Monday, December 1, 2014

Financial Independence Is Rarely An Accident

Albert Einstein was once asked what the most powerful force in the Universe was...

His answer?

Compound Interest.

Protecting your money against loss is the most fundamental principle in investing, and if there is one thing all good investors know (or should know), it is this: never touch the principal!

The Difference Between A Good Investment And A “Real” Investment

A little over a year ago I had a conversation with a client who had approached me about what to do with his modest savings in a 401(k) account that he had left at his previous employer. He could see the market threats mounting against his little nest egg and was concerned about how to protect it.

My advice was that he should move at least half of the value of his portfolio into fixed indexed annuities (the recommendations for the remainder of the account are not relevant to this discussion), and I had a couple of reasons for making that recommendation:

First, I believe it’s never a good idea to leave your 401(k) portfolio with your previous employer. It is similar to leaving your valuable possessions in the house of your ex-spouse after a divorce.

Second, with everything that had happened with the market over the past few years, I thought he needed a vehicle that would preserve and grow his nest-egg for the long-term. (Note: The fact that the stock market has been on a tear lately and reached record highs this year in no way invalidates this particular concern, as the rest of this article will try to show.)

My client said he would think about it and get back to me. About a week later he told me that he had discussed the situation – and my recommendation – with a relative who also happened to be a banker, and the relative had advised him to "stay put" because "stocks always bounce back". Now that response is typical of most folks when it comes to a discussion of market-based investments, especially stocks and mutual funds.

All too often – as in that particular case – this kind of response comes from the often-repeated, but mostly inaccurate assumption that "the returns on annuities are low”! And usually it also comes with this thinking: “I've lost some money in the market and I want to get it back when the market rebounds. As soon as stocks come back up and I break even, I will make the move to a fixed indexed annuity”.

Unfortunately, my experience (and that of most advisors I know) has been that this classic response – and its accompanying “the market will always rebound” philosophy – keeps people at the break-even level with their investments, never being able to really pull out ahead. But even worse, it also comes with lots of regret, and inevitably those who subscribe to it come back to say, "I wish I had listened to you; I wish I had made that switch to annuities or at least moved a part of my money into annuities…”

This is because the expected market rebound and recovery of losses typically doesn't happen as anticipated; instead, those folks end up with disappointing investment results and even more losses, often at a time when such losses can least be tolerated. Of course, hind-sight is always 20-20 so they can now see things more clearly, but then the damage has already been done!

The other side of the coin – what some folks don’t seem to appreciate – is that those of us in the industry are privy to the asset management and investing strategies of successful investors and therefore get to see what moves are made to help ensure investment success and enduring financial stability as the years go by.

I Would Like You To Consider This...

If you start the year with $100,000 in the stock market and lose 40% by year end, it would take 2 subsequent years of 30% returns to break even. The question is, how often does that happen? What are the chances of the market having two consecutive years of 30% growth?

Against this background, placing at least a portion of your retirement (and other financial) assets into an alternate investment vehicle that could help protect your principal against market losses should be considered a good (even great) investment strategy. And annuities – the right kind of annuity – could be just the vehicle you need for that.

Sure, the occasional “giddy highs” of the market (as we have seen this year) can be intoxicating and fun, but we all know too well that “what the market gives, the market takes away”, and as much as we all want to wish that it wouldn't happen, there is no doubt in my mind that it would not be long before this “raging bull” that we've seen for most of this year tires itself out and a sanguine bear (if not a rampaging one) takes over and allows the market to correct itself. When that happens, having a decent chunk of your assets in a vehicle (or basket, if you will) that assures a rock-solid 6 – 10% average annual returns over the long-term will be a pretty good position to be in – and clearly a worthy proposition to be considered by any serious investor.

So you ask, what is a Fixed Indexed Annuity? How does it work, and what can it do for me and my investment or retirement portfolio?

Well, how would you like an investment with the following features:

Ø  100% Principal Protection – Your money (what you put in) will never be lost due to a down-turn in the stock market.
Ø  6% – 10% average returns annually, with a guaranteed minimum of 2% typically
Ø  Gains locked in each year, and once locked-in, they can never be lost by a market down-turn.
Ø  A guaranteed income for life during retirement, even if you out-live your investments.
Ø  A good night’s rest – because you neither have to worry about losing your money in the market, nor about out-living your income in retirement.

If any of what has been said above sounds good to you and you would like to know more, take a few minutes and get back to us at AAKOBB Financial Services with your questions and concerns. We will work with you to explore some options that would get your money working for you (instead of it working for Wall Street money "managers" and/or Uncle Sam!)

We Are Here to Help You  Help Yourself!

To recap, if you want something that...

Ø  Has zero market risk – no losses from market down-turns – with gains locked-in!
Ø  Is relatively liquid
Ø  Comes with tax-deferred growth
Ø  Allows you portioned tax-free, penalty-free distributions
Ø  Provides you with guaranteed lifetime income you cannot outlive,
Ø  Assures that your retirement will pay out (i.e., that you have funds to adequately support you in retirement) even if you outlive your other savings
Ø  Could be set up as a ROTH (after-tax contributions) if you qualify...

Then…speak with us. We wish you all a happy holiday season.

Patrick C. OsBourne
Phone 1: (614) 707-1775
Phone 2: (513) 889-2134

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