Monday, May 24, 2010

How Much of Your Retirement Money Do You Want to Keep Safe?

How Much of Your Retirement Money Do You Want to Keep Safe?

Today let’s take a moment to hypothetically compare two investment strategies that you might employ in growing your retirement nest egg. Let’s call them Strategy X and Strategy Y. Strategy X imposes no caps or floors – you simply earn whatever the stock market returns, whereas, with Strategy Y, your gains are capped at, say, 12 percent with a guaranteed minimum of, say, 2 percent. So in this example, you would make unlimited gains with Strategy X, along with unlimited losses, while with strategy Y, you’d be guaranteed 2 percent even if the stock market tanked, but your upside gains would not exceed 12 percent.

Which Strategy Would You or Your Financial Advisor Pursue?

Most so-called experts would likely implore you to go with Strategy X, with this explanation: “You never want to cap your gains. Besides, over the long haul, the stock market will deliver and your retirement nest egg will be fine. Simply make sure your portfolio is ‘well-diversified.’” Isn’t this exactly what most worried investors are being advised to do today?

Sure, this may sound good, until you actually start doing the math. Let us try to mimic what usually happens with the stock market – ups and downs. Assume that in Year1, the stock market index gains 20 percent. All other things being equal, a $100,000 investment would have grown to $120,000 under Strategy X, and it would have grown to $112,000 (capped at 12 percent) with Strategy Y.

Now assume the index loses 10 percent the following year. Strategy X would drop to $108,000 ($120,000 less 10 percent). Strategy Y, on the other hand, would increase to $114,240 ($112,000 plus the 2 percent guaranteed gain).

Wait to See Year 3 Before Making Any Conclusions

If in Year 3 the index were to gain 10 percent, Strategy X would grow to $118,800 (10 percent gain on $108,000), while Strategy Y would grow to $125,664 (10 percent gain on 114,240).

How soon, easy, and likely is it that Strategy X’s balance would catch up and overtake Strategy Y? Of course, no one knows with any certainty, but if the trend in the example (an up-and-down market) were to continue, it might take some time. Don’t you agree? I hope that the millions of diligent investors who are looking for a better retirement receive a little more information and wider options before making their investment decisions.

How many hard-working Americans are sick of losing sleep over the markets’ wild rides of late and could benefit from something like Strategy Y? Your traditional financial advisor has likely created the impression that your only viable option, as an investor, is Strategy X, but you now see there is another way. I wish every investor knew of all the other viable options available to them.
To receive your free consultation and learn how something like Strategy Y might work for you, please call Laser Financial at 301-949-4449 or visit us on the Web.

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