How to lose your nest egg
By Karlan Tucker
Losing your nest egg is much easier than you may think. Let’s compare placing your nest egg in the market versus a fixed indexed annuity (FIA).
1. Place your principal in the market without a stop loss.
The market — as we all know, but apparently forget — goes in both directions, up and down. I’m surprised by how many people have no downside protection in their portfolios. Wall Street has a bronze bull on display for all to see, but no bronze bear. I don’t blame them for not promoting the downside of the market, but it does exist, and poses a dangerous threat to your nest egg. To be positioned only for the upside is foolish when, on a regular basis, we see daily dips of up to 1,000 points (May 6, 2010), monthly drops of several thousand points and up to 12-year intervals (DJIA 11/13/1997 at 7,487 to 3/18/2009 at 7,486) where the market produced nothing if you didn’t capture the gains that were fleeting.
The FIA’s stop loss is that you can’t lose to the market what you don’t have in the market. It has an automatic stop loss in that principal is guaranteed to always be there.
2. Place your principal in the market without any guaranteed returns.
It has been said that over 10-year intervals, the market will always go up. Well, if that were ever true, it no longer is. Just look at the DJIA dates and numbers in point number one. In the January 2000 issue of Reader’s Digest, Warren Buffett said, “If you aren’t willing to own a stock for 10years, don’t even think about owning it for 10minutes.” He knows that it’s possible to hold a stock for a very long time and make nothing. If you place your nest egg in the market without any guarantees of making something, then the end result could be that you are unable to preserve your standard of living because you are unable to keep pace with inflation.
The FIA offers a minimum interest rate credited to your account every year, independent of the market’s performance. If you want a stronger guaranteed return, position yourself in the fixed account. Bonuses are also guaranteed when you stay within withdrawal limits.
3. Relying upon diversification to protect your nest egg.
Warren Buffett says diversification reduces your return because your losers offset your winners. But does it at least protect you from the downside of the market? The answer is a resounding "no!" In our most recent downturn, 14 of 16 asset classes were down. The only two that were up were corporate and gvernment bonds with maturities of one to three years and long-term treasuries. Consider the performance of America’s most widely diversified mutual fund from 2007 through early 2009’s downturn. The Growth Fund of America has 469 holdings, almost as diversified as the S&P 500. Yet in just 16 months, it lost 73 percent of its value. So much for, “I’ll be okay because I’m diversified.”
The FIA’s principal is never placed in the market, so it can’t be lost to the market. Its safety comes not from diversification, but from guarantees.
4. Waiting for your broker to tell you to sell.
You’re likely to wait a long time. Wall Street is a proponent of the buy-and-hold strategy. You’ll notice that within this idea, there is no recommendation to sell. Brokers are unable to make any money on the funds you remove from their management. It would not be a good business plan for the broker to advise you to sell unless you are willing to keep the proceeds with them, and then reinvesting them in the market. Putting up the capital and taking the risk only to never access your nest egg means that not only will you never benefit by the use of the funds, but you are also very likely to lose your nest egg over time. Why? Because it is much easier for the market to take than to give. On $100,000, a 50 percent loss leaves $50,000; then a 50 percent gain only puts you back to $75,000. It would require a 100 percent gain just to break even. This could take many years. If you don’t have many years, then you may never fully recover your nest egg.
The FIA does not wait for you or your advisor to capture a gain. It does it automatically on an annual basis.
5. Having to sell your winners while they are winning if you ever hope to win.
Typically, you can’t sell a loser and make money; so, you would need to sell your winners to benefit. The problem is that since the market is cyclical, you have to sell them while they’re winning. If you hold them long enough, eventually, they may well become a loser. The question is, who wants to sell a winner while it’s winning? The answer: Very few. So few, in fact, that there is a name for them: contrarians. It’s a good name, isn’t it? There has to be a better way to make money than to be forced to sell the very instrument that is making you money and not sell the vehicle that is losing in the hopes of waiting for the time when it may make some money.
The FIA allows you to capture your gains without ever selling the very vehicle responsible for the gains.
6. Having to time the market to know when to buy or sell.
After all, if you get this one wrong, you could lose your shirt. I know what it takes to time the market. You have to be able to time the news. Good news and the market goes up; bad, and it drops. If only you could know the news a day or even a few hours in advance. If you do know this, its called insider trading, and you receive a free pair of striped pajamas and a cellmate.
The FIA sells automatically every year on your anniversary and captures any gains that may have been there.
7. Not capturing a gain while it was there.
If you can’t ever capture a gain, what is the point of the exercise? How do you capture your gains? Buy and hold offers no answer. Timing is not possible. Will the market be up or down on the day you retire? The day you die? If you don’t have captured gains and need to sell, you could once again lose your shirt, because you may be down badly and need the time you no longer have to recover.
The FIA offers an answer. It captures gains annually while you’re still participating in the market.
8. Paying taxes in order to capture a gain.
With all positions in the market, you have to sell in order to to capture a gain. With non-qualified accounts, this means you will trigger a tax event if you have a gain. So, you’re in a dilemma. You don’t want to pay the tax, but you want to secure your gain.
The FIA captures interest earned from the market annually, getting it safe, never to be lost to the market in the future, and all the while inside a tax deferred account. Hence, no taxable event.
9. Deferring all taxes to later in life.
I believe taxes are going up, and going up substantially. If you should be successful in weathering the storms the stock market throws at your IRA, you still are not out of the woods. Inside your IRA, you have a partner named Uncle Sam. To get rid of him, you have to buy him out. I would rather buy him out sooner than later, as it will cost much more in a higher tax rate environment to get rid of him. I grew up on the farm, and I understand it is much better to pay the tax on the seed, rather than on the crop.
The FIA defers taxes; however, when placed inside a Roth wrapper, it eliminates all future taxes on the growth. It will feel great to have income in your retirement that is tax free.
10. Not insulating your emotions from the market’s volatility, which can lead to excessive fear or greed.
John Bogle, founder of Vanguard Mutual Funds, says the number one reason people don’t make money in the market is emotion. To stay the course through thick and thin and not let either a crashing bear market or a roaring bull market impact your decisions is not possible without help. The result is often a damaged or decimated nest egg.
The FIA protects your nest egg from the downside, while keeping you positioned to benefit by the upside. Either way, you are always in a position to take advantage of the best the market has to offer on all the principal you placed in the FIA.