Can you believe that it has been 2 years since the stock market hit the bottom? The Dow Jones Industrial Average(DJIA) bottomed out at 6,443.27 and the S&P 500 at 672.88. Within a year and a half the DJIA and the S&P dropped 54.5% and 56.9% respectively. Remember all the pain and anguish we all had to endure at that time? The recession was in full swing, everyone on TV was telling you to “SELL, SELL, SELL; put all you money in cash! We have never seen anything like this before! This time it is different, the stock market will never come back!”
What was being projected was doom and gloom, and I would agree with half of that statement. I believe it was a very gloomy time. Nobody had anything good to say. If you were planning to retire the question you had was, “is there any way I can retire now, or do I have to work the rest of my life?” If you were retired at that time your question was, “should I go out and find another job just to support my lifestyle because my investments dropped so much?”
The problem is that the specifics of this market might have been different, but huge drops in the stock market are not uncommon. There are many financial professionals that were telling people to sell everything off and go to the “safe money.” What is the safe money? Equity Indexed Annuities! You have the stock market potential for the upside with none of the downside risk. The problem with this is if your portfolio lost 30% or greater and you pulled out, you would not be able to break even when the stock market breaks even due to the CAPS or ceiling that these annuities place in the contract. If the stock market made 20% one year, your annuity might only give you credit for 7% because that is their ceiling.
There is a risk/reward trade off. You are only rewarded in the stock market if you are a long term investor. Since the March 9th, 2009 bottom the DJIA has increased 89.6% as of the close of the markets last night, and the S&P is up 94.4%. What has your annuity done? Nobody knows what the future will hold in any aspect of your life, but we do know that there is a way to determine how much volatility is in any portfolio. Do you know how it is determined? The idea that diversification is good, and most people know that term, but do you know that asset allocation helps to explain over 90% of where your returns come from? If you have no idea how to answer those questions, please send us an email or give us a call to chat about these concepts. As always, you do not need to know everything about investing, you only need to know a few of the right things to be successful!
Philip A. Guske