Retirement Funds Safe…
by Avoiding the Stock Market Mistake
By R. E.
Relying on the stock market as your retirement investment
tool of choice is like using Las Vegas as your financial advisor.
Unfortunately, many people have retirement portfolios that are
heavily invested in mutual funds and other stock market items. Even
worse, the average American doesn’t realize how weighted in stocks
their retirement portfolios are, and then they wonder why their
retirement accounts fluctuate so drastically.
First, here are a few facts about the stock market and its
performance over the years. In 1999, Congress was under pressure to
invest Social Security funds in the stock market because of the
extreme upward trajectory of the stock markets during this decade.
Before doing so, Congress asked the Brookings Institute to report on
the performance of the stock market’s 121-year history (from 1871 to
1999). Here’s what they found and reported in their article “Risk
and Returns of Stock Market Investments Held in Individual
Retirement Accounts” (available at www.brookings.edu):
annual stock market return on investment has only been 6.3%, not
the 10%+ some brokers and financial advisors claim.
market has been subject to wide variations with long and
unpredictable periods of gains and losses.
approximately 60 years (about one-half of the measured time),
the annual rate of return was less than 6.3%.
approximately six years, the stock market showed a negative rate
occasions, the stock market gains of the previous 10-12 years
were completely wiped out during several down periods of 2-3
years, and it took years to recover from the losses.
from Sept. 25, 2001 to Sept. 25, 2002, the S&P dropped from
1003.45 to 819.29, a loss of 18.3% in one year.
On October 17,
1987 (Black Monday), the stock market lost 18%+ of its value
in a single day. It was the largest loss in American stock
As a result of this report, Congress concluded that no Social
Security funds should be invested in the stock market, as much of
the time (about half according to the Brookings Institute report)
the market lost asset value. If Congress decided that the stock
market was not a good investment choice for retirement funds, then
the average American should take heed too.
But if the stock market is as risky as the report says, why
don’t more financial planners and advisors steer their clients away
from heavily focused stock portfolios? Well, here’s a fact few
people realize: Most professionals who do financial advising and/or
planning have a securities license, which means they can sell
stocks. They also typically work under a broker or dealer, who only
makes money when those who work under them sell or trade stocks.
Even if an individual financial planner wants to offer a non-stock
market related product, he or she has to get approval from the
broker or dealer to sell it. But most brokers and dealers only want
to sell securities items, as that’s when they make the most money.
Additionally, most large firms that advertise their financial
planning services are really brokerage firms. So no matter how often
their ads tell you to “trust” them or that they’re “bullish” with
investing, when you use one of those firms you’re putting your money
in the stock market…and putting your retirement in extreme risk. If
you’re tired of gambling with your retirement funds, consider the
Know where your
Take out your
portfolio documents and look at what you have. If you don’t know
what something is, ask your financial planner. Is all or most of
your money in stock market items? Most people have little knowledge
of where their retirement funds are invested. When they receive
their regular portfolio statements and documents, they look at the
dollar number (the current value) and little else. But if you really
want to plan for your future, you have to take an active role and
understand where your money is.
retirement investment options:
Despite what some financial planners might tell you, there
are many other retirement investment options that are not contingent
on stock market performance. Some to consider include:
A life settlement is the sale of a life insurance policy
covering a person who has a limited life expectancy, normally 10
years or less. The person selling the policy receives a lump sum
of money (rather than letting the policy lapse or sell it to the
issuing company for its cash surrender value), and the firm or
individual who buys the policy receives returns based on the
insured’s life and not the market trends. While past performance
is not a predictor of future performance, it is a good
indicator. And in the last 25 years, the return on investment
for life settlements has been 15%-16% per year.
Considered “old fashioned” and often forgotten, whole life
insurance has many advantages that can help people plan for
retirement. This is one investment where, as long as you choose
an insurance company that’s financially strong, you can’t lose.
As your policy builds cash value, you can write loans to
yourself and then pay yourself back. You also get a reasonable
rate of interest that enables you to build more cash into your
policy. And unlike an IRA, whole life insurance investments grow
tax free, meaning you’re not taxed when you take the money out.
Also referred to as an equity indexed annuity, a fixed index
annuity is a life insurance product that pays gains based on the
stock market. However, unlike most securities or mutual funds
where your account balance can fluctuate due to market
performance, premiums deposited into a fixed index annuity are
guaranteed to never go down due to market downturns. In other
words, you can participate in market-indexed interest without
market-type loss. With this option, you pick which stock market
index you want to be tied to and then you choose a cap, such as
70%. When the market goes up, you get 70% of the gain rather
than the full 100%. But when the market goes down, you’re
guaranteed not to lose money, no matter how low it goes.
Find a financial
planner or advisor who is not tied to the stock market:
If you’re being
advised by someone who makes money from stock market transactions,
what kind of unbiased advice do you think that person will give you
regarding other retirement investment options? Ideally, your advisor
should suggest you diversify your portfolio across things like cash,
bonds, stocks, alternative strategies, commodities, and precious
metals, not simply a variety of mutual funds with different names
and “styles” like large-cap value, small-cap growth, midcap blend,
international small-cap value, and so on. These are nothing more
than marketing gimmicks. Finding someone with the credentials of
Certified Retirement Financial Advisor (CRFA) is best.
It’s Your Future:
have some money you want to gamble and don’t foresee a trip to Las
Vegas in your future, then by all means buy some stocks. If you pick
the right ones, you could come out ahead. When it comes to your
future, however, you simply can’t rely on the stock market to fund
your retirement years. The risk of loss is too great for most people
to endure. Ultimately, the more carefully you plan your retirement
today, the more enjoyable your golden years will be.
Read other articles and learn more about
R. E. Branch.
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