Published July 25, 2012
If everything you’d ever been taught and everything you knew to be true turned out to be false, when would you want to know? It’s an interesting question for the times we live in. I ask this to attendees at each of our financial boot camps, and it’s a question I wrestle with constantly. In my 27 years as a licensed Securities Broker and Financial Planner so much of what I was taught about how to build wealth and manage risk seems not to apply anymore.
Traditionally, we advisors practiced diversification to manage risk. We utilized sophisticated asset allocation software to allocate assets that reduce the risk that client portfolios would suffer from market volatility. It all looks great on paper and sounds wonderful in the lecture hall, but what happens when all the asset classes go down the proverbial toilet at the same time? Don’t think it can’t happen, because it just did. The painful truth is that the real definition of any securities product—stock, bond, mutual fund, REIT, variable annuity, etc. is:
A financial instrument in which the risk of loss of some or all of your money is borne by YOU THE INVESTOR.
PERIOD END OF STORY.
It’s not mere coincidence that the malpractice insurance in our industry is called errors and omissions. The stock and bond markets can be a very dangerous place, and much is often omitted about its inherent risks. The fact is average people often don’t know how to manage their own money in the markets. Even if they do, there are too many unpredictable events like corporate corruption and real estate collapses that can cause your 401K to become a 201K or worse.
The fact is the very design of a 401K facilitates the transfer of investment risk from the employer to the employee. If the professionals are finding it increasingly difficult to effectively manage risk, what do you think your chances are? The fact is the entire securities industry is premised on hypothetical assumptions about future performance. If you have any chance of not being as bamboozled in the future as you have in the past, you need to come to terms with this. It’s all one big crapshoot; the risk is all on your shoulders and this time it’s becoming increasing apparent that “the cavalry ain’t coming!” This brings to mind two very important questions:
1) What the heck do we do now?
2) Why didn’t our clients lose principal during the latest market collapse?
The answers are amazingly simple. They simply chose not to absorb the risk of market volatility. We chose to transfer 100% of the risk to somebody else. Our strategy is simple: If you can’t manage it, get rid of it.
The fact is you already employ this exact strategy when you write a check, for your homeowners, auto, or health insurance premiums. You know you don’t have the financial capacity to absorb a catastrophic loss such as a fire, serious car accident, or a bout with terminal illness, therefore you choose to transfer the risk to an entity that can absorb the loss. Why wouldn’t you do the same thing with your life savings? Fundamentally you are either in the risk absorption business or the risk transference business. If you are a realist and willing to come to terms with your own limitations, risk transference becomes the only logical course of action.
The stark reality of life for each of us is this:
• We will live too long and outlive our money.
• We will die too soon and leave our family emotionally and financially devastated.
• We will become disabled and unable to work to support our families.
If you can eliminate the economic risks of these life events by transferring their inherent risk to a third party, you will have achieved a level of financial security and peace of mind most people only dream about. It really is that simple and simple is better.
We preserve our clients’ life savings and eliminate market risk by placing their assets in an insurance product known as a Fixed Indexed Annuity. Our clients participate in the upward movement of the market without any downside risk. They never go backwards again. No more buying the same piece of real estate over and over.
Our clients don’t just get a statement they get a legally binding contract that obligates the company to do what it says it’s going to do when it says it’s going to do it. Isn’t that a novel concept in the investment business? These products deal in guarantees not hypotheticals. Traditional retirement plans such as 401Ks offer no guarantees of a paycheck for life. These products do. When a beneficiary designation is placed, the assets in the annuity pass to your heirs without probate. Simply put, instead of the lawyer building a house on the lake with your money, your heirs get to build one.
In the universe of thousands of investment products, there really are only two ways to invest. You can choose to invest in some form of security where you alone bear all the risk, or you can choose to invest in an insurance product where 100% of the market risk is transferred to a third party—the insurance carrier.
Now which choice will make you sleep better at night? You already know the answer. An investment vehicle that never goes backwards, gives you a paycheck for life, preserves your principal and prior gains in any market cycle, and avoids probate at death. Sounds like a recipe for a peaceful night’s sleep to me. Simple. And simple is better.
For more information contact Larry P. Vogel, CEO of Safe Money Enterprises at firstname.lastname@example.org