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What If It Happened Again?
What If It Happened Again?
What If ….? : S&P 500 LAST 10 YEARS
The illustration above shows the S&P 500 returns (6) for the years 2000 through 2009 on the left. The investible assets are $500,000. This example shows a typical investor who has about 10% in cash earning an average of 3% and 90% allocated to the market represented by the S&P 500. We use the broad market index to approximate what investing in the market in general was like over that period of time. Certainly an investor could have been in more or less risk than illustrated here. Yet, the illustration shows in general terms how the market performed from 2000-2009. Notice, there are no monies allocated to Column B, which are Index Annuities.
The chart shows at the end of the ten year period this investor would have lost over $100,000. I don’t know about you, but a 20% loss in the market is devastating when it comes to retirement! Imagine if you were 52 years old in 2000 and planning to retire when most people retire at age 62. Would you do what many have had to do, which is work another 3-5 years in hopes of recovering those assets needed to retire?
And what if it happen again? What if the next ten years aren’t any better than the last ten years? Can you afford to lose another 20% or possibly more? Can you continue to push off your retirement indefinitely?
When I show this graph to clients they tell me, “Yep, that’s about what happened to us.” Yet, the same clients will surprisingly stay in this broken down Wall Street model attempting to recover with a hope and a prayer.
There has to be a better way, and I believe there is. Look at the graph below.
Using the same $500,000 over the identical ten years (7), let’s allocate 60% to short term laddered maturities in indexed annuities. Assuming an average index Cap of 7% we begin to see how the ABC Model is a great model to use for Bear markets. This time period was a Bear market and yet the allocation made $96,869 over the same time period while the first example lost $101,786. That is a difference of $198,655 over a really nasty decade. It is probably the difference between you retiring when you want to or not!
“The first rule is not to lose.
The second rule is not to forget the first rule.”
Mr. Buffet helps us to understand why the ABC Model works so well. The key is simply to protect your principal and retain your gains. Remember Green Money Rules #1 and #2? That ‘s right . Green Money Rule #1 is the same as the first rule for Warren Buffet. Don’t lose! Look at the Red Column C in the years 2000 through 2002. You started with $150,000 in 2000 and ended with $89,000. Remember the “Tech-Bubble”? If you were invested in tech-stocks in those years you took a much greater beating. Now look at the same years in the Green Column B. You started with $300,000 and ended with $300,000. Are you happy? Darn right! You didn’t gain anything, but you didn’t LOSE anything. Zero is your Hero!
Look down the Red Money Column at the ninth year, 2008, and the loss of 38%. It took you five years to just get back to where you started in 2000 and then the bottom dropped out. You lost $55,796 and only had $92,203 left of your Red Risk money. Yet, peer into the ninth year of the Green Money Column and notice you didn’t lose a dime and have $391,901 which is more money than you started with in the year 2000. You cannot say the same for the Red Risk Column can you?
I am not saying that you shouldn’t invest in the market, but I am saying you can diversify with Fixed Principal Assets like laddered maturities of Fixed Indexed Annuities and the decade would not have been the abysmal lost decade of 2000 through 2009.
The decade from 2010 and forward doesn’t look any better either. With government bailouts, increasing mortgage defaults, escalating taxes, a new government controlled healthcare system, and a thirteen million dollar rising deficit; something is going to get ugly. i hate to think it is your retirement account in the market that gets devastated.
I know. It is negative. But what if it happened again?
Note: From 1950 to 2012, Average Inflation Rate is at 3.70%, where should be our be at to keep up with inflation.
*info from Bureau of Labor Statistics
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