I received a piece of propaganda in the mail this week. It was a postcard promoting a free lunch if I would be willing to attend a seminar entitled "Getting the most out of your retirement plans." The bullet points promoting the seminar informed me that I can "Eliminate Risk in today's market conditions" (emphasis theirs, not mine). I also learned that their "Clients Never Lose a dime during market declines." That was all I needed to know. These folks were insurance agents and they were trying to get me to put my IRA into an equity indexed annuity contract.
A month ago I posted an article to this blog showing how annuities are terrible investments. You can read it here. Equity indexed annuities are a particularly pernicious form of variable annuity that preys upon the fear and ignorance of investors. The postcard I received disgusted me because I know precisely what those insurance agents are trying to do. They know that many inexperienced and ignorant investors who are in the stock market are prone to panic when the market drops. As I write this the stock market is in correction territory, down more than 10% since the high point late last year. Predictably, many people are panicking. So how can the insurance agent promise that his clients will never lose a dime when the market corrects? Let me explain.
An equity indexed annuity is invested in the stock market. Insurance companies are not stupid and they know that the stock market is the only place to be for high investment returns. They stay fully invested in stocks for the long term and receive returns commensurate with folks who follow the sound economic principles of eschewing market timing and remaining in the stock market at all times. I wrote a piece for this blog, found here, which conclusively and persuasively showed that everyone should put their tax qualified retirement plans in stocks and stock mutual funds and never take them out until they begin making withdrawals at retirement. Insurance companies probably average around 12%/year in total return on their investment in the stock market, which is the same rate of return earned by long term stock fund investors.
The money they have to invest in the stock market comes from the premiums paid by those who are told it is too dangerous for them to invest in the stock market. Instead they foolishly purchase their annuities in which they are promised to never have a negative year or never lose a dime during market declines. What those foolish investors are not told is the fact that although it may be true they will never lose a dime, they will also never make a dollar. In order to cover themselves during down years the insurance companies put a cap on how much they will pay in up years. The net result is that investors never have down years but they also never have strong up years. When the stock market is up 30% they may earn 10% in their annuities. Over the long term equity indexed annuities, like all insurance products, make a lot of money for the insurance companies and their agents but the policy holders end up doing worse with their annuity contracts than if they had assumed all stock market risk and stayed in stocks all the time.
I become enraged with people who prey on the fear of others. Unscrupulous insurance agents are just the tip of the iceberg. The media is infamous for turning a meaningless stock market correction into the biggest deal since the Great Depression. Just today I read an article on the internet attempting to capitalize on the most recent stock market drop. This article, found at CNBC.com says, "The S & P 500 has begun 2016 with its worst performance ever. This has prompted Wall
Street apologists to come out in full force and try to explain why the
chaos in global currencies and equities will not be a repeat of 2008.
Nor do they want investors to believe this environment is commensurate
with the dot-com bubble bursting. They claim the current turmoil in
China is not even comparable to the 1997 Asian debt crisis. Indeed, the unscrupulous individuals that
dominate financial institutions and governments seldom predict a
down-tick on Wall Street, so don't expect them to warn of the impending
global recession and market mayhem. But a recession has occurred in the U.S.
about every five years, on average, since the end of WWII; and it has
been seven years since the last one — we are overdue. Most importantly, the average market drop during the peak to
trough of the last 6 recessions has been 37 percent. That would take
the S&P 500 down to 1,300; if this next recession were to be just of
the average variety. But this one will be worse."
Notice how the author conjures up images of 2008-2009 and 2000-2002 (the dot come bubble he writes about). Those two bear markets were the second and fourth largest bear markets in modern history. The author is exploiting the unfortunate human tendency to engage in hindsight bias as a means to dramatize his prediction about impending doom. "This one will be worse," he assures us. People are free to write whatever they want and I am free to call those people stupid idiots. The author is a stupid idiot. By the time summer's warm breezes are wafting over all of us this current market correction will already be forgotten. Does anyone remember last August's correction? I didn't think so. It was deeper than the one we are in now. I rest my case.
The belief that we are about to plunge into recession and a 50% stock market drop also causes people to make stupid decisions and investment advisers to give bad advice. According to this article, "The American College recently surveyed financial professionals to
determine how their clients reacted to a significant drop in the Dow Jones Industrial Average
and found that the majority of retirees show heightened concern. Three
out of five respondents said retired clients have been more apt to reach
out to them due to recent market volatility and more than half of their
clients admit they are more concerned about retirement security than
they were last year." Surprise! Surprise! People respond to a barrage of hysterical reports about how the stock market is about to tank by calling their advisers and asking them to predict the future for them. So how do their advisers advise them when they call? The article quoted here goes on to give the following advice for clients who are retired, "Conservative investors would instead have 50
percent of their portfolio in bonds, 30 percent short-term investments
and 20 percent in stocks." That is a guaranteed prescription for inferior long term performance. All investors, including those who are retired, should be 100% in stocks and stock mutual funds 100% of the time, no exceptions.
It is not just the media types who hype up down markets into something they are not. The intellectual class gets involved as well. One man described as an "economist" wrote an article bearing the headline, "80% Stock Market Crash to Strike in 2016." According to this article describing the economist's predictions, "...there is one distinct warning that should send chills down your
spine … that of James Dale Davidson. Davidson is the famed economist who
correctly predicted the collapse of 1999 and 2007. Davidson now warns, 'There are three key economic indicators
screaming SELL. They don’t imply that a 50% collapse is looming – it’s
already at our doorstep.' And if Davidson calls for a 50% market correction, one should pay heed." When you see someone writing about "economic indicators" you should run screaming for the exists. The presupposition behind that nonsense is that it is possible for the most brilliant among us to predict the future by looking at the past. Something that every child knows is not possible is believed by people who invest in the stock market. Let me make it clear. Nobody can see the future. Nobody knows what is going to happen one second from now. Don't do anything with your retirement accounts based upon what some charlatan who claims to be able to see the future predicts is going to happen.
There is one investment adviser that I respect very much. His name is Ken Fisher. He has a somewhat different take on the current stock market correction. Sanity reigns at his website where I found a very well written article about this stock market correction. Here, in part, is what he wrote: "We still have every reason to believe this is a correction (sharp, sentiment-driven drop of -10% or worse),
not a bear market (longer, deeper, fundamentally driven decline). As far
as we can see, there is no identifiable fundamental cause—just
rehashed, long-running false fears. China’s situation hasn’t changed.
Officials are still allowing the economy to slow gradually as they
transition from heavy industry and investment to services and domestic
consumption. They’re also still taking a haphazard approach to
stabilizing the domestic stock market, which remains isolated from the
rest of the world.
Neither development means the long-feared hard landing has finally
arrived. Manufacturing and trade have slowed globally, but this isn’t
new, and the global economy is still growing. Commodity-heavy
countries like Brazil and Russia are deep in recession, but growth
elsewhere more than offsets their troubles. S&P 500 earnings are
projected to decline again for Q4, but the Energy sector remains the
culprit. Excluding Energy, earnings continue rising. And not once has
sentiment gotten too far out over its skis. Investors have largely been
too skeptical, not overly optimistic."
I can't conclude this post without mentioning our favorite class of fear mongers. They are the career politicians who dedicate their lives to convincing us that the entire country is falling apart and, without their continued efforts, we are all doomed. They tell us that global warming will kill us. They tell us that the economy might not even exist tomorrow if the Fed does not keep a diligent watch over it. They tell us that terrorists are lurking behind every tree and criminals are just waiting to jump out and snatch our cash from our hands. Because life in the Socialist Democracy of Amerika is so dreadfully frightful we must willingly sacrifice our personal liberty and 4th Amendment rights to privacy to our overlords if we have any hope of survival. It is all rubbish but it is heartily endorsed by the media class and readily believed by the sheeple.
I am writing this today because I do not want the handful of people who read this blog to fall prey to fear mongers who want to take their money. I don't know which is worse...insurance agents, media types, investment advisers who prey upon fearful investors, career politicians who terrify you into giving up your freedom for a specious promise of security or Evangelical preachers who convince the faithful to open their wallets and empty them into the offering plate in exchange for a promise of great wealth from God in return. None of them are men of character. Avoid them if you can.