This post is
about hopes, dreams and expectations.
The hopes,
dreams and expectations of all of us who make our living working for our money
and need a place to put our hard earned savings to work for us until our
retirement years.
Facts:
*Money is only good for what it
can do (for us).
*A large portfolio is good for a
stream of income it can provide.
*There cannot be a retirement
without income.
Most of us try
to make investment decisions that improve our position in life and care for the
people we invited into our lives. Almost always making those decisions is
difficult at best since we are faced with a lot of conflicting information.
When try to do
"research" on the web we can get "Google slapped". What I
mean in plain English is that too much information is available. A simple
Google search yields hundreds pieces of information, some are misleading or
just the opinion of the person writing them who may not be an expert.
Many times this
volume of information is enough to make us feel like we are trying to drink
from a fire hydrant.
We can't
possibly take it all in and as a result, we freeze,
…and DO
NOTHING!
Always
remember that our station in life should play a big part in making those
investment decisions.
What
worked at age 20, when time was on our side, may not be prudent at age 60 when
approaching retirement.
In order to
make my point and explain the BIG NEGLECTED FACT,
let's take a closer look at one of the ways most of us deal with the money we
saved.
Most of us
invest in the stock market in one form or another.
Since there are
many ways to gauge market performance, we'll take a look at a one of them, The
Dow Jones Industrial Average and how it performed over time. This information
is available to all of us on the web.
A good place to
start is the Dow Jones Industrial AverageTM Fact
Sheet
Stated
Objective
To represent large and well-known U.S. companies. Covers all industries
with the exception of Transportation and Utilities.
Key Features:
—The index is maintained by the Averages Committee.
—The index is maintained by the Averages Committee.
—Components are added and deleted on an as-needed basis. For the sake of
continuity, such changes are rare, and typically occur following corporate
acquisitions or other significant changes in a component company's core
business. When one component is replaced, all of them are reviewed.
—While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process. —The index is price weighted.
—The Dow Jones Industrial Average TM was first calculated on May 26, 1896.Mean, median, largest component and smallest component values are based on float-adjusted market capitalization.
—While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process. —The index is price weighted.
—The Dow Jones Industrial Average TM was first calculated on May 26, 1896.Mean, median, largest component and smallest component values are based on float-adjusted market capitalization.
It seems Wall Street has done a pretty good job selling the
"hope" of getting big returns investing in the stock market, And some
people do just that.
What do I mean?
Just a few years ago, Wall Street had many believing that
the stock market regularly average 10% per year rate of return.
…Then the 2000's came along and did much to debunk that
myth.
However, I find when you talking to people, that many still
hope that their market-based portfolios will double over 10
years.
That’s not asking too much is it?
Only
a 7.2% return. Per year.
They aren't asking for 10% only 7.2% per year.
That's enough to "double" what you
have in ten years. Right?
Let’s
review how history lived up to these odds?
Let's compare our hope and expectations to...
Wall Street actual performance and uncover the BIG
NEGLECTED FACT.
Let’s examine how the hope and the hype measured up to real life by
reviewing a chart I got by visiting one of the best known names in the investment
world. One of the largest sellers of Mutual Funds. Vanguard's Group web site.
The
information might come as a surprise to some.
Vanguard Total Stock
Market Index Fund Admiral Shares
Average annual performance
* Most recent data available. ©
2014 Morningstar, Inc. All rights reserved. The information contained herein:
(1) is proprietary to Morningstar and/or its content providers; (2) may not
be copied or distributed; (3) does not constitute investment advice offered
by Morningstar; and (4) is not warranted to be accurate, complete, or timely.
Neither Morningstar nor its content providers are responsible for any damages
or losses arising from any use of this information. Past performance is no
guarantee of future results.
For the 10-year period ended
September 30, 2014, 10 of 10 Vanguard money market funds, 46 of 51 Vanguard
bond funds, 17 of 18 Vanguard balanced funds, and 105 of 113 Vanguard stock
funds—for a total of 178 of 192 Vanguard funds—outperformed their Lipper
peer-group averages. Only funds with a minimum 10-year history were included
in the comparison. Source: Lipper, a Thomson Reuters Company.The
competitive performance data shown represent past performance, which is not a
guarantee of future results.
**Dow Jones U.S. Total Stock Market Index (formerly known as
the Dow Jones Wilshire 5000 Index) through April 22, 2005; MSCI US Broad
Market Index through June 2, 2013; and CRSP US Total Market Index thereafter.
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What led me to doubt the
conventional wisdom and the belief in 10% stock market yield is an associate
of mine is a bit of a spreadsheet nerd.
When he gets bored he starts
running numbers on his nerdy spreadsheets.
A couple of Thanksgivings ago, he
pulled together some information that I think is worth taking a note of. He
put together a spread sheet of the performance of the Dow Jones
Industrial Average over the last 110 years or so and compared it to a
hypothetical 110 year CD returns.
The results showed that 4.75% is
the comparable CD rate of return which represented the equivalent
rate of return the DJIA had. In other words, if we owned a CD
paying 4.75% annually we would replicate the Dow Jones returns forgoing all
the stress and hard ache.
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THIS is Wall Street’s BIG NEGLECTED FACT
THAT’S RIGHT! Over the last 110 years, the DJIA has
averaged about 5% return.
Do you think Wall Street wants the public to know that? I
don't think so!
More important is how those returns break down decade by
decade since it effects us most when we are closer to retirement.
This information is vital for all retirees and for those
soon to retire. We should not plan on getting much more from the markets when
those returns and levels of return aren't backed up by history... and aren't
guaranteed.
I know, you must be asking yourself: where can you get a
CD that pays 4.75% nowadays. You can’t, we have access to something else.
*Note: Yes, this doesn't include
dividends.
However,
it doesn't include fees for
investing either.
All we truly need when we approach
retirement, or once retired is a vehicle that delivers reasonable return,
allows for a dependable stream of income we that can count on year after year
and not be concerned about market conditions effecting our income
stream.
The solution could be boring, yet
reliable instrument backed by the claim paying ability and vast resources of multibillion
dollar companies
An underutilized option that
proved itself through recessions and the ups and downs of the stock market.
The same thing that Babe Ruth and
Charles Barkley used as well as the chairman of the federal reserve to rely on
for income during their own
retirement.
Yes, and it is also the same thing
currently used for providing retirement benefits to most Federal Retirees in
the form of monthly retirement check.
What is this thing you are asking?
Perhaps
an annuity can serve as the solution to creating income to last during your
retirement is just the right fit when it comes to reliable source of guaranteed
income for life.
*Premium deposits to fixed and index
annuities are backed by the full claim paying ability of the insurance
company issuing the contract and subject to each state guarantee association
Today's Equity Indexed annuities
provide us the ability to "link" our returns to an index without
taking on any stock market risk.
Obviously nothing is this simple
There is a cost associated with
getting the safety and guarantees provided. The tradeoff is the
fact that we are not credited with all of the gains when market conditions
are favorable and the index goes up. In return we do not lose any of our
account values when the market goes down. Any interest gains credited to our account gets locked in
every anniversary.
We can only
gain or retain gains. When market conditions are poor and the index loses
ground, we get credited with $0. So in a sense ZERO is our HERO.
Also, no
one solution is going to work for everyone.
People may have preconceived
notions about annuities since annuities have been misunderstood and misused.
There are a number of types of
annuities and many annuity products, so it is a good idea to always consult
with an Advisor who specializes in income retirement planning issues, as
opposed to an accumulation specialist and find out if the use of an annuity
is beneficial in our circumstances, and if it is, which type of an annuity is
the right choice for our needs.
This information is
provided for educational purposes only and is not a solicitation to buy or
sell an annuity or any financial instrument. Always get educated prior to
purchasing any financial instrument. Annuities have surrender charges during
the first few years and are not suitable for everyone.
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