Asset Protection Society

Home Does – Buy and Hold – Work in a Volatile Stock Market? The Surprising Results!

Does “Buy and Hold” Work When the

Market Goes Up and Down like a Yo-Yo?

When reading this newsletter don’t forget that anyone or anything that can take yours or your client’s money is a creditor. That includes the stock market.

I don’t know about you, but I’m a bit freaked out about the stock market. I know I’m relatively young, have a lot of time to recover, and that I don’t have a million dollars the market, but it’s very uneasy to think about the security of my invested assets in such a volatile market.

The day that I wrote this the S&P 500 index went up and down nearly 10%. To say that is volatile is an understatement.

You know what everyone says:  If you are in the market for the “long-term” you don’t have to worry about the short-term losses.

I guess that sort of makes sense doesn’t it? Or does it?

This is a new very volatile world and I wrote this newsletter to give you something to think about and determine if “buying and holding” stocks right now is a good idea even when looking at the long term?

Ask yourself this question: If the stock market goes up and down and up and down over a ten year period with the average rate of return equaling ZERO, will the account balance be the same at the end of the ten-year period?

Put another way, if you invested $100,000 in the S&P 500 index where the index went up 10% the first year, then down 10%, then up 10%, then down 10%, and if this cycle continued for 10 years with the average rate of return equaling ZERO, would your initial investment still be $100,000?

The answer is NO!

Look at the following chart where I assumed a very volatile market that goes up and down 10% every year and after ten-years the average return is ZERO.  You’ll notice that the account value is $95,438.

Never go backwards and lock in gains

Most of you know that I’m a big fan of Fixed Indexed Annuities (FIAs) to hedge a client’s risk in the market and to earn decent returns when the stock market does well.  FIAs are not a cure all, not every penny of someone’s money should be in them, but as an asset allocation model, the older you get the more money you should have in a wealth building tool that will not go backwards.

If you are not familiar with FIAs, please click here to view a brief voiced-over educational PowerPoint Presentation.

What if the $100,000 invested in the above example instead went into FIAs?  If I make a very conservative assumption that over time the cap on returns will be 8% annually, look at the results.

Invest. Invest.
S&P 500 Annual Acct. Fixed Annual Acct.
Year Index Return Value Index Anuity Return Value
1 $100,000 $10,000 $110,000 100,000 $8,000 $108,000
2 $110,000 ($11,000) $99,000 $108,000 $0 $108,000
3 $99,000 $9,900 $108,900 $108,000 $8,640 $116,640
4 $108,900 ($10,890) $98,010 $116,640 $0 $116,640
5 $98,010 $9,801 $107,811 $116,640 $9,331 $125,971
6 $107,811 ($10,781) $97,030 $125,971 $0 $125,971
7 $97,030 $9,703 $106,733 $125,971 $10,078 $136,049
8 $106,733 ($10,673) $96,060 $136,049 $0 $136,049
9 $96,060 $9,606 $105,666 $136,049 $10,884 $146,933
10 $105,666 ($10,567) $95,099 $146,933 $0 $146,933
Ave. Return 0% 4%

 

Why did the FIA end up with an account balance of $146,933 instead of $95,099?  Simple, in down years the FIA returnedZERO instead of -10% and in up years it returned 8%.
Are these examples real world?  Prior to 1998 you would have said no way?  Are these examples real world?  Who knows, they could be. The question of the day is: are you doing everything you can to help educate and protect your client’s money in this uncertain world.  Recently, I wrote an article titled Should Clients Sue Money Managers When the Stock Market Collapses?, to read that article, please, click here.  I mention that article becuase, as this article does, I am attempting to stress the importance of fiduciary duty and the standard of care that you are held to when dealing with your clients and their assets.
It’s one thing to be upset when you only earned 8%when the market is up 10%+, it’s another and much more positive feeling when your money earns ZERO when the market is down 10%.  The first feeling makes you a little grumpy, but the second, even though it sounds odd to be happy with a ZERO rate of return, brings a nice smile to your face (especially if you are over the age of 60-65 and close to or in retirement).
-20%

Just in case you are curious, if the market has wild swings of 20% every other year (up and down), the account balance at the end of 10-years would be $81,537 and the FIA account balance would remain at $146,933.
Conclusion

I’m not sure if the days of “buy and hold” have come and gone as a tried and true way of growing your wealth. That may or may not be the case. What I know is that it’s time to have a discussion with your clients to help them understand ALL the various options to grow and protect their wealth and I think that conversation should include the information discussed in this newsletter.

Sincerely,

Roccy DeFrancesco, CWPP™, CAPP™, CMP™