Will the 2008 Bear Market Ever Be Back?

Will the 2008 Bear Market Ever Be Back?

One Basket

Many Americans have a lot of their financial eggs in one financial basket, the Stock Market Basket. Consider your own retirement account(s). If the market experienced an extended loss and entered into a market “correction”, how would you react?

 COVID-19

In February 2020, thanks to COVID-19, there was a powerful 34% loss in the market. Many thought it would bring about a prolonged Bear Market. It appeared much like a Black Swan event. How would you have reacted if the COVID-19 correction had developed into a real correction? Would you hold’em and ride it out or fold’em? For those that stayed, it would take over a 51% return to offset the COVID 34% principal loss. While the market did rebound, the larger question is how much loss would it take for you to fold’em?

 Damage Control

Damage Control: Seasoned investors know the No. 1 Rule: Always cut your losses short. Establishing a loss threshold i.g.7-8% would enable a person to cut the losses and regroup. But for many, mastering the No.1 Rule is difficult to do. Cutting market losses sooner than later could prevent a devastating loss. If 50% market loss happened, it would take a 100% return to regain your lost principal. How many stocks do you think have made a 100% gain in any one year? (Additionally, the interest that could have been earned on the lost principal is also lost.)

Afraid to Look?

Psychologists say that most people feel the pain associated with a market-loss more than the joy associated with a market gain. So, when a market loss occurs, they tend to hold on to the “losers” fearing that if they sell the losers, and the market comes back, they will have lost the chance to make their money back.

Why Not Insure Some Of Your Retirement Funds

This is not a trick question. Americans insure everything they consider of value against financial loss, but not their company-sponsored retirement plans.  Wouldn’t it make financial sense to insure a part of the very account(s) that you would depend on to maintain your retirement lifestyle for the next 25-30 years?  

Fixed-Indexed Annuities?

Why? For years, ads ran in many publications titled I Hate Annuities and Why You Should Too. It was obvious that the author of the article wanted to downplay all annuities to persuade individuals to invest in his company’s assets under management programs.

Why “hate” any financial product? Although annuities are not for everyone (especially variable annuities) they are just a financial tool used to solve potential financial problems, e.g. market loss, broker fees, lifetime income, and more while leaving the possibility of double-digit market-linked returns.

Dad’s Pension

Another reason that people trashed the idea of annuities was due to what I would call “Dad’s pension” or monthly payment from his defined benefit retirement plan (Note that it was the company’s responsibility to guarantee the amount of the monthly benefit payment). When Dad got ready to retire after many years on-the-job, he was offered a pension that had different payout options. The highest payout option was the single-life option. Often this was the option of choice. While it had the biggest lifetime payout option, it also carried a future problem. When Dad, the pensioner, died, the pension /annuity payments stopped and the remaining balance was kept by the company.

Why Not Annuities?

Annuities are the only financial product that can contractually guarantee an income stream you can never outlive. The word annuity derives its name from the Latin “annuas” or payments. Originally, they were a gift to Roman soldiers and their families. A single premium immediate annuity of today would resemble the original Roman annuity.

Annuities and Social Security?

Annuities are life insurance products and are the only financial product that can contractually solve the longevity risk of outliving your money by providing an income stream you can never outlive. Social Security also provides a lifetime income stream you can never outlive. So it would be logical to say that Social Security income payments are for all practical purposes an annuity.

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