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Market Correction Concerns


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The market has been on tenterhooks about when and how (mostly when) the Fed will begin to tighten its monetary policy. And the same people who screamed when the bond-buying began, saying that the Fed should let the economy try to stand on its own two feet, are now fretting the eventual loss of their crutches.

Concerns about an economic slowdown pressured markets.  People who bought a stock at too high a price are looking for greater fools to unload it on.

Market returns and portfolio performance usually involves taking calculated risks with your investment money. Investors that have experienced considerable losses and watched helplessly as their investment portfolios fell to pieces during the last stock market crash, are making much more cautious investment decisions today than ever before.

Common Wall Street myths:

  • Over the long run, the market always goes up. The biggest trick the devil ever played is convincing the world he does not exist. This is the same as the market always goes up. There are 20 to 30 year trends from 1900-2011 that the market was flat. Thus if that was your investment time, you lose.
  • Diversification and Asset Allocation are critical to retirement success – Warren Buffet calls it De-worsification. Being invested in the stock market in different sectors is not diversification.

Today, Wall Street freaked out as The Dow dropped nearly 320 points Friday. The S&P 500 closed down 2.5 percent, and the Nasdaq and the Dow both lost 2.3 percent — the biggest one-day drop in the Dow since November 2011.  The losses come at the end of the worst week for stocks in recent memory.

The stock market is a collection of countless transactions. The stock market doesn’t have an opinion. The stock market doesn’t have feelings. Sometimes stocks go up and sometimes stocks go down. When times are good, stocks as a whole tend to go up—bull markets. When times are bad, stocks as a whole tend to go down—bear markets.

According to Dr. Maslow, people have a hierarchy of needs. The most basic need is that of security. Money may not buy happiness but it does buy choices and with choices comes freedom. If you were scheduled to retire in 2014 then you see your 401K portfolio lose have of its value or more. Think about that impact for a moment. You spend 40 years working and saving your money and it takes all of three weeks to lose half of that savings.

Financial markets as well as the economy are in a correction. This correction will remain a part of the investing horizon for the foreseeable future.  We all know that markets go in cycles, and that eventually we will see other downturns, so maybe it’s time to revisit whether you need to transfer some portfolio risk you are currently shouldering. The recent downturn in the stock market has caused many investors to look “outside the box” at alternative investments.

The tougher explanation is that today’s stock declines came out of a hovering cloud of bad sentiment caused by several negative economic data points that arrived over the last few weeks. Every investor should understand that this is not to be considered empirical fact, and that the trajectory of the market often flies in the face of what one might expect, regardless of whatever opinions or data is out there.

Earnings continue to disappoint: News from Corporate America wasn’t helping either. After last year’s big rally, investors are looking for signs the economy will be strong enough to keep the bull market going but so far, this earnings season has been sluggish.

Swimmers that find themselves in trouble usually end up treading water to save themselves or conserve energy to survive. That same thought process can be applied to an investor navigating through raging markets and an unpredictable global economy.

The obvious goal should be for your investments to not “drown” and go down in value if the financial waters turn against you.  I can tell you from personal experience that the dot com crash and the 2008 Financial Meltdown did not affect my annuities yet some of my stock market investments went in the toilet. My guaranteed portion went unharmed.

Implementing an annuity treading-water strategy can provide the peace of mind, contractual guarantees and flexibility that you might be looking for while letting the economic dust clear. For a portion of your portfolio, treading water might make a lot of sense.   This is a great way for them to preserve their principle and lock in guarantees along with the option for life time income benefits which they are not currently able to do with their traditional investments.

Financial gurus who are in favor of mutual funds will pooh pooh this idea of annuities because the guaranteed returns may be lower than what the market returns in a CERTAIN year.  If you consistently tell people that annuities are poor value and that shopping around is difficult, you will find that they develop “analysis paralysis” and decide that the simplest choice is simply to stick with their present position. This is – of course – exactly the opposite of what people should do and reinforces the negative perception of the industry.

Once you have determined that you want to take some risk off of the table, then there are some basic steps that you can take to transfer that risk from your current portfolio. For example, you can determine how much income is needed to cover basic lifestyle expenses, and use the combination of current income streams and the possible addition on a lifetime income annuity to solve for a specific contractual number.

In essence, you are contractually solving for the foundational part of your portfolio like lifetime income or legacy so that you can spend all of your time on maximizing returns on the non-guaranteed part of your investment holdings.  This is a great way for you to preserve the principle and lock in guarantees along with the option for life time income benefits which you are not currently able to do with their traditional investments.

When the basics are contractually guaranteed regardless of how long you (and your spouse) live, your investment decisions won’t be clouded or distracted.  If you knew that an adequate lifetime income stream was in place regardless of how long you (and your spouse, if applicable) lived, would that sense of security make you a better overall investor? Maybe, and it’s at least worth considering.

A correctly placed fixed annuity strategy can solve for those lifetime income, legacy, or long term care transfer of risk situations. Knowing that these life events are contractually taken care of can free you up to focus solely on managing the part of the portfolio that still involves risk.

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Friday, January 24th, 2014 Wealth Management

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