Danger Will Robinson

Published: Friday, June 27, 2014 at 12:39 PM.

Thanks to their trusty robot, trouble never snuck up on the Robinson family in the 1960’s sci-fi series “Lost in Space.” Whenever a menace lurked, the robot sniffed it out. With your investments certain words or phrases can be dangerous to your wealth.

Annuity: When you hear the word annuity linked with investments, beware. An annuity is perfect if you want an income stream you cannot outlive. Annuities with values linked to the stock market generally have much higher annual costs than plain vanilla mutual funds. Salespeople advertise guaranteed benefits with above market rates of return. The guarantee kicks in only if you annuitize aka take a lifetime income stream. In a sense, these benefits remind me of Monopoly Money. Investors pay for expensive riders they never use or see the rider’s value reduced by inopportune withdrawals. Further complicating matters, annuities have surrender penalties for pulling money out early.

While buying an annuity can be problematic, dumping an annuity in haste can also cost you money. Remember the adage, if you have a lemon, make lemonade. Some older variable annuities (the lemon) provide three to four percent returns (the lemonade). Note this return goes straight to the cash value and is not the Monopoly Money referenced above. Please show me a list of short term, investment grade bonds paying three percent or higher. With the surrender period over, these older annuities provide our clients a money market equivalent paying three percent or more. Not too shabby, huh? Despite this handsome benefit some advisors shamefully give blanket recommendations to dump annuities simply because they cannot charge asset under management fees on the annuity. 

Risk tolerance:  Studies indicate risk tolerance measures how you feel today not how you may feel in the future. I like to show clients how an asset mix performed in 2008. Five years ago, many investors shunned stocks or wanted stock light portfolios with twenty to thirty percent stock allocations. Fast forward, those same portfolios might hold 40, 50 or 60 percent stock. Humans have shifting risk preferences and that poses problems. Either we take too much risk during boom times or become too risk averse when markets decline. 

Growth with downside protection: If you have changed the BS detector battery, then an alarm will sound (hopefully) when any advisor offers this advice. Some annuities are sold this way but it’s generally an investment manager’s marketing spiel.  This whole concept makes my head explode; it is such hogwash. If you are a near retiree, then you should expect market declines and plan accordingly. Market drops mean little if you don’t have to sell or don’t choose to sell.  Money set aside for short term goals should never be in stocks. Downside protection practitioners simply prey on human frailty. Like Mick Jagger said, “You can’t always get what you want but if you try you get what you need.”  Before the Rolling Stones got a recording contract, Jagger studied at the prestigious London School of Economics. He disappointed his father by dropping out, but things are alright now … in fact it’s a gas.

Even though Buz Livingston is a fee-only Certified Financial Planner this should not be considered personal advice.  For specific advice visit us online at www.livingstonfinancial.net or at our new office in Redfish Village , 2050 Scenic 30A, M-1 Unit 230.



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