Retirement Planning

Why we don't sell securities

KEY POINT: All of our strategies have a built-in guarantee that neither your initial principal nor past gains (once "locked in") can ever be lost due to a market downturn.

Conventional wisdom has made us believe that "the market will always come back", "it's not a loss until you sell it", and to "stay the course". While this may be true in some circumstances, history, both recently and over the long-term, has shown that there are serious flaws in this methodology. At Safe Money Arizona, we realize that the market may come back, but that it may not come back when you need it to. None of us has a crystal ball, and you should seriously question any advisor that tells you he or she can perfectly time the market to buy at the exact bottom and sell at the exact top. A whole industry has been built around TV personalities who act as market prognosticators, but in many cases, their stock picks have been outperformed by the flip of a coin.

Our strategies use time frames determined by you going in, so that you know when and how you will have access to your money, combined with the guarantee against market loss. This way, you can make plans to retire, send your children to college, or do whatever you want to plan for, and know that a huge market loss won't stop you from living your dreams. In this most recent market downturn, so many people have had to work past their planned retirement or go back to work because of market losses. So many children's college funds have been significantly depleted. The fact that "the market will come back" does not help them.

KEY POINT: If timing the market was possible, no one would ever lose money in it. Your financial goals have a time table. The market does not go up or down for any one persons' benefit; if your money is at risk, you may have to change, cancel, or delay your plans while you wait for the market to recover. Consider how your lifestyle would be affected if this were the case.

With our strategies, you make money in good years when the market is up, but you don't take losses in bad years when the market is down. While the last ten years have provided rather dismal returns for stock investors, our clients have enjoyed taking returns in the years when markets were up. More importantly, our strategies allow you to hold onto those returns; any gains you earn in the products we offer become "locked in", meaning they are yours to keep forever, no matter what happens to the market in the future. You can keep your money working to take advantage of further gains without having to worry about losing money if the market crashes. With our strategies, you take the gains as the market goes up. Then, when the market goes down, you sit right where you are, or even earn a small fixed interest rate. You never take a market loss. Then, unlike stock investors, you begin taking gains when the market starts rebounding; you don't have to wait to get back to even before you start making gains again. This gives you an advantage because you are never playing "catch up" with your money and you're never fighting to get back to even. Your money is never at risk of a market loss, whether you've had your money in the account for one day or ten years.

It's reasonable to expect that even in a bad ten-year period (like 2000-2010), there would still be some good years. For stock investors, those good years might be largely or even completely erased by the negative returns in the bad years. In some cases, the bad years would even outperform the good years. However, using our strategies, each year stands on its own. The means you simply add up the returns from good years. You can see that by not subtracting negative returns to offset your gains, you can grow your money in a steady and guaranteed way.

Who determines risk?
Many financial advisors or individual investors will tell you that their strategies are not risky. Our view, however, is that having something that can go down, regardless of how likely it is, is taking a risk. Who would have thought just a few years ago that General Motors was a "risky" investment at all? Who would have thought they would file for bankruptcy, eliminate shareholder equity, and become majority-owned by the US and Canadian governments? It is hard to plan for risk by simply "managing" it or "diversifying" it, especially when a correction of scale we have recently seen hits the market. Companies like GM, Enron, Bear Stearns, Lehman Brothers, have caused great damage to the portfolios of individual investors who often couldn't afford to lose that money. That's why we only offer strategies that eliminate, not simply minimize, the potential for market loss.

KEY POINT: What is considered low-risk today may be high-risk in the future. Unfortunately, it may be too late at that point. That's why our strategies are only risk-free.

Recent market returns
To dispel the notion that the market "always makes money long term", let's analyze the returns of several major market indexes over recent short-, mid-, and long-term time frames. The amount you could have earned with the products we offer would vary based on a number of factors, but your principal would never have lost money due to market losses, and you would have taken gains in good years.

This first chart shows the performance of the S&P 500. The S&P 500 is an index of 500 of the largest publicly traded companies, and is widely considered to represent the broad stock market.

Performance of the S&P 500 from 6/23/00-6/21/10. Data courtesy of Google Finance.

This second chart shows the performance of the NASDAQ. Due to the type of companies listed on the NASDAQ, it showed more volatility. It was hard-hit by the dot com bubble, of which this chart does not show the full scope of losses, which are over 50% from its peak in early 2000.

Performance of the NASDAQ from 6/23/00-6/21/10. Data courtesy of Google Finance.

KEY POINT: If the market drops 50%, it needs a 100% gain to merely get back to even. That's the equivalent of 7.2% growth, every year, with no losses, for ten years... not to gain, but just to get back to the point before the 50% correction.

How our strategies work

Insurance products are our preferred products because insurance companies are subject to numerous regulations that can give you faith in their guarantees. The insurance companies we work with are primarily life insurance companies; they are usually different companies than those that insure your car, home, etc. Life insurance companies are required by law to maintain a "legal reserve"; that is, they are mandated to keep enough cash in the bank to pay policyholders. Just like you wouldn't want to gamble at a casino that didn't have enough money to cover it's chips, you wouldn't want to buy insurance only to find out the insurer couldn't pay you when the time came. Unlike other financial institutions, insurance companies are widely regulated, which is why life insurers didn't run into the liquidity issues in the recent Wall Street crisis. In fact, the companies we work with didn't take TARP funds or other bailouts.

Life insurance companies also are limited as to how much of their income they can invest in the stock market. For the most part, insurance companies invest their money in treasuries and bonds which provide more safety and lower yields. However, they are still able to take part of their profits and buy contracts that give them market-like returns in years when the market is up. This means they can give you market-like returns without taking the risk of actually being in the market.

It's a little-known fact that America's largest banks keep more of their "tier one" capital in life insurance contracts than anywhere else. According to the FDIC, US Bank had $4.83 billion of it's capital in insurance contracts, up from $4.66 billion the year before. This represented 32.68% of its entire tier one capital. Key Bank had 38.8% of its tier one capital in life insurance contracts, and Wells Fargo, BNY Mellon, Bank of America, and others also had sizable portions of their assets in insurance contracts. Why? It comes back to the guaranteed reserve that insurance companies keep. Unlike banks, which can leverage the money they take in money times over, insurance companies are required to keep cash on hand, which gives large institutions a safe place to park large sums of their money.

Chart showing the dollar and percentage amounts of "tier one" capital kept in insurance contracts by many of the largest American and world banks.

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