Wednesday, October 21, 2015

Navigating Through a Perfect Storm

Here we are starting the 4th quarter of 2015. Many of the gains have been erased for the year, with more volatility to follow. Yet, the market still stands near its highest point ever. All the result of over $5 trillion dollars (not including interest) being pumped into the market over the last 7 years, to offset the largest recession since the Great Depression. The question is, is the market's worst behind us, or is the reality of a struggling world economy going to correct an over inflated market? In other words, what does the big picture look like moving forward? In order to answer that question let's take a look at how we got to where we are today. The answer was simple, spend and spend. Through quantitative easing, the Federal Reserve has pumped trillions of dollars into the bond market in order to create a strong foundation, or safe haven, for investors from volatility. It was a part of an attempt to drive down interest rates while stabilizing a volatile market. Whether or not you are for or against government intervention to protect the market, it worked. The results of the Federal Stimulus was unimaginably successful. It was a game changer. It allowed the market to outrun the pace of the economy, which over the years was welcomed by investors with open arms.
[How many of you remember all the times from 2009 -2012 where the market significantly rose on the suggestion/speculation of the Feds involvement (anticipation of the Fed printing more money)? I remember discussing these huge market jumps on my radio show, almost in a state of disbelief. In fact, some of my earlier articles referenced this phenomenon.]
Federal spending pulled the market up at an alarming rate, well above the threshold of what the economy could realistically (naturally) support. An unnatural cash injection to prop the market up.
It was either that, or see how far the rabbit hole (market plummeting) went. When they announced the stimulus everyone knew there would be long term consequences to this action, just no one knew when. Additionally, everyone was well aware that you cannot buy off a recession in the long term. So fast forward the clock and here we are today. We have record levels in the market, a struggling economy unfit for a rate hike, all while knocking on the door of a volatile election year.
I see today's market as the best opportunity investors have had in the last 100 years. I sincerely do. An opportunity to lock in their gains at just under the highest point the market has ever been, optimizing long term performance. Let's face it, today the words "long term goals" are rarely ever heard. The market is still trying to figure out what is happening week to week, let alone month to month. It seems anything past a month out is too far for speculation. The truth is we are in uncharted waters trying to navigate forward. This is why the proper advice can create a huge opportunity for most investors, if the right picture is painted.
Think of it as the perfect storm. A rally of epic proportions that has capped out, causing what is arguably the highest market surge in US history.
Most investors saw a 300% increase in their portfolio from 2009 to 2015.
How could there be a more perfect time to help your clients re-position what they have accumulated from 2009? Since the Federal stimulus ceased a couple of years back, there is a grave concern with many financial analysts that the market is overly inflated, certainly not reflective of a struggling economy at near record market highs. Besides, what other alternatives are there? The only other option to locking in your gains is to try and wait out, or beat, the market. In order for the economy to support these market highs, oil would need to completely rebound, middle class incomes significantly rise, European markets take a turn for the best (eliminating any threat to the Euro), and that China overcomes all their woes, just to name a few. Unfortunately, those who decide to wait it out may disrupt their time horizon depending on how long it takes the market to overcome another market drop. Remember, it is very unlikely we will see another form of stimulus to pull any future bear markets out of the red. It's too damaging to long term interests. Just think about how far investors were set back from the recession in 2008 to the market highs of 2015. A significant market drop could easily take several years to get back to even. If this happens, the end result could be the client missing out on over $80,000 of income throughout retirement on just a $250,000 deposit or ending up with a much lower end account value; depending on how the market performs. Whereas, the investor could have locked their gains in at one of the highest points in history, essentially skipping over future market downturns. The truth is most investors would have made moves to protect against the volatility if given the chance in 2008. We know through multiple studies since the Great Recession that most investors prefer a moderate return with no downside over exposure to volatility.
Even among the perfect storm, most investors will not realize the significance to locking in their gains at this opportune point. This is especially true given the current financial climate. Their interests lie in their own careers and families causing many to be distracted from the rhetorical talking heads, focusing on insignificant minor details instead of the whole picture. Besides, traditionally speaking, gains are usually locked in at the end of a bull market when the economy is at its strongest, not the other way around like the market we are seeing. Others get trapped in the day to day, week to week progress of the market abandoning long term focus. Once again, you can't plan for, or see, the long term if your navigating through uncertain times. When the market is at an all time high amidst a struggling economy, all signs point to a bear market ahead. Not to mention an election year around the corner filled with significant change and fear of the unknown. The writing is on the wall.
When you take a look at the driving factors of today's market, sometimes it feels as if the rules are set in opposition. For example, just this week the market significantly rallied on the notion that the Fed was not going to raise rates for the rest of the year because the economy was too weak to sustain a rate hike. Does this sound like a legitimate reason for the market to rally? Is this statement conducive of a strong economy? This is a perfect example of why the market is not likely to hold as high as it is. This is the market looking to the Fed for growth. As mentioned earlier in the article, how many times did the market rally since 2009 on speculation that the Fed was going to print more quantitative easing? What do you think the result of the rally would have been without the stimulus? True market surges are lifted on the backs of a strong economy both domestically and internationally, not on scattered speculation within a struggling economy.
In summary, the market rally from 2009 to just recently, has been arguably the highest market surge in US history. Investors now have an unprecedented opportunity to lock in their gains at one of the highest points the market has ever climbed. Moving forward, investors can bypass all market downturns, ensuring their long term goals are not disrupted. Through proper planning dedicated to preservation and longevity, investors have the best opportunity of success to whatever the unforeseen throws our way.


Article Source: http://EzineArticles.com/9202481

Friday, January 9, 2015

How To Pick The Right Indexed Annuity

When it comes to lifetime income there are many options to consider within a fixed indexed annuity (FIA). Preferences may vary from hoping for upside market performance, to a more conservative approach with a fixed rate of return. It is important to assess each option to make sure you are picking the right FIA to meet your long term needs. Which way you decide to go can drastically effect the amount of income you can receive moving forward.

One FIA providing lifetime income will credit interest based on market performance. The better the market does, the better your income payout is down the road. In fact, there a few of these indexed annuities that provide increasing income in market up years that will not lose income down years. Typically, these kinds of annuities usually payout based on performances of a market index, like a spread on the Barclays Bond Index or a capped version of a like index. Choosing how your funds are allocated will determine what your future income looks like. Therefore, how your funds are allocated will dictate how much of a cap, or upside, you will make in a given year. The downside is that if the market performs poorly over a given time period, your starting income may be lower than anticipated. To help put it into perspective, insurance companies can provide detailed illustrations to show income performance based on the last 10, 20, and 30 year look backs. What this means is they show a period of time in the past as an example of how your annuity income may pay out moving forward. If you choose this type of payout for your annuity income within retirement, it is highly recommended that you use a diverse option with respect to allocation percentages to help balance unforeseen market events; which in turn can protect your payouts in the future.
The argument when choosing the best market based performance income annuity is in how to determine market performance moving forward. Factors such as domestic and global federal stimulus packages have deviated the market from its norm. It is evident that what caused market fluctuations over the last few years is completely different than what we have seen in the past 10, 20, or 30 years. So from a certain perspective, what we see moving forward may work in opposition to what we have seen in the past; especially given the state of our global economy.

Another option when considering lifetime income is the fixed option with the income account value (IAV). The IAV is a feature on some indexed annuities that is separate from the cash value, strictly used for income calculation purposes. Therefore your cash value and your IAV value will be of different values (the IAV value will likely be higher as time goes on) throughout the lifetime of your annuity. The IAV receives a predetermined rate of return each and every year until you start the income, guaranteeing a payout regardless of market performance. The risk being that extra income may be left on the table in the event of a strong market performance. Today, this rate of return will usually average 6 – 8% annually with a predetermined payout dependent upon age. The older you are, the higher the payout. Because this is more of a conservative approach, the insurance company may allow provisions within the IAV to allow increased income in the future when poor health follows in retirement. The purpose is to provide the retiree with additional income for external costs associated with long term care or the need of nursing assistance. Once again, this type of FIA is generally for the more cautious retiree who wishes to leave nothing at chance with his/her lifetime income. With this strategy the retiree can purchase this annuity and know exactly what income they will qualify for up to 10 plus years in the future.

One of the main dilemmas on choosing the right IAV within your FIA is both the income and interest crediting options your contract will come with. I always use the analogy: what you don't make on the popcorn you make on the peanuts; meaning you may sacrifice a lower rate of return on your cash value in exchange for a higher lifetime income payout within the IAV. Typically higher lifetime income payouts within the IAV come with lower caps on the cash value which can restrict the amount of interest you can earn. Remember, pretty much all FIAs today give the option of partial withdrawals to lifetime income (within the surrender period) as a liquidity feature. This gives the retiree the flexibility to stop and start his/her lifetime income at their discretion and instead take a partial withdrawal. The partial withdrawals are contingent upon the cash value, not the IAV, so how much interest you earn on the cash value can be detrimental to how much you can withdrawal over retirement (assuming the lifetime income is not elected). Furthermore, the cash value is usually passed on to the beneficiary in the event of death, not the IAV. This is why it is important to find a professional that can show you a perfect balance between your earned interest on your cash value and your IAV payout.


When choosing the right FIA for your income needs it is crucial to determine what your risk level is. The more aggressive, optimistic approach generally follows the direction of the lifetime income that can increase over time and is solely dependent upon market fluctuations. Whereas the more conservative approach will tend to lean towards the fixed rate of return with the IAV while adding long term protection, providing a guaranteed payout regardless of market performance. Whichever way you go on your lifetime income, it's crucial to know the facts to make the right decisions for retirement income.