like California, Michigan and South Carolina are in the 12 percent to 13 percent range already. In fact, Harry Dent is predicting 15 percent unemployment nationwide before this crisis is over. We are all familiar with the subprime loan defaults, but now we are seeing dramatically rising numbers of prime loans defaulting. This is because some homeowners who are making their mortgage payments on time are becoming discouraged, since their homes are now worth less than their mortgages. Some of these people are walking away from their homes to start over with less debt. This could cause more bank failures and could also create additional concerns over the economy. In turn, people may lose even more faith in the stock market, which would result in a further decline. Other problems exist too, such as credit card defaults, tight credit and a continuing global recession.

There is a saying that there is safety in numbers; but, in investing, all too often that is not true. The most successful investors are contrarians, who often move in the opposite direction of the masses. In the Money section of the June 29, 2009 USA Today, the title reads, "Comebacks could be a sign that [the] market is on a sustainable run." Another article in a recent issue asked us who we believed -- Bernanke or Buffett. Bernanke said in recent congressional testimony that he can see the "green shoots of recovery." Meanwhile, Buffett said despite the recent cataract surgery improving his eyesight, that he couldn't see any green shoots. I think there's a much higher likelihood that Buffet's eyesight is more accurate than that of Bernanke, a government official who has to be very careful with what he says and who tries to put a positive spin on conditions whenever he can. When the papers and politicians say the recovery has begun, it's a good time to take cover.

Where can we place our clients' nest eggs to protect them from market volatility and allow them to fight inflation sufficiently in order to provide income if needed now or in the future -- without running out of principal? I know of only one sure place, and that's in an annuity.

The market is volatile and dangerous. Even buy-and-hold hasn't worked for the past 10 years, since the market is about where it was a decade ago. The same USA Today article says, "The good old buy-and-hold strategy doesn't pan out in a time when even the strongest of companies' stocks are plummeting."

Alternatively, bank CD rates are between 1 percent and 3.5 percent and even 30-year government bonds are paying just less than 4 percent.

Fixed and indexed annuities are designed to first protect principal and interest, then defer the taxes on the increase and finally, provide an income that cannot be outlived. All of this is offered, not through a prospectus that says you can lose your shirt, but through a contract backed by conservative bond portfolios, the claims-paying ability of the insurer, and lifetime income riders reinsured with a third-party insurer.

Both traditional fixed and indexed annuities offer bonuses of up to 10 percent and fixed accounts in the 3 percent range -- which creates more than a 13 percent first-year opportunity. In the middle of the worst recession of our lifetimes, where else can you get a 13 percent opportunity without incurring any market risk? The income riders of both the fixed and indexed annuities offer either increasing income to fight inflation or a guaranteed growth rate of 8 percent annually for up to 20 years.

Recently I was visiting with one of my more notable clients, Dr. Marshall Goldsmith, executive coach and author of the best selling book What Got You Here Won't Get You There. He told me, "The pleasure of gain is far less than the fear and grief felt from large losses." Say for example, you have $200,000 and you hit it right in the market and your money grows to $300,000. The extra $100,000 is not likely to change your life to any great degree. However, if your $200,000 falls to $100,000, the loss of security, potential income and peace of mind can greatly diminish your contentment and happiness.

With this in mind, let's keep our clients' nest eggs intact and growing. Your clients will be much happier with low to moderate growth on all the money they've ever had than they will be with greater growth just trying to recoup the money they've already lost.