Does “Buy and Hold” Work
I don’t know about you, but many people are a bit freaked out about the stock market. With the stock market crash of 2000-2002 (negative 46% over the worst stretch) and 2007-2009 (negative 59% over the worst stretch), many people are worried about protecting their money and are confused about how to grow their money.
It is not uncommon today to have days when the stock market is both up and down nearly 10%. To say that is volatile is an understatement.
You know what everyone says: If you are in the market for the “long-term” you don’t have to worry about the short-term losses.
I guess that sort of makes sense, doesn’t it? Or does it?
This is a new, very volatile world; and I wrote this newsletter to give you something to think about and determine if buying and holding stocks is always the best thing to do when the stock market is volatile.
Ask yourself this question: If the stock market goes up and down and up and down over a ten-year period and ends up at the same point ten years from now, will the account balance be the same at the end of the ten-year period?
If you invested $100,000 in the S&P 500 index which started at, let’s say, 1,000 points and if the index went up and down like a yo-yo for ten years and ended with a value of 1,000, would your initial investment still be $100,000?
The answer is NO!
Look at the following chart where I assumed a very volatile market that goes up and down 10% every six months and after ten-years the average return is ZERO. You’ll notice that the account value is $95,438.
Never go back wards and lock in gains
Most of you know that I’m a big fan of Fixed Indexed Annuities (FIAs) to hedge a client’s risk in the market and to earn decent returns when the stock market does well. FIAs are not a cure all. Not every penny of someone’s money should be in them; but as an asset-allocation model, the older you get the more money you should have in a wealth- building tool that will not go backwards. To view a PowerPoint explaining how FIAs work, please click here.
What if you repositioned $100,000 instead into FIAs? If I make a very conservative assumption that over time the cap on returns will be 8% annually, look at the results.
Why did the FIA end up with an account balance of $146,933 instead of $95,099? Simple. In down years the FIA returned ZERO instead of -10% and in up years it returned 8%.
Are these examples real world? Prior to 1999, you would have said no way? Are these examples real world? Who knows, they could be. The question of the day is: Are you doing everything you can to help protect your money in this uncertain world.
It’s one thing to be upset when you only earned 8% when the market is up 10%+; it’s another and much more positive feeling when your money earns ZERO when the market is down 10%. The first feeling makes you a little grumpy; but the second, even though it sounds odd to be happy with a ZERO rate of return, brings a nice smile to your face (especially if you are over the age of 60-65 and close to or in retirement).
-20%
Just in case you are curious, if the market has wild swings of 20% every other year (up and down), the account balance at the end of 10 years would be $81,537 and the FIA account balance would remain at $146,933.
Conclusion
I’m not sure if the days of “buy and hold” have come and gone as a tried and true way of growing your wealth. That may or may not be the case. What I know is that it’s time for you to understand ALL the various options to grow and protect your wealth, and I hope this information has been helpful.
For help with your situation
If you would like help reviewing your personal situation and determining if FIAs are a good fit to help protect and grow your wealth, please contact me using the information provided below.
Mitchell Levin, MD, CWPP, CAPP
The Financial Physician TM
407/922-4689
info@levinwealthsystems.com
