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Best Retirement Strategy for Passive Investors? July 22, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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For regular readers, they understand I encourage all to become active investors.  But, for some they will never want to be anything but passive investors.  That is fine, but it becomes even more critical to make good choices as to strategy and product because it will need to carry you through boom times and recessions.  That is, of course, one of the insidious facts of mutual fund investing that most people do.  Mutual fund investing is great in boom times when the stock market is moving up over long period of times.  In fact, it is during the 18 year bull market [1982-2000] that mutual fund investing made its name for itself.  But what most people don’t know is how much of an anomaly that time period was.  Look at this chart for the reality of how often the market goes down.

What most people don’t realize is that investing for the long run in mutual funds works really well when the market is going up year after year.  But it works much less well when the market has down periods every decade or even every 7 years like is does normally.

That is why I ask people to consider equity indexed universal life insurance as an alternative.  You see when you have normal markets [ups and downs] this product works at least as well as mutual funds even with higher front-end expenses.  And if the market has several down periods in a decade, it works better.

Take the last 10 years for example:

The market  returna [S&P 500 with dividends] is the first column.  The following two columns compare how much you would have have in an EIUL with 16% ceiling and 0% Floor compared to a no-expense mutual fund starting with a $1,000 investment :

1999  +21.1%                     $1,160                    $1,211

2000 -9.1%                        $1,160                    $1,101

2001 -11.98%                   $1,160                     $968

2002  -22.27                   $1,160                      $753

2003 +28.72                  $1,345                       $969

2004 +10.82                  $1,490                       $1074

2005 +4.79                     $1,561                       $1,125

2006 +15.74                   $1,805                      $1,302

2007  +5.46                    $1,903                      $1,373

2008 -37.22                    $1,903                      $862

Quite a difference over the last 10 years, which is exactly the point.  Since no one can predict what the next 10 years will do, for folks who just want a general purpose strategy that will perform well under all market situations, the EIUL is far superior.  [Note, I didn’t include expenses for either product.  The up front expenses for the EIUL are higher and will dampen performance compared to the mutual fund, but the lower expenses will not produce better results except under an “all bull” market time period.]  Then there is the sleep factor with the EIUL never going less than 0, people should be able to sleep better!



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