Why Investors Should Be Concerned About the Market

At the time of writing, the market has recently begun to nosedive in response to news of the Federal stimulus coming to an end, the troubled financial state in the EU, and other influences.

I am of the opinion that the market will continue to deteriorate to counter balance the unprecedented market surge brought on by the Federal Stimulus, especially as the market's correction was almost solely based upon quantitative easing.

How far the market will fall remains to be seen; however, I feel that it will be significantly greater than a 15% correction. In October 2014 the Federal stimulus, known as quantitative easing, is ending with a Federal balance of $4.4 trillion dollars (not including interest). If it took trillions of dollars to inflate the market, what do you think is going to happen when it is taken away?

In the wake of the 2008 financial meltdown, the Federal Government was forced to act with an initial bailout of $800 billion to prevent a “Financial Armageddon.” Now, six years later, we have trillions added to our deficit due to quantitative easing. Granted, the Federal stimulus did protect the market from imploding in the short term, pulling the market up to record-setting levels; however we are now walking into the long term consequences of this act of socialism.

This is because both investors and the market alike have become complacent about the Fed purchasing trillions of dollars of bonds to artificially create a solid foundation under the market.

Now, with the foundation likely to stop being laid out or maintained, the market will have to wean itself off of this government intervention. This could be a blessing or a curse depending on the moves you make during this time.

If the market does take a significant drop, no one can say they didn't see it coming. This was not the case in the latter part of 2007 at the start of the Great Recession. The difference being that you can lock in your gains to make sure you don't ever take a step backwards. What many fail to realize is that if a percentage loss is immediately followed by the same percentage gain you will still end up losing value.

Think of it this way...

If four quarters (one dollar) lose 50% of their value, you have two quarters left over. If you then immediately apply a 50% gain back to the two quarters, you only increase by a single quarter and still finish up one quarter short. This is why it is crucial to lock in your gains to ensure you never take a step backwards, especially if you are dependent upon that money to live on during retirement.

However, parking your portfolio in cash over the next couple of years to weather the storm will still set you back. This is because most money market accounts will pay less than .01% interest, which usually equates to pennies of interest earned in a year, basically pausing your momentum. Instead, it is important to look at your long term goals, making sure that your momentum is never disturbed by market downturns.

The more momentum you have moving forward, the better position you will be in the long term.

When the market crashed in 2008, the Dow Jones was just over 14,000. At the lowest point of the recession, on March 5th, 2009, the market hit 6,594. At that point investors were in a state of shock, realizing what they had lost in just over a year. Because of the $4.4 trillion the government added to our deficit, the market soared to new highs, breathing hope back into both investors and Wall Street.

And yet, even though the market reached record levels, investors distrusted the reality of the situation and they turned to the Fed as insurance from volatility, conveniently turning a blind eye to the reality that the Federal Stimulus would end one day.

Well, here we are, with the Federal Stimulus coming to an end. The NASDAQ has already been officially categorized as being in a correction with pretty much everyone expecting more losses. Many recent articles are saying “Don't panic, stay the course,” or “We are still way ahead and corrections are natural.” I could not disagree more. The writing is on the wall, meaning if the market does take a big hit there was plenty of warning.

If you do not have a pension, you are responsible for taking care of your own retirement instead of looking back and pointing fingers. Added to which, if the market does take a big hit, you may have to work for several more years to make retirement a reality. There are, however, several variations of safe money options to make sure that your financial interests are covered moving forward, regardless of the Texas two-step the Fed is playing with Wall Street.

One of the most viable safe money options falls within a strategy of “indexing,” where many top-rated insurance companies will absorb all market losses in exchange for a variety of capped interest options paid out monthly or annually. Many of these insurance companies are the same ones that serviced and backed the pensions of the past and have recently redirected their interests.

Now, instead of the insurance company backing an employer's pension (group annuities), they have shifted the benefits to the consumer in the form of fixed indexed annuities (FIA). These FIAs usually come equipped with lifetime income benefits that can easily be used as an alternative to the pensions of the past. These income payouts can be stopped and started at the owner's discretion while still allowing access to the cash value.

Over the last 15 years these strategies have performed stride-for-stride with the market without any Federal Government bailouts while having explicit guarantees. In fact, many of these lifetime income payouts can be structured to increase over the years as the market increases (while also never decreasing), showing impressive payouts.

Moving forward, investors can choose to stay the course, putting their money into cash or money markets with near zero returns, or they can look to other strategies to protect their long-term interests. Whatever choice they make, I believe they should be aware of the volatility coming around the corner from the weaning of the Federal Stimulus.

The bottom line? Our global economy is not in a position to perform anywhere close to that which our over-performing market suggests. Once again, the writing is on the wall and it is up to you to decide how to prepare for this.

Where Will We Be 10 Years From Now?

Today, thanks to the effort of the Federal Stimulus, the Dow Jones is at the highest point we have ever seen. Considering that interest rates are at historic lows and the Federal Government is still spending $30 billion per month (now the 5^th round of Federal Stimulus in the last 6 years), this recent market surge can easily be viewed as a statistical marvel. Not to mention that our nation's highest income tax bracket is at 35%, almost half the historical average. Yet, against conflicting economic data, here we are in the best possible position we could ever hope for. The question is, given the volatility we have had over the last decade, what do you think our financial world will look like in 2024?

However the stage is set 10 years from now, there are moves that you can put into place today to help protect yourself against inevitable changes. For starters, Federal tax rates have nowhere to go but up. Make no mistake about it, tax rate hikes are just around the corner. There is only one way for our nation to pay back the $4 trillion dollars we have spent over the last 6 years: raising taxes. Let's take a closer look at this for clarification. Historically, since 1913, that average marginal Federal tax rate exceeds 60%. This is a far stretch from our highest tax rate today of 35%. Given we have accumulated more debt over the last decade (by over 10 times faster) than any time period in US history, how long do you think it will be before we see our first Federal income tax increase? So, what does this mean for you 10 years from now?

It means you will have less net income than you have today. If we assume that the Federal tax rate jumps by 7% over the next decade, with inflation averaging 3% annually, you will have well over a 30% decrease in net spendable dollars with the income you make today. When you take into account that the main source of retirement income for the working class is in the form of a 401k, IRA, SEP, or similar type of pretax dollar investment, it becomes very clear how much spending money you stand to lose to Uncle Sam. This is why it is crucial to protect your future income from imminent tax hikes, while locking in market gains at their highest point.

One way investors are able to protect their future income is through Indexed Universal Life (IUL) policies, a form of permanent life insurance. These vehicles allow you to accumulate funds exempt from any market volatility, providing impressive moderate returns, while also allowing for tax free withdrawals throughout your retirement years. In order for IULs to have tax advantaged withdrawals, your policy must be set up as a Non Modified Endowment Contract (Non MEC). Non MECs have to pass the seven pay test (a funding formula derived from the IRS for purposes of tax free income) in order to enjoy an income exempt from Federal income tax. If any IUL policy fails the seven pay test, then all withdrawals are taxed as ordinary income tax on a First In – Last Out accounting basis. Non MEC policies have all the same tax free exemptions as a Roth IRA without many of the restrictions. Non MEC IULs do not have low annual limits or withdrawal penalties prior to age 59 ½ like a Roth IRA does. Nor do Roth IRAs pay out accelerated death benefits based on the amount of premium you fund the policy with.

Lets take a closer look at how a Non MEC IUL can provide a moderate return amidst a volatile market. Since an IUL is a fixed product, if the market goes down you will have a minimum guaranteed (floor rate) return regardless of how far the market may fall. These guarantees can be as high as 2% depending on which policy you chose. Conversely, if the market goes up, these policies will match you dollar for dollar up to as high as 14% (cap rate). Because these products protect you against market loss, you cannot earn above the cap rate. Insurance companies are able to offer these returns through concepts of annual reset and indexing. Each year, on the anniversary of the policy date, a chosen market index (such as the S & P 500) determines how much interest is to be credited to your policy. There are different variations of interest crediting, which can include dollar cost averaging. Just imagine if you were able to eliminate the downside of the market prior to 09/11/2001 with a cap of 14%. Although not typical of past market results, you would have drastically outperformed the stock market.

With a Non MEC IUL policy you will be able to protect your money from both market downturns and the imminent threat of rising taxes. Given that the market is at its highest level, what better timing could you ask for? Top financial institutions are warning of a market correction around the corner and the Federal Government is looking for an end to the Federal stimulus for good. Yet today the market is at the highest levels and Uncle Sam is still pumping in $30 billion monthly of Federal stimulus. Over the last several years the rules that govern the economy seem to be set in opposition, and I fear that this trend will continue, followed by tax increases and periods of volatility. Without taking precautions against these financial threats, how do you intend to offset the volatility and rising income taxes? These concerns have prompted many investors to look into Non Mec IULs as a viable solution to an unpredictable market.