FWIW, the spreadsheet I created is web-based, and links from my site;
One of the easiest stock market predictions is that next year will not be like last year, the next five years will not be like the last five, nor the next ten like the last ten.
The question that no one can really answer is how they will be different. If they could, they would be planning their retirement in Aruba, not writing market forecasts. That said, reading and understanding a variety of forecasts and commentaries is essential to investment success.
In my opinion, a well diversified portfolio and focus on the long term has carried us through the last few hundred years and will do so for the next few hundred. I think it is reasonable, after reading all those commentaries, to "lean" in the direction you think the market will be going. For example, I'm over weighted in international stocks, under weighted in long bonds, and focusing my equity efforts in specific stocks and actively managed mutual funds as opposed to indexes. But these are shifts of 5-10% of my overall portfolio in each of these areas, not bet the farm shifts.
-- Doug
"Douglas Johnson" wrote
I do not think this at all does justice to Siegel and Shiller's claims.
You might want to contemplate that, while so many "experts" were saying in the late 1990s that old market pricing models were invalid; the sky's the limit (or nearly so) for stock returns, Shiller spoke of "irrational exuberance" and pointed out, with elaboration, that a serious correction would have to occur.
I think you mean, "how exactly." That seems a trivial point. Siegel and Shiller do offer their explanations of why they think the market will be different, and do say domestic stock returns, for one, will be quite a bit lower.
They are planning their retirement in wherever. Both put their money where their mouths are.
I don't necessarily disagree with you, but the folks at Long Term Capital Management (several of whom were Nobel laureates) put their money (and that of many others) where there mouths were as well.
-Will
Douglas Johnson wrote: > For example, I'm
What market predictions lead you to putting more money in managed funds (as opposed to index funds)?
-Will
I don't see anything in the original post that indicates it is an equity indexed annuity. In fact it sounds just like a standard variable annuity. As other posters have noted there is no real value in putting qualified funds into a variable annuity. You are still invested in securities (usually mutual funds) so you are not making your money safer.The only real advantage of a variable annuity is the tax deferral on non-qualified funds, even then it is hard to justify the 2%-4% in additional fees.
The basic guarantee on a variable annuity is a death benefit that insures against loss if you die and the market is down. This usually has a cost of
1%-2% of the account value (it is basically life insurance, and expensive life insurance at that). Many have a rider that will guarantee a minimum amount of growth (between 5%-7%) over a term, usually 10 years. What most people are not told (or at least no clearly enough) is that to get the guarantee you must annuitize the annuity (take the balance in payments) over at least 10 years. This rider has an additional cost of 0.5%-1% but to benefit from it you must keep the annuity for 10 years and withdraw the balance over 10 years, if you don't there is no guarantee, but you paid the fee every year you owned it.So the notion that a variable annuity gives you safety or guarantees is very weak, which is why tax deferral would be the only real value in owning one. Since you already have that in your IRA (401k) there is no value in a variable annuity for you.
Equity Indexed annuities are a whole different animal, they can give you safety, they can give you better than average growth. I think they get a bad rap primarily because they are compared or confused with variable annuities. If anyone takes an unbiased look at them they would see some value. Remove the negative hype from the securities industry (and journalists that rely on them) and the positive hype from the salesman that earn a living from them and just examine the data on how they perform (like you would any investment) and they can make sense for some people (not everyone of course).
My understanding is that this product offers guarantees which of course involve additional annual costs (over and above normal investment costs). As a result the product always underperforms the targeted stock market index by those costs.
If that is true - and I am open to being educated - then I would be uncomfortable with the suggestion that this product offers "better than average growth". Especially after compounding that difference out into the future.
-HW "Skip" Weldon Columbia, SC
The classic doom-and-gloom economic projection has been the social security's annual trustees report, the past ten which are on the web. Their analysis which includes a dozen sub-factors sounds very reasonable, but it has been consistently wrong, under-predicting a US economic performance half of what it actually was in the past decade. (The goofed on demographics and productivity.) So I am skeptical about so-called projections.
John Mauldin (Bull's Eye Investing) and Ed Easterling (Unexpected Returns), as well as Siegel and Shiller all argue good cases that overall domestic stock returns are going to be mediocre at best. We went through this in the 70's primarily because we were unwinding the bubble of the 60's, like we are currently unwinding the bubble of the 90's.
In my mind, this becomes a stock picker's market. While indexes are going sideways, individual stocks can and will do well. The trick to is find them ahead of time. So I'm putting money into funds such as ACRNX that have long track records (including the 70's) of doing well even in sideways markets.
-- Doug
I would sure be interested in trying the spreadsheets you referred to above if that would be ok? I did my own "simplified" attempt of a couple versions I came up over the weekend with just using a #2 pencil on a sheet of paper and using a calculator and I would like to see if mine even come close to a professional version.
Thanks, Steve
Steve, just one comment on that last sentence...annuity isn't a dirty word and you could end up using annuities as part of the mix. You wouldn't buy them for tax deferral, of course. But one thing that an annuity can provide, which is unique, is a guaranteed stream of income for your lifetime, even if you have a very long life. They're sometimes called "longevity insurance" for that reason.
They also are an easy way to buy downside protection for volatile investments, which is more or less what you described initially. Not a cheap way, not the only way, but an easy way, if that's something you're willing to pay for.
On this second rationale...after learning more about investment risks may make you rethink the value of the protection (my point that it may be worth "zero"). But the first rationale (longevity insurance) remains valid and so they may fit in at some point. A few things in your post even point to it...that retirement is going to be long (30+ yrs), and you're not too concerned with leaving much behind. Buying an annuity lets the insurance company figure out how much to pay you for life, and transfers the risk to them that you'll live much longer than average.
-Tad
This is called an "immediate annuity" and as any product has its trade offs, one trades the principal for a higher annual return.
For a 60 year old,
To me, this is pretty straightforward, I know what I am getting, guaranteed. The unknowns are certainly there, I don't know when I'll die, nor what impact inflation will have. But for the client who needs that $7500 and accepts the tradeoff, it can make sense. JOE
I should have clarified that when I said "better than average growth" I meant in a comparable safe investment. A fixed annuity (whether indexed or not) is similar to a money market or bank CD as far is risk is concerned. When compared to a fixed interest rate annuity, bank CD, or money market account the indexed annuity offers "better than average growth." For the conservative investor it can be a good fit.
An indexed annuity is not rocket science... the concept is pretty straight forward despite all the hype in the media and elsewhere. Here is the concept in a nutshell... let's assume current interest rates in a fixed annuity are
4%. The annuity owner can take the 4% or use an index crediting method. If they choose to use an index crediting strategy (the annuity could have 1, 2, or 20 different strategies available) the insurance company will use the 4% to purchase an option on the movement of the index. How much the option can return will be based on many factors.Let's assume the insurance company can purchase an option that will capture the first 7% of the growth of the index. That means if the index grows at least 7% the annuity owner will earn what ever the growth in the index is up to 7% (that's called a cap). If the index drops the option is worthless. Even if the option is worthless (produces no return) the insurance company has only spent what it would have given to the annuity owner anyway (4%). So the annuity company has not taken on any additional risk. The annuity owner did gamble the index would grow at least 4% in hopes of earning up to 7%.
There are other variations on the concept such as an option that has no cap on the upside, but does not pass the first 1%-3% of growth. So if the index grows 10%, but the option does not pay the first 1% the annuity owner would earn 9%. If the index grows 30%, the annuity would earn 29%.
Most fixed annuities (including indexed annuities) do not have any upfront fees, annual fees, sales charges, etc. which is almost always cited as a "major problem", how it can be a problem when it does not exist is interesting to me. What a fixed annuity does have is a surrender charge or penalty period. This concept is not new or unique to annuities.. you find these in bank CD's and mutual fund B shares. The idea is you pay no upfront fees or charges but must hold the investment for a certain period of time. If the period is too long or penalty too high to meet your objectives, than do not consider the product.
There are good indexed annuities and bad indexed annuities. Just like there are good and bad mutual funds and equities (would anyone consider Enron a good investment in hind site?) All you can do is learn how the annuity works, look at past performance, and base your decision on facts.. not sales hype or uneducated misinformed journalists. I pick on the media because I do not think I have seen an article yet that was critical of indexed annuities that did not contain some statement about "high fees, commissions, and charges" to the owner. I have yet to find a single indexed annuity that has "high fees, commissions, and charges", so when I see this in the article the author is immediately suspect.
There is an e-mail address on your yahoo profile, is it accurate?
The one I use here works (most of the time) and if I know to check it... I will look.
I can send the spreadsheet I use...
Steve wrote:
Yes it is accurate. Thanks! Steve
I got though Siegel's "The Future for Investors" and you are right. He does discuss the aging demographic in the US, and goes on to suggest that growth (i.e. demand for stock) will come from abroad. It would take more analysis than a post here can offer, but I do believe that the willingness for the next generation to own stocks (the pension reform act helping to push the savings rate right from the time of hiring) directly as traditional pensions fade away and defined contributions being the way of the future. Also, as you allude to my email above, one must consider the distribution of wealth. Most people who retire simply have no assets to sell, the numbers are alarming. The wealth controlled at the top (the top 1% own what percent of assets?) is not going to be sold to fund retirement, it gets passed along in tact.
I'll maintain that the prudent path is to assume the lower rate of return (7-8%) and if that leads towards over funding one's retirement, then so be it. The alternative is to assume 10-12%, and realize at 50 that retirement is still 20 years away. JOE JoeTaxpayer.com
joetaxpayer wrote: > one must consider the distribution of wealth. Most people who retire simply > have no assets to sell, the numbers are alarming. The wealth controlled > at the top (the top 1% own what percent of assets?) is not going to be > sold to fund retirement, it gets passed along in tact.
You're right, while the percentages owning stock have crept up a bit, the amounts most people own are small, and stock ownership by individuals is heavily concentrated. According to the Fed study "Currents and Undercurrents: Changes in the Distribution of Wealth,
1989?2004", the top 1% of households held almost 51% of stock, and the top 5% held 79%, considering only the stock that is held by households. That's direct ownership of individual stocks; the top 5% own about 70% of mutual funds (of all types) as well, though more money overall is in individual stocks.Plus, retail investors are just one piece of the market...they hold only about 1/3 of stock (another Fed study). So 95% of households -- assuming this 95% includes the boomers that won't be wealthy enough to let most of their investments ride -- share ownership of perhaps 7% of stocks. Even if this group leaves stocks entirely, I don't buy the premise that the liquidity needs of 7% of the market dictates pricing for the other 93%.
-Tad
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