Transcript
Welcome to The Investor Coaching Show, a podcast to help you get an insider’s view of the financial world and escape common investment drafts. We look at the financial news of the day and help you make sense of it. So you can relax about money and here’s your host, Paul Winkler.
The Stock Market
Paul Winkler: I was actually talking to a friend and they were telling me that they had been pitching a product at their business. I’m not going to be too specific about it, but they pitched a product at their business for a retirement savings vehicle. And the way it was pitched was a little bit unique, a little bit different than what I normally see. So I’ll talk a little bit about that, but let me talk a little bit about just retirement investing in general. You know, typically we talk about stock markets a lot on this show and it bears repeating why stock markets are typically where we go to invest retirement money.
It’s been often said that the stock market is the greatest wealth creation tool has been historically ever known to mankind simply because you get to own businesses. And the reality of it is that I own businesses. I own part of the American dream. I own part of capitalism. The reason a business exists is to create value and create profits for its owners. And you think about it, you’re taking a risk when you own businesses. So what happens historically, we look at returns and significantly higher than other fixed income investments. You know, for example, if we go back a hundred years and we look in and even shorter periods of time than that, you know, some, if you go too short, the returns are even higher or lower than these numbers, depending on the period of time you’re looking at, you know, for example, we could look at a 10 year period in some stock asset categories where the return is zero and then some periods of time, you know, you look at a 10-year period, and it might be 18% per year.
I mean, it just, it can be higher than normal, but historically large US stocks returned about 10% going back to 1926 till now. And if you look at every 30-year period, you’ll see that the return has been about that, which means that money doubles historically about every seven years. But remember, don’t get stuck on that. If it’s a 10-year period where there’s no return, that’s not something that’s, Oh my gosh, I can’t believe it. It doesn’t work anymore. Investing is broken and there’s a problem with it at the same token. If the returns are super, super high, you know, don’t take that as, Oh my goodness, this is great. This is the best thing ever. And this is the best asset category out. And he didn’t invest in anything else. You know, don’t take either extreme as being, you know, something that is a permanent so to speak.
But if we look at that and it was that’s one area of the market, small US stocks, about 12% return, historically in most periods in time, it’s right in that neighborhood for, let’s say longer periods of time, you know, 20, 30 years. And, and this is why we diversify because you could go to a 20-year period where there’s much lower than historic norms, but another asset category may have higher than historic norms during that same period of time now. So that’s why we don’t just own big companies. We don’t just own small companies. And then you got value companies, eh, you know, the large value companies, 11.5% somewhere in that neighborhood, a small value companies is 14. It has been a bit higher there because you got more risk in that area.
Investment Portfolios
Then you’ve got international large about 10 for most periods in history. You know, you’re gonna have periods of slower and periods of retirement. And then you have a small international community. The international asset categories have been civil similar to the US counterparts. So, you know, equities stocks over time, they, but they’re, they’re more volatile. Like I said, so you can have the lower or higher returns and volatility cuts both ways. I could have higher than historical norm higher returns than, than is normal, or I could have lower than normal returns over any period of time. Now, if we look at cash type investments, there’s no risk.
You don’t have the volatility with cash types investments like CDs and money market accounts and, and, you know, savings accounts that pay interest treasury bills. You know, we don’t have that volatility. So the returns have historically been a whole heck of a lot lower, you know, so you may have heard me say before that it takes well over a hundred years for money to double in treasury bills after inflation. Well, over a hundred years versus the seven years I just named with large US stocks. So you’d look at it and go, man, that’s huge. And that’s why, you know, a dollar grows to about $20 in treasury bills from the 1920s versus, you know, into the multi thousands, you know, $9,000 for larger companies up to like $70,000 for small value companies.
It’s just absurd the difference between the two of them, but it’s a huge difference in accumulation. So therefore if I’m trying to outpace inflation, I don’t have a fighting chance with fixed income and investment vehicles. So this is a super, super important concept to get. That’s why we don’t invest a lot of retirement money in fixed assets, you know, for younger people now. And we start to add them when you get older, because you can’t put up with that any more, but when you’re younger, yeah. You know what I’m saying? Older, it doesn’t mean that you completely get rid of stocks by any stretch of the imagination. You might be 80 years old and still have half of your investment portfolio, three quarters of your investment portfolio in stocks.
It’s not that you totally get rid of it, but you know, that’s the, now one of the things that I’m seeing is this. Yeah, because markets have gone through volatility coronavirus, then you had the real estate crisis and then the banking crisis. And everything’s a crisis these days. Right? And then you had, you know, the tech bubble bursting earlier than that. And, you know, various market fluctuations historically have created that fear about volatility and, Oh my goodness, the risk of the stock market. And the reality of it is the thing I love about the stock market is that the risk actually creates the return.
Historical Risk
You know, if we look at it historically the risk as an investor, and we say, well, wait a minute. If I’m going to put my money at the type of risk where it’s going to go up and down and I, and we’re not talking about losing everything here, could you lose everything? Yeah. If you had a global, thermonuclear war, yeah. You could lose everything, but then everything else is for nod as well. But what I’m talking about when I’m talking about losing everything, now, this is, I’m assuming that you follow the rules of investing in diversify and don’t stock pick don’t market time and all that junk. But in essence risk, as from an academic standpoint, when academics talk about measuring risk, they’re measuring the amount of fluctuation around a mean return or an expected return of a portfolio.
That’s typically how risk is measured. We look at the ups and downs and we measure the best way we got right now is standard deviation. One of the best ways there are other things we can use, risk adjusted returns and things like that. But that’s too complicated for this, for this discussion right here. So in essence, what we have is the higher returns from the stock market has historically been driven by, Hey, as an investor, I’m not foolish. If I’m going to put my money into something that is going to go up and down and fluctuate a bit in value, I want a higher expectation of returns. I want some kind of a promise that maybe my returns will be higher in this investment vehicle.
So what I do is when I’m paying for the profits of the company, cause it’s what I’m buying. When I buy stocks, right? I’m paying for the profits of the company, the right to receive them. I will lower the amount I’m willing to pay in order to give myself the hope of a higher expected return. So what happens with fixed income investment vehicles is that you don’t have that. So say, and because, Hey, everybody, we’ll take that investment. That doesn’t fluctuate in value. I’ll, I’ll take that any day. I don’t have any kind of fluctuation. So there’s a lot of demand for those investments. And because there’s a lot of demand, there’s a lot of supply of money because there’s a lot of supply of money.
Money Supply and Insurance
The cost to use your money is very, very low. Hence brings us to what I wanted to talk about, which is this concept of using indexed annuities or indexed life insurance as a retirement savings vehicle person goes into a, a, an operation and they say, Hey, we’ve got this thing. You guys are gonna need to check this out. We’ve got this investment vehicle you can use for retirement planning purposes. And y’all check this out. It has all these great features. Well, one of the people in the group, you know, so are there any downsides and the only downside that they came up with, period, end of sentence, which amazed me was that we have to qualify for it.
You have to go through underwriting, you know, make sure that you’re healthy enough to qualify for life insurance. And I thought, Whoa, wait a minute. There are so many downsides that I just feel compelled to do a whole segment on this show and talk about some of the downsides of this investment vehicle. So to speak. Now, life insurance of course pays off a death benefit. If you die prior to life expectancy, and you have two different types, one is term insurance and the other is permanent insurance. I’m just going to lump it into permanent insurance that you might be whole life insurance, a universal life insurance variable, universal life indexed, universal life.
There are a lot of different types, but in essence, when you have term insurance, you are purely paying for the risk of death. So what happens? I pay a premium and if I die, then a big death benefit goes to my heirs. Now, if I don’t die, then I’ve just wasted the premium, the money’s out the door. So term insurance is you’re paying for a term or period of time that if I don’t die within that period of time, then I’ve lost the money and you have different types. You have a 1-year term where the premium goes up every year. And then you’ll have a 5-year term where the premium stays level for five years then goes up.
Then you’ll have a 10-year term where the premium stays level for 10 years and then goes up from that point on and a 20-year term and so on, so forth. So there are different types of term insurance. Now, my whole life. The original concept was I paid a much, much higher premium, but I could pray that and pay that same premium for the whole of my life. So hence the term whole life, and that premium is much, much higher in the early years. And then it would be the same throughout your life, but basically what’s going on here. Well, if you kind of unbundle it and look underneath the surface, like you would with a universal life policy, that universal life is considered a, an, an unbundled type of permanent or whole life type.
And I’ll use that term loosely the whole life type of a product. And the reason it’s called unbundled is because when you actually look at a statement or look at an illustration, you can see the insurance, which is in essence term insurance. And then you can see how much money is going toward the investments. And that’s what they’re doing. They’re taking, they’re overcharging you in the early years and sending that extra money toward investments and how that money gets invested can be different. One might be investing in fixed accounts. So, you got a fixed universal life. It’s just investing in something, it pays interest like bonds, you know, insurance companies own a lot of bonds.
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Indexes
So they’re going to be putting it in their portfolio that owns bonds. Another one might be variable, which is they’re going to allow you to use things that look like mutual funds. So they may be investing in stocks, commodities and, and longer term bonds or short term bonds, or, you know, you can have all different types of sub-accounts. So to speak, they are invested in things like mutual funds. So variable universal life can fluctuate in value because of the stock market, but the insurance cost is still there. That’s part of what it is. It’s just the extra money that you put in there over and above the cost of the term insurance that goes into these other investment accounts. And then you’ll have an index.
Now, index is kind of a term that I’m going to describe to you and what that means, but I want you to understand underneath the surface what’s actually happening. So it is actually considered a fixed product. And I’ll, I’ll, I’ll go into this in more detail in a second, but it’s considered a fixed product. And the industry, the life insurance industry forever was trying to fight the idea that they did not want to be regulated by securities regulators. Now they’ll talk about, you know, like indexes, like the S&P 500 in Europe, Australia, far East index, and the NASDAQ.
And you’ll see like Russell indexes and things like that in these products, which are stock market indexes, but they fought like crazy not to be regulated. And the reason is because, well, they would actually have to go through lots of licensing. They would be subject to, you know, the government looking in, making sure what they’re doing is maybe legal from a standpoint of securities laws and the reality of it, as they said, no, we’re a fixed product. We’re a fixed product. But the funny thing is the way it’s sold so often is something that can benefit from stock market movements and stock market returns.
Well, wait a minute, which one is it? Are you a fixed product that is going to basically have returns that are more like what we talked about having extremely long periods of time before money doubles after inflation, or are you going to be a securities product? You got to choose one of these two things. You can’t have your cake and eat it too. And so that’s what happens. There are people that are out there that are reputable that sell this stuff. I don’t like buying in, you know, doing anything on commission, but there are people that are honest about it and say, no, it’s a fixed product. Don’t expect returns over and above fixed investment vehicles. But they’re few and far between, from what I’ve noticed, the people that typically I’ve seen sell this stuff, you know, they emphasize how high the returns can be versus stock markets.
Downside Risk
But the reality of it is since there’s no downside risk, that’s what they’re sold on. No downside risk, can’t lose anything the returns go away and how well I’ll talk about that in a few minutes, you know, what’s actually happening, but in effect, these products are fixed. And if you actually look at the research that has been done on these products, you’ll notice that the returns historically have been about what bonds event. So, you know, there’s no defying gravity here is really what I want to get down to. Now, there are some sensible points that were made in the presentation, but, you know, I would look at them and go, well, this is common sense.
This is something that everybody ought to be aware of in Atlanta people, you know, a lot of times they’re not taught finance. So some of these things that may seem, say maybe common sense, they’re just not so common anymore. But you know, in growing up, I was always taught, you know, stay out of debt. You know, don’t have debt on depreciating items, you know, it’s okay to have a mortgage on your house. If you own a business, it might be okay to have debt in your business. But depreciating items like, you know, cars, don’t develop a habit of getting dead on cars and buying cars and financing them. Don’t get into a habit of buying your TVs or couches, or, you know, things that you have around the house.
That’ll go down in value and need to be replaced. As time goes on. You know, don’t buy that with, with credit, you know, don’t borrow money to buy stuff like that, you know, put it off, delay gratification, you know, put it off. And then later on, go buy it with cash. And that way you won’t be paying those interest payments and you’ll save a lot of money on interest payments to somebody else. It’s a great way to get somebody else rich is to pay them interest, to use their money, especially when you’re a person that doesn’t have the money. You know, I said earlier that interest bearing vehicles have very, very low rates of return. There is an exception to that. That is when somebody is lending money to somebody that didn’t have any money, they can charge you lots of interest.
And you’re on the losing side of that thing, you know? So you see credit card debt, you know, 18% interest rates and you go, Whoa, wait a minute. That’s our, that’s a good deal. But the reason the interest rates are so high is that there’s such a high risk, that they won’t get the money back at all. You know, you know, so I’m gonna charge you 18% and you know, maybe somebody is not going to pay back at all. And then somebody is going to pay. So, you know, it’ll, it’ll all even out. So that was the way it was taught. And, you know, Hey look, why don’t you do this? Why don’t you put this money in? And this’ll be your retirement savings account. And then you can have, I think it was a book they were actually referring to where this person in the book says, Hey, you know, do this.
And every time you borrow to buy a car, you borrow off yourself and make payments back to yourself. If you borrow to buy, you know, if you go and buy something like the aforementioned furniture for your house, instead of borrowing to buy it, you save this money into this life insurance plan and then pull the money back out and pay payments to yourself. That’s probably what they’re talking about doing, but you know, I look at that and go, wait a minute. I could do that anywhere. And when we could just have a savings account, that’s the old times what we would do is we would have, you know, three to six months worth of savings sitting in a cash account in case that, or were laid off, if I were disabled I could always access that and not worry about if I lost my job or I’m between jobs or if I were, I was hurting, I couldn’t work. Or, or if all of a sudden, you know, my job disappeared or whatever, and our Coronavirus hit or something like that, then I would have money sitting in savings to cover that.
Special Goal Funds
Now, the other thing you think about is this, though, I always talk about this is, and this is in my, on my website right now. I have this whole section on this financial planning book that I’m writing. And I talk about this special goal fund. So I might have, and by the way, the website’s paulwinkler.com and you can go there. And for a while, the book is on there.
The financial planning book chapters are in there under the blog section, and you can download that for free and read it. And eventually when I’m going to do something to pull all those chapters off and make it into a book, but for right now, it’s up there for free. But basically I talk about our special goals funds. So let’s say that I’m going to buy a car in four years and I’ve got a car right now. So I’m driving the car and figuring four years, my car is going to be, you know, done caput, no good anymore. Well, what I could do is I could figure out what my car might be worth in four years. Let’s say it’s going to be worth maybe $5,000. And then the new car that I want to buy is $20,000, let’s say.
So I figured that I’m going to have to come up with $15,000. So what I do is I take that goal of $15,000 and I break it up into 48 payments to myself, because remember I said, it’s going to be four years. So I’m going to, in four years, spend all this money. So I break it up into 48 parts and I put away per month. And at the end of four years, I’ve got the $15,000 that I need to actually pay cash for the next car. Well, what do I say by doing that? Well, I might earn some interest on my money, but then, you know, the idea is the car could go up in value, may not be $20,000, but it may be $24,000, you know, cause of inflation, you know, so I’m, I’m not going to necessarily count how much interest I’m going to earn on my deposits because the reality of it is the car might be more expensive.
But in essence, I can put this money aside and then in four years have the money. Well, what do I save? I save the interest that I would have paid somebody else in financing the car. So hence that ends up being an expense that doesn’t go out the window or what could have if I’m paying that interest. What’s the harm in that? Well, the harm in that is a, I’ve got a lot of money coming out of my pocket, obviously, but that’s money that could have gone toward retirement savings. So if you go and sit there and do the math, you can make a sound like a really good idea. And it is to actually save up for your goals. You know? So it’s a really good idea to put this money aside.
And then that way you’re not using somebody else’s money and having to pay for that. And so it’s just, you know, it’s belaboring the obvious, but people don’t think about that. The fact that you’re paying for something maybe multiple times when you’re borrowing to buy it. You know, if let’s say I talked about that 12% interest rate, let’s say, let’s say that I borrowed, you know, from my credit card or, you know, Lord forbid I even paid more than that, but let’s say that, you know, every six years that I have that loan outstanding, I’ve paid for the thing twice. You know? So in essence rule of 72, he takes 72 divided by your interest rates. 72 divided by 12 is six that tells you how long it takes for money to double.
Well, if it’s you borrowing the money, you basically paid twice. You can turn that around and look at it that way. So the idea of using a universal life for this vehicle, he could have used anything. You could have used a mutual fund. You could have used a savings account. You could have used a money market account, a bond account. Why do you have to pay a big commission to some investment person or some insurance agent in order to save money for yourself? Now, what the problems with the product are. I want to cover in just a second, cause it’s going to take me a couple seconds to really develop how this next couple of minutes to really develop how this works and why it’s such a
Bad deal for people. So let me do this. I’m gonna take a quick break and we’ll be right back after this. You are listening to The Investor Coaching Show.
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Life Insurance
In this particular case, it was in what’s called an indexed universal life product. And I was telling them, don’t do this, don’t do this. Don’t do it. That’s what I heard about what was going on. Because a friend of mine works for the business and doesn’t do this. Why? Well, you know, life insurance is, as I said, it’s for death. You know, if something happens to me, I die prematurely. It goes to my heirs and, and you know, people say, well, you know, I need life insurance because if something does happen to me, my heirs may be hard-pressed to make ends meet.
Well, this is why you buy term life insurance. Just keep your investments and your life insurance separated from each other. And I’ll talk about more why in just a second, but the idea being, if I need life insurance for 10 years, by a 10-year term life insurance policy, you know, the premiums stay level for 10 years, be a lot cheaper. And then you can go. And if you let’s say, if I need it for 20 years, go by a 20-year term, then it stays level for 20 years and you can actually set the period of time. The premium stays level based on how long people will be dependent upon your ability to earn income because you’re fogging a mirror. You know, that’s the idea behind life insurance in term insurance and there’s a one-year term hardly anybody ever buys that where the premium stays level for one year and then it goes up the next year and up in the year after that.
But these products, the universal life products are based on that idea. Now the pricing is a little bit different, but the idea is that the premium goes up every single year inside the product. So I’m just going to use a nice number example to help you understand how this works. Let’s say that your premium or the amount of money you’re quote, unquote saving as they like to say with in life insurance sales, you know, w the presentations, if your savings amount is $200, let’s say, so, you’re going to put it in your premium is going to be $200. And on number one, your commissions are based on your, your commissions on these products are based on, it can be all over the place, but, you know, back when I was selling insurance, it would be, you would have a certain premium amount that the commissions would be based on a commissionable premium, and you might get $105 and 10% of the first year premiums go to go and commission.
So, you know, let’s say if that commissionable premium was $200 and it’s $24, I might get $2,400 on the sale or more, you know, it just varies based on how the contract works, but let’s just put it this way. The commissions can be very high and then you get renewals. In other words, you might get a commission, a trail commission, as long as the product stays enforced. So this stuff can be pretty doggone lucrative to the insurance salesperson, but let’s say the premium is $200 and, you know, that’s the amount paid in every month. Let me put it that way. The cost of insurance will come out of that. So let’s say the cost of insurance you’re young and the cost of insurance is $20.
That would mean that $180 would go. And let’s say that, that includes also the administrative cost, just to keep this simple, the $20 can include the administrative costs. The $180 goes toward the investment or the indexed investment in this particular case. Now that as time goes on, it will change. As I get older, the cost of insurance goes up and it may be $30 the next time. And then that means $170 goes towards the investment. And then the premium goes up as I get older, and maybe it’s $50 and less going toward the investment, $150 because I’m making a premium payment of 250, goes to the investment.
The other $150 goes toward the investment. And then the premium goes up to a hundred dollars. Then I’ve got another a hundred dollars. It’s going to the investment. And then, you know, I get older and the premium may be $150 and it’s only $50 going toward the investment. And it can get to the point where, yeah, as you get older, the premium may be $250 while you’re paying a $200 premium. That means $50 is coming out of the investments that were built up to continue the premium. So you see how that works. As time goes on, as I get older and I can get closer to where I am likely to pass away, the premium for the insurance goes up now, what is the money invested in well with an indexed product?
Bonds and Maturity
It is a fairly complicated product, but it may be where you have some bonds. You’ll have some bonds. The insurance company buys some bonds with your premium payments. And the idea is that those bonds are discounted there. They may not be regular bonds. Where when I buy a bond, I may pay a thousand dollars for that bond. And they pay interest payments for as long as the bond is out there inactive. And then when it matures, I get a thousand dollars back. So if it, if I have a 4% bond, I pay a thousand dollars for it. It pays me $40 every year, 4% of a thousand.
And then when it matures, I get my thousand dollars back. Well, you’ll have these stripped bonds. The idea being that it doesn’t have interest payment, but it is sold at a discount. This is how treasury bills work. You know, so a treasury bill would be issued for $900. Let’s say it won’t be that low, but I’m just using it just as an example, would it be $900? And then it’ll mature for a thousand. So that hundred dollar growth is imputed interest. And that is my interest rate. That’s my rate of return right there, that’s a hundred dollars of growth.
So what happens is this, when I have a bond that works that way, where maybe I pay $70 for it and it matures at a hundred, or I pay $700 for it. And it matures at a thousand that $30 or $300, whichever number that you want to use for growth is the interest rate of return. And these products can be marketed as, Hey, you can’t lose money. You pay, we’ll take your hundred dollars that you invest. And what we’ll do is we’ll take $70 of it and we’ll buy a bond for $70.
And then it will grow to a hundred. At some point. Now it may take us several years. So if you pull your money out early, you’ll have a loss. And you won’t hear that. Typically in the sales presentation, they may actually avoid that. I’ve seen people just avoid talking about that. You could lose money on this all together, but you gotta look at the illustration that they are, that, that they give you. And you can request this and say, Hey, I want to see an illustration. I want to see the numbers on how this is going to work. And you’ll see what I’m talking about when you actually do that. If you actually pull out a calculator and start crunching the numbers and looking at how much should I put in, what’s the cash value of the account? What’s it say that I actually can pull out if I pull my money out?
And they said, well, this isn’t a short-term thing. Don’t pull it. You’re not going to pull your money out. And then, you know, they’ll have all kinds of answers to that objection, but realize that you have a loss on your hands. You know, you can’t hide that. So, and habits, they take the money and they say, we can’t lose money over the long run, as long as you hold them to maturity, because the $70 will eventually grow to a hundred dollars. But I would look at that and go, what’s my last opportunity they cost. What could I have earned on that other $30? Had I not gone and locked it up for all these years? You can’t ignore that now what? They take $70. And they buy the bonds. Like I said, well, what do they do with the other $30?
A Stock Buying Example
Well, besides the expenses of running an insurance company, you know, they’ll take the other money and they will go and buy maybe options, contracts with it. And that’s how they tell you. You can get market returns. They’ve because it’s going to be somehow tied to the stock market and options are sometimes called derivative contracts because their value is derived based on the underlying stock market. And an example I like to use to make this a little bit simpler to understand is I can have an option on a stock. And let’s say that that stock is a $50 stock. I can buy it in the open market for $50.
And I buy an option on it. I buy a call option, which is the option to buy it at a certain price. Now, when I buy it, it will be out of the money as we call it. So in other words, there’s no benefit in me exercising it. So it may be an option to buy the stock for $52. Well, if I can buy it in the open marketplace, why on earth would I buy for $52 and exercise the option? That would not be very smart. So I paid $2 to buy this option. Let’s say, and the option is to buy it for 52. Would I exercise? It will. No, that doesn’t make any sense. Cause I can buy it in the open market for $50.
If it goes to $51, if the stock rises in price and goes to $51 to exercise, we’ll know if I can buy it for $51, I’m going to buy it for $51, not the $52 by exercising the option. If it goes to $50 to do exercise. Well, no, I’m indifferent. If it goes to $53 and the stock price is $53 and it is about to expire, it is about to be useless. Do I exercise it? Yes, because I can buy it for $50 to sell it for $53. I made $1. I spent two. So you think about it. I made one, I spent two, I lost 50% of my money. It’s better than losing all of my money.
Now, if it goes to $54 to exercise it, yes, because I buy it for $54. I buy for $52. I sell it for $54. I made $2. I spent $2. I’ve broken. Even if it goes to $55. Now this is where it gets interesting. Do I exercise it? Yes. If it can be bought for $52 and I sell it for $55, I’ve made $3. I spent it buying the option. I have a 50% profit. I have a $1 profit on a $2 investment, which is a 50% profit. So I have just magnified the gains because if I bought the underlying stock, what might, what would my return event?
If it went from $50 to $55, that’s a $5 gain on a $50 investment. That’s a 10% gain. But if I had the option, I can magnify it because I made a $1 gain on a $2 investment, which is a 50% return. So you can see where, you know, you could convince somebody that you could get some market returns, but the problem is if the market doesn’t move far enough, because remember when it stayed at $50 or if it went to $51, $52, $53 or $54, I made no money. Well, what if it goes down in value? You know, I would have lost money, but you know, in the options because the option just expires it most, you can lose what you paid, which was the $2, right?
Indexed Annuities
So in effect, that’s how this stuff is talked about and sold. So in these indexed annuities, you look at that and go, well, you know, most of my money is sitting in these bonds and the rest of it’s going to exemption option contracts. And a lot of times they expire without any value. Oh, what’s happening to my return. My return, you have to, you can’t sit there and go, well, this is definitely what’s going to happen because it’s way too complicated. But what you can do is you can look back at the studies on these products and see that, you know, the rate of return has been about what treasury bills and bonds have paid. And that makes sense if there’s no risk, there’s no return.
And here’s the thing. These products are all set up so they can actually change the returns. After the fact, they can change the participation rates. They can change, you know, the rates of return that you are eligible for. And this is problematic because now the insurance company is in control and just realize this folks, insurance companies, you know, they have all kinds of mechanisms that they control caps on these products and they control control. If let’s say the cap is 3%. If the return on your underlying stock index is 8% and they have a cap of three on the product, well, they can actually control your return.
And you’ll only get 3% of an 8% return and that’s not unusual. And they have high returns in a given month. I mean, shoot, it just took us a few weeks for like a 50% return in the stock market after the March downturn This year. And just imagine how much return you can be giving up when you have these products. Anyway, you’re listening to the investor coaching show and I’m your host, Paul Winkler. We’ll see you next time.
The Playbook for Relaxing About Money
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It is Paul Winkler. Hope you enjoyed today’s edition of The Investor Coaching Show. You want to learn more about what we do go to our website paulwinker.com. You can watch some of the videos there, and if you’re not already a client, you can set up a free initial consultation until next time. I’m Paul Winkler reminding you that I believe that more educated investors are more competent investors and confident investors are more successful investors. Have a great one.
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