Market volatility: protecting against uncertainty

By Cal Burgess

Retirement Servicing Group PLLC


Given the current financial climate, how can you even begin to assess what the future will hold? Surprisingly, this interesting question is failing to be addressed in most income and retirement planning models.

This morning, I took my son to a local diner for breakfast. During the meal, I couldn’t help but overhear the couple in the next booth, discussing how to protect a lump sum of money as they busily entertained their three-year-old. The topic at hand was a five-year CD option and I found the husband’s remark interesting. “Five years from now,” he said, “who knows what will happen in the market. By then, it could be a whole different world.” The more I thought about that statement, the more I think he hit the nail on the head.

In order to better understand this, let’s take a look at the financial arena today. The market is rallying to all new levels, while the federal government is still pumping $35 billion per month into bonds and mortgage-backed securities, as a counter measure to a fragile market. Ironically, a fragile market that’s somehow at an all-time high even though interest rates remain at an all-time low.

The rules are literally set in opposition and the outcome is impossible to determine. We know that everyone who lost big in the market has had the good fortune to recapture his or her losses. We also know that the federal stimulus has managed to lay a foundation of confidence under the average investor. This mentality, however, is short-term in nature. Long-term planning, on the other hand, has taken a back seat to day-to-day market fluctuations, which unfortunately seems to discredit the reality of a strong economic turnaround.

When you talk about long-term goals (five to 15+ years out), identifying the right financial plan can prove to be quite the conundrum. To reiterate the remark spoken by the man in the booth, given the current financial climate, how can you even begin to assess what the future will hold? Surprisingly, this interesting question is failing to be addressed in most income and retirement planning models.

If we are printing over $400 billion per year, how long will it take us to pay it back? As inflation creeps up, what will happen with the market? How high will federal taxes climb, considering the average marginal tax rate since 1913 exceeds 60 percent? These are just a few of the many questions investors should be addressing within their retirement planning.

I don’t think today’s investor distrusts the market; they simply don’t like the unpredictability that comes with it. Why should they? These investors have already been exposed to the most volatile decade on record, watching their portfolio fluctuate like a roller coaster over the past few years. The only difference now is that their eyes are wide open, and they understand that anything can happen. Are you willing to roll the dice moving forward or will you take precautions to lock in financial guarantees to protect your long-term financial goals?
When you take into account that more than 90 percent of working Americans are without a pension, along with employees paying into a bankrupted Social Security system, it’s clear to see an income epidemic is right around the corner. Where is your future income going to come from? Can you count on Social Security along with a 401(k) to be a solution to your financial security within retirement? Without taking precautions to exempt your money to an uncontrollable financial climate, you may be inadvertently placing yourself in a dangerous spot. Once again, given current market conditions, anything is possible.

The only remedy to an unpredictable market lies within concepts such as annual reset, which provides true financial guarantees — guarantees that expel any future volatility with long-term growth potential and lifetime income. These concepts reposition your portfolio from securities to fixed, asset-protected concepts.

Simply put, deposits are protected within this concept through reserve pools mandated by the state in order to offset the most extreme financial circumstances. Institutions that offer these products front large sums of liquidity to match all deposits, and usually do so on a dollar for dollar basis.

There is a reason why you might not have heard of this philosophy. The massive reserve requirements needed for annual reset usually pose a conflict of interest to security-based firms offering deferred compensation plans. Instead, traditional securities, or stock-based plans, usually rely on leveraging assets to drive in additional income. Companies that use leverage assets, by default, cannot afford to front reserve pools in order to protect the money, as it is a conflict of interest.

Leveraging assets, or borrowing against funds, are the exact opposite of placing cash into reserve pools. Therefore, it should be of no surprise that in the wrong financial environment, leveraging could prove to be of severe consequence. To put it into perspective, many experts believe the fall of MF Global stemmed from a leveraged asset as high as 43 to 1. This means for every dollar deposited, $43 dollars were borrowed in hopes of trying to drive in profit. So, when the market crashed, excessive debt obligations effectively rendered the company insolvent. Since the assets within these plans were leveraged, the money in turn was completely exposed to volatility.

What happens in the market remains to be seen. Those concerned about unanticipated market downturns should educate themselves on concepts that provide true financial guarantees. This is especially true for those who strive for a comfortable lifestyle in retirement, regardless of how the market performs. However, before investors start exploring safe money solutions that incorporate annual reset, it is highly recommended that they seek the advice of a financial professional. Doing so, will help determine if these products are a good fit.

Correction: This article originally cited over $35 trillion in monthly federal spending and over $400 trillion per year. It has since been corrected to $35 billion in monthly federal spending and over $400 billion per year.