The Treasury Department may hold casinos responsible for knowing if the money they take in is clean.

The Treasury Department may hold casinos responsible for knowing if the money they take in is clean. (Reuters)

Peace of Mind Without the Gamble

By Features FOXBusiness

There's an old gambler’s saying - if you don't know who the sucker at the card table is, it's you! 

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When the US economy and the US stock market experienced a systemic collapse resulting in significant losses in 2008, did you feel like you were being played for a sucker? Did you feel like you were gambling with your money? Were you thinking of the risks involved? I’m sure you didn’t think so at the time, but investments left unprotected against loss such as stocks or stock funds is nothing more than a gamble. Speculating in these markets may be great entertainment, but the risks are incredibly high.

Risk is one of the most avoided, misunderstood and least quantified subjects in the financial services industry. This is unfortunate because the primary purpose of an investment professional should be the intelligent management of financial risk. Protecting financial assets against loss while achieving a reasonable rate of return should be the objective of both investor and advisor. This is the critical issue in investing and it is being handled by many professionals with smoke and mirrors. And it is the evaluation of risk and the way that you deal with investment risk that is critical in planning for a successful retirement lifestyle.

It has been my experience that investors deal with the issue of risk as it relates to their money in three primary ways. The first way is to ignore the risk or avoid it. This is usually the case when a person who might be contributing to a 401(k) or 403(b) or any IRA account, simply makes their monthly or annual contribution with very little, if any, knowledge as to how their money is being invested. They occasionally will open their statements and, if they notice the value going down, they might just not even bother to open future statements or ignore them altogether. This certainly is a very foolish way to manage one’s risk but you would be amazed how many fall into this category.

The second way to handle risk is to manage it. And even though individuals can certainly assume this responsibility, most will not. Most will pay fees to professional portfolio managers or mutual fund managers to manage their money for them. These people are paid to invest your money, they are not paid to protect it. And most of the time they underperform. In fact, an overwhelming majority of professionally managed mutual funds have underperformed the S&P 500 index for the last 35 years. These financial advisors would have you believe that an allocation of investments properly diversified and managed is the very best way to manage risk. 

There’s only one problem with this approach: does it protect you from risk of loss? Did it protect you in 2000, 2001 and 2002? How about 2008? How about 30% of the time when the markets have had losses? I know people who had to change their retirement plans because of the 2008 dramatic drop in the markets. They weren’t protected. Their money was not managed to avoid loss. So managing your risk has not worked very well, especially during the past 12 years.

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So, how can you protect yourself in today's volatile market environment? Where should you put your money if you don't know where the risks lie? How does one control this risk? The challenge is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities, as they happen to be. And those realities involve all kinds of economic, geopolitical threats, which fuel instability and uncertainty.

Which brings me to the third way to manage your risk. You can insure your risk by transferring any risk of loss to a legal reserve insurance company. The hurdle, which most investors must overcome, is their lack of knowledge that they even can insure their investment risk. In the same way you insure your home, your car, your health and your life, you can also insure a retirement which would be protected from any risk of loss, regardless of any market activity and even insure a lifetime income you will never outlive.

And this can be accomplished by using fixed and fixed indexed annuity contracts as part of a new indexing strategy. This strategy utilizes lock in and reset features which provide for reasonable gains when the markets go up but to never ever sustain losses when the markets go down. The more often a fixed indexed annuity resets and the gain locks in, the better for the investor, especially when the market is volatile and has both up and down years. Most of these indexed annuities today have annual reset provisions. This means that any gains are locked in yearly and automatically reset for the next year. 

With the annual reset feature, the worst case is that the annuity doesn’t return anything for a year the markets sustain any losses. As a result, there is a series of steps from year to year. Some years will result in level steps when no money has been made but no money has been lost either. Other years, it’s a step up as the market makes gains. But there is never a step down. The new investment base is always protected. 

One of my favorite analogies I like to use in order to explain how the strategy works is the use of an extension ladder. Whenever you use an extension ladder, you pull on a rope, which is connected to a pulley system to raise the level of the ladder. As you do this, there is a ratcheting mechanism that locks in each rung of the ladder as the ladder rises so it cannot fall and hurt you. The fixed indexed annuity works much the same way. Your money grows and locks in when the markets go up but never loses when the markets go down.

This approach of transferring any risk of loss to a legal reserve life insurance company in order to protect and preserve your money for retirement has created what I consider to be a new “asset class” of investing. You no longer have to worry that you’re gambling with your money. By insuring the risk of loss, you truly can have total “peace of mind.” After all, in this volatile world we live in today, isn’t that what we all are trying to achieve.

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