401K Alternatives – Expert Advise and Solutions!

November 9, 2011 by · Leave a Comment 

Investors spend their lives focused on “Average Annual Returns”. That’s all people hear these days… the index average or a stocks avg. return. Nothing “Average” should ever be included in building your retirement account. EVER! Average returns hide the critical role of portfolio volatility and NEGATIVE RETURNS! Its compound returns without any negative returns are where “Real Returns” are made. You want “REAL RETURNS”! So where does one find these returns?

Follow this example:

Consider two portfolios. One loses 25% the first year, then surges back with a 75% gain the next. The other portfolio gains 20% the first year, and 30% the second. Where would you rather put your money? In terms of average annual returns over two years, both portfolios did equally well. The average of -25 and 75 is 25; so is the average of 20 and 30. But that doesn’t mean their performance was equal.

Suppose each portfolio starts with $100,000. After the first year, having lost 25%, Portfolio 1 is worth $75,000. Then, after the 75% gain, its value rises to $131,250. Meanwhile, Portfolio 2 returns 20% the first year, boosting its value to $120,000. Moving ahead an additional 30% the second year, it’s worth $156,000. Portfolio 1 has a compound return of 31%-no match for the 56% of Portfolio 2.

So… Where did that extra $24,750 come from? It’s the bonus you get for avoiding investment losses. Though this example is an extreme case, it illustrates a basic principle of investing: To progress steadily toward your objectives, you must avoid negative returns. In just 2 years Portfolio 1 is already behind $24,750. How many negative years do you think a traditional “tax deferred qualified plan” will have in 20-30 years? I would say 5-10 easily.

During the technology stock boom of the late 1990s, many investors didn’t care about volatility. They couldn’t resist concentrating their portfolios in the high-risk sectors that had posted several years of phenomenal returns. These investors probably figured that even if returns later tailed off, surely it was better to go for the biggest gains rather than settle for lower returns, even if they were more sustainable.

As it turned out, it wasn’t better. Consider again two hypothetical portfolios worth $100,000. Each one earned an average of 10% a year during the past 10 years. But one was invested aggressively, earning 22% a year during the mid- to late-1990s and then losing 2% a year during the past five years. That makes it worth $244,300 today.

The second portfolio didn’t aim so high. It earned 12% a year for two years, then gained 11% the next two, 10% the two after that, then 9% for two years, and 8% in the final two years. Though averaging 10% gains like the first portfolio, this one is now worth $259,160. That’s a 159.2% compounded return versus 144.3% for the more aggressive portfolio. As so many investors learned during the bear market, slow and steady really does win the race.

What makes losses so bad? A little investment math shows that you need to earn more than you lose on a percentage basis to get back to even. Suppose you have $10k and lose 10%, leaving you with $9k. To get back to where you started, you now need not a 10% gain on the $9k that gives you only $900, for a total of $9,900. It takes an 11% return to restore the original value of your holdings. And the bigger the loss, the harder it is to get your money back. If you lose 40% of your $10,000, taking you to $6,000, you need a return of almost 67% to catch up. If you lose 50% of your investments, you have to double your money-a 100% return-to get back to even.

What’s unnerving about the math behind investment losses is that you may not realize how much risk you’re actually taking when putting your money in volatile investments. Risk is normally worse than is assumed. “You don’t want to take on risk based on false assumptions.” The bottom line is the deeper the holes your portfolio has to crawl out of, the harder it is for you to achieve your financial goals.

So, what’s better than the traditional tax deferred qualified plan?

An Indexed Universal Life policy. These are built custom for the individual, no participation requirements if you’re a business owner and NO ADMINISTRATION FEES like traditional plans. They’re perfect for children savings plans, individuals, companies and entrepreneurs who would eventually sell their company one day. These plans have more living benefits than the death benefit that’s comes included with the investment. Plus, they are TAX-FREE and have 2 unique features: They LOCK-IN your profits each year (Annual Lock-in) and they never go negative and maintain a floor of 0-3% depending on the carrier while being able to achieve unlimited gains. Contact us for more information. We specialize in building these types of retirement plans.

Greg Jones Insurance is a licensed insurance broker and builds retirement accounts for individuals, companies, business owners, families, children and others. We eliminate risk and provide “Real Returns” for our clients. Contact us today for a consultation!

Greg Jones Insurance specializes in building Indexed Universal Life Insurance (IUL) policies for clients. We are a licensed insurance broker specializing in alternative investments to 401k’s and other tax deferred qualified plans. We have built policies for individuals, employees, business owners, children and others. Contact us today! We welcome the opportunity to help you! or Call: 714-884-3577 or 661-703-8848



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