Market Game
 Let me start out by saying that everyone should have some Percentage of his or her portfolio directly invested in the Stock Market. The question is ... what Percentage? I'm afraid most have forgotten, yet again, the lessons learned in 2000, 2001 & 2002. It seems every 10 years or so, lessons learned are forgotten. Most People are disrespecting the REAL RISKS involved here, especially those age 50 and older who should begin to cut back to 50% or less, and at Age 60 cut back to 40% or less (Depending on your Risk Tolerance for how much less). For this Growing "SAFE Percentage" of the Portfolio there are attractive alternatives that should be utilized, and this is another attempt at explaining the Benefits of these Wonderful Alternatives.
Investing in the Stock Market means: Investing in Individual Stocks, Index Funds, Managed Mutual Funds, Exchange Traded Funds and Variable Annuities and Holding 5 Years, for this example.
Your Investment Advisor, Broker or Fee Based Advisor (CFP/Certified Financial Planner) always talks in Percentage Terms and NOT ACTUAL DOLLAR Terms.
Ever Wonder WHY?
Do you really understand what these Percentages mean?
Do you Really Understand the RISKS you take?
Questions:
If you start out with $100,000 fully invested in the Stock Market and for each of the next 5 years you had the following Returns (Assuming no Management Fees)(This whole Example is hypothetical to illustrate Real Market Risk - the RISK that most have already forgotten)(You should always think long-term to obtain the best performance and 10 Years should be the minimum):
Year 1: +10% ...UP
Year 2: +10% ...UP
Year 3: -(40%) ...DOWN
Year 4: +55% ...UP
Year 5: +10% ...UP
What do you think your Actual Account Value would be at the end of 5 Years?
What do you think the Annualized Return would be?
$123,783 Actual Account Value ... OR ...an Annualized Return of 4.36% over the 5 Years.
Are YOU Surprised it's so low? Just ONE BAD YEAR can Kill your Return. All that work and RISK taken for 4 good up years and just one stumble destroys it all. ONLY 4.36% over 5 years. Wow!
YES... The Math is Correct!
$100,000 + :
+10% or $10,000 = $110,000 ...End of Year 1
+10% or $11,000 = $121,000 ...End of Year 2
-(40%) or $48,400 = $ 72,600 ...End of Year 3
+55% or $39,930 = $112,530 ...End of Year 4
+10% or $11,253 = $123,783 ...End of Year 5
Wait... Your are not being fair because you are showing the Down year before the UP year!
OK... Lets switch it around:
+10% or $10,000 = $110,000 ...End of Year 1
+10% or $11,000 = $121,000 ...End of Year 2
+55% or $66,550 = $187,550 ...End of Year 3
-(40%) or $75,020 = $112,530 ...End of Year 4
+10% or $11,253 = $123,783 ...End of Year 5
$123,783 Actual Account Value ... OR ...an Annualized Return of 4.36% over the 5 Years.
No Change!
What happens if You can eliminate the -(40%) Down Year?
They would say, you can't eliminate the down years and keep the Up Years! That is impossible to do!
OK ...What if you can eliminate the Down Years in Exchange for accepting less in up Years ...say 50% less.
Starting with the same $100,000:
Year 1: +10% @ 50% = +5% ...UP
Year 2: +10% @ 50% = +5% ...UP
Year 3: -(40%) @ 50% = -0-% ...Remember No Down Years Possible
Year 4: +55% @ 50% = +27% ...UP
Year 5: +10% @ 50% = +5% ...UP
What do you think your Actual Account Value would be at the end of 5 Years?
What do you think the Annualized Return be?
$147,017 ...OR ...an Annualized Return of 8.01% over the 5 Years.
The MATH:
$100,000 + :
+5% or $5,000 = $105,000 ...End of Year 1
+5% or $5,250 = $110,250 ...End of Year 2
-0-% or $-0- = $110,250 ...End of Year 3
+27% or $29,767 = $140,017 ...End of Year 4
+5% or $7,000 = $147,017 ...End of Year 5
OK ...Now...what if you made a longer than 10 Year commitment (14 Years) and in exchange you receive a fully earned 10% Bonus on the day of deposit?
$100,000 becomes $110,000 on the day of deposit (assume all else is equal).
The MATH:
$110,000 + :
+5% or $5,500 = $115,500 ...End of Year 1
+5% or $5,775 = $121,275 ...End of Year 2
-0-% or $-0- = $121,275 ...End of Year 3
+27% or $32,744 = $154,019 ...End of Year 4
+5% or $7,700 = $161,719 ...End of Year 5
$161,719 ...OR ...an Annualized Return of 10.09% over the 1st 5 Years (Remember 14 Year commitment for this hypothetical bonus and example).
One more quick example of REAL RISK stated another way:
If the Market Declines (25%) in the next 12 months or 1 Year .........
What Percent would you need to Earn the following 12 months or Year to just get back to your initial investment?
Answer: 33.33%
If you Factor in Fund Management Fees and the Fee Paid to your Fee Based Investment Advisor or CFP (Total Fees of 1.50% per year)?
Answer: 38.13%
The Moral of this story...is to Eliminate ALL DOWN YEARS.
Richard Russell, founder and editor of The Dow Theory Letter, put it succinctly when he said, "He Who Loses Least........Wins!"
Still Not Convinced? Take a Look at the following Chart. The RED Line is the S&P 500 Index and how it performed from 9/30/1998 to 9/30/2006 starting with $100,000. The GREEN Line is a similar type of Strategy (Not the exact one) that I have been discussing. A LOOK at Real Dollar Amounts NOT Percentages. CLICK HERE for CHART #1! Chart #2
Hypothetical S&P 500 Back Testing Data with three Participation Rates of 55% / 65% / 75% - Annual Reset 1 Year Point-to-Point crediting method for the following periods:
Last 20 Years: Hypothetical #1
1990 to Present: Hypothetical #7
{Interest Earned and credited each year is = to the increase in the S&P 500 Index from start date each year to end date 12 months hence X the Participation Rate ::: Annualized Return for the full period of time is under the Annualize Return Column in the bottom row for each hypothetical participation rate. Please also read the yellow tags on each page.}
OK ...I get it Now! Where can I sign up for this Market Risk Elimination deal for a portion of my portfolio?
Wait ...there's a lot more to learn First.
Learn more about this well kept Secret: CALL BONNIE AND SCHEDULE A 1-HOUR IN HOME DISCUSSION: 800-481-0819
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