What is your investment comfort zone?

life insurance and annuity marketing

Think of it this way: Everyone has a comfort zone when it comes to weather. Some people like the hot temperature of the south; some like the cooler, wetter climates in the northwest; still others would rather have a seasonal variety, like you get in the north. It can be similar with your investment comfort zone. There is no single answer that’s right for everyone. It’s what you decide is most comfortable for you. To understand your investment comfort zone and the type of investor you are, you’ll need to consider where you are in your life, what goals you want to accomplish in retirement, and what level of risk you’re comfortable with in your portfolio.

Knowing your investment comfort zone matters.

Understanding the type of investor you are is particularly important for a number of reasons:

  • If you’re too complacent, you may be ignoring risk.
  • You need to recognize when risk is increasing or decreasing.
  • If you’re an uncomfortable investor, you may allow your emotions to take control of your decisions.
  • You want to minimize the possibility that you may need to make difficult decisions under pressure.

The three primary types of market investing

Investing in the market always involves a level of risk. That’s why it’s essential for you to know how much gain or loss is acceptable to you, and what level of risk you’re comfortable with.

Remember, there is nothing fundamentally better about being a risk-taker or risk-advisor. Sometimes the greatest risk is taking no risk at all. Understanding your risk tolerance as well as your overall objectives and goals can help determine the type of investment that is appropriate for you.

Generally people think of three main types of investments: stocks, bonds, and cash or cash equivalents. All of these types of investments have advantages and disadvantages, depending on how the market is reacting at a particular time period. Whichever investments you choose, you need to consider the opportunities for gains, losses, liquidity, tax advantages, and consequences.

Stocks

Although stocks may give you the opportunity for bigger gains over time, they can also be the most volatile. To most investors, particularly those who invest in equities, volatility is something to be aware of. The stock market can change from year to year and can be volatile, as the chart below displays. Most of us recall the “Lost Decade” from 1999 to 2009, when investors saw the S&P 500® Index drop more than 40% at the height of the 2008 financial crisis.

When the markets are volatile, the typical reaction is to want to get out of the market altogether and move your money into safer alternatives. But if you had done that following the 2008 market crisis, you would not have captured the rebound in the market the following years.

When determining your Investment Comfort Zone, think about: What is your time horizon (the amount of time before you’ll need your money)? What is your plan if the markets go down? Ask yourself, how is your portfolio protected?

Bonds

Bond funds have been solid investments in a retirement strategy for many years. As fixed income investments, bonds help provide diversification, stability, and tax benefits to almost any portfolio.

Generally speaking, people tend to avoid the risks they are aware of. That’s why, in recent history, people have sought to reduce their exposure to losses caused by volatility by switching from investing in the stock market, to investing in the bond market.

And while bonds are generally seen as a safer alternative, they are susceptible to a different kind of risk, due to their inverse relationship to interest rates. With interest rates currently still near historic lows, bonds can offer higher returns, making them more desirable to investors and driving bond prices higher.

But as the graph shows, we’ve had three decades of a general decline in the baseline for interest rates. Now interest rates can’t go much lower- and when they begin rising, the value of existing

bonds moves in the other direction. Your bonds would then be worth less in order to keep the returns they offer competitive with the higher interest rates of newly issued bonds.

So if you’re holding a disproportionate amount of your retirement assets in bonds, you may have more risk in your portfolio than you realize. While bonds should continue to be part of a well-balanced portfolio for most clients, you need to be aware of how a rising interest rate environment could affect your portfolio.

Cash and cash equivalents

We all know how important it is to have some money in a savings account or short-term investment such as a money market account. By keeping money liquid (i.e., as cash, or as an asset that can be quickly converted into cash), it will be available at the time you need it. But it is also important to discuss how much is enough, and when an amount of cash might negatively affect your accumulation goals.

As you can see, the value of a dollar is projected to erode due to the effects of inflation over time, so you need to consider this potential “cost” versus the convenience and relative safety of holding assets as cash.

So while cash can play a role as a part of your retirement plan, cash alone will likely not help you reach your financial goals. Given this, it might make sense to balance your portfolio by shifting some low-earning cash to investments with higher growth potential.

Emotional investing

A 2013 Psychology Today article discusses economic research and emotional investing. Specifically, that emotions play a significant role in how people make financial decisions. But one of the most common mistakes investors can make is to let emotions guide their investment decisions. That’s why it’s important to understand the impact that emotional investing can play in your investment decisions. Because investors tend to focus on short-term gains and losses, emotions can run high in both directions. When the market is up, we are all relaxed and confident in our investments. But when the market goes down, anxiety can set in and our first reaction is to pull out our money from the market and move it to a safer place.

When we act on this impulse, we are allowing our emotions to make our investment decisions. Remember, the ability to “time” the market- to predict which direction the market will move at a point in time and invest accordingly- is virtually impossible. (If it was more possible, we’d all be rich.)

The investment cycle as emotional cycle as shown on the graph below, people typically get most excited about investing when market prices are at their highest.

You could think of it as the “overconfident” stage, but it can also be the stage of greatest risk. Because this is the market’s high point, as it starts going down, investor confidence often follows, giving way to nervousness and worry.

People may tend to wait it out for a while, but as panic and discouragement set in, they may decide it’s time to get out of the market. By shifting their investments into cash, the thinking goes, they can avoid additional market downturns.

Unfortunately, by exiting when prices are lower (or even at their lowest), they’ll lock in their losses – meaning they’ve given up their chance to regain value when the market starts rising again.

Are your emotions driving your investment decisions?

After you have made your plan for retirement, and the market inevitably goes up and down, will you be willing to stay the course through the highs and lows? Or will you overreact to the market and make decisions based on emotion?

Rebuilding your assets after a big loss takes time. It’s simple mathematics: the more value you lose, the more you’ll need to gain back in percentage terms to fully rebuild from your losses.

Always keep in mind that the decisions you make may affect not just your portfolio’s total value, but can also impact your timeline for retiring. Make sure you have enough time to recover from any market correction to meet your goals.

Finding your personal Investment Comfort Zone

Understanding your Investment Comfort Zone begins by working with your financial professional and reassessing it on an annual basis.

The type of investor you are takes into account your financial goals, your time horizon, and your tolerance for risk. And just because you think you are one type of investor today doesn’t mean you can’t change over time as your needs, goals, or attitudes change.

When determining your Investment Comfort Zone, here are some points to consider:

  • What accumulation goal is necessary to meet your future retirement needs?
  • What financial changes could change your Investment Comfort Zone?
  • What mix of investments is suitable to achieve your retirement goals?
  • Have you taken on an unnecessary amount of risk to reach your goals?
  • Can you maintain financial discipline when you are faced with changing market conditions?

 

Source:

Allianz Life  https://www.allianzlife.com/

Bond Volatility

DFS Marketing Inc. Insurance Marketing Organization

THE WALL STREET JOURNAL

Buried deep in section D, Page 13*, you would uncover an outstanding article that clearly reveals a universal truth about bonds. “Many investors looking for safety and higher returns might falsely assume bonds are riskless investments, not realizing that even a modest increase in interest rates would take a serious bite out of fixed income values.”

Who’s making these statements?

The 2nd largest bond fund manager – The Vanguard Group.
Vanguard realizes the folly of many investors who do not understand they can lose principal if interest rates head higher. Vanguard rightfully warns investors, “…the value of a long-term bond fund might fall 20% if rates went up just two percentage points.”

 

In spite of these warnings and the fact interest rates are near historic lows, investors continue to flood money into risk laden bond funds. It is important to know this financial principle: Rising interest rates reduce bond values. It is a hard cold fact.
Author Ken Little from “About Money” is well aware of this relationship between rising interest rates and loss of bond value. He clearly states, “The biggest economic threat to bonds is rising interest rates.”
(Source: http://stocks.about.com/od/bonds/a/11-30-2012-Investors-In-Stock-Market-Need-Bond-Protection-Strategy.htm)

Do you believe interest rates are heading higher in the future?

Let’s examine an easy to understand example…

Imagine a bond was issued for $10,000. It has a five year term with a 5% coupon or interest rate, paid every six months.
Then, let’s imagine the market interest rates rise from 5% to 6%. If you want to sell this bond, would anyone buy it from you when it is paying 1% below market rates (5% vs. 6%)? That buyer could go elsewhere and just buy a 6% bond.
To get your bond sold, you will need to sweeten the deal so the buyer gets a competitive rate for buying your bond.
The problem is, you cannot change the interest rate on your bond. That’s locked in at 5%. What you can do, however, is change the price you will accept for your bond.
Here’s how you do it! Reduce your price so the annual interest payments of $500 ($10,000 x 5%) must equal a 6% payment.
This is called selling at a discount. To get the buyer a market rate of interest (6.0%), you must sell your bond at a discount for just $8,333. Now, the $500 fixed interest payment equals a 6% yield for the buyer of your bond…

 

 

 

 

 

While interest rates only rose by 1% in this example, your bond value reduced by a surprising 16.67%.

As an alternative, you may consider the safe haven provided by traditional fixed rate annuities. In most fixed annuities, the insurer accepts the market risk allowing the annuity owner to enjoy true safety and tax-deferred growth. Or consider the opportunities created by a Fixed Indexed Annuity. These innovative products provide you the potential to exceed traditional fixed interest rates without exposing your principal or past interest credits to market risk.

 

 

*(Source: The Wall Street Journal, March 19, 2003, Section D, Page 13)
“PLEASE NOTE: This is just an example to illustrate the relationship between interest rates and bond prices. It does not represent an actual computation. To do this calculation correctly would require a more complicated process and the answer would be different. However, the seller would still have to discount the face value of the bond to compensate for the interest rate difference.”
(Source: http://stocks.about.com/od/bonds/a/11-30-2012-Investors-In-Stock-Market-Need-Bond-Protection-Strategy.htm)

Social Security FAQ

Life Insurance and annuity Marketing Organzation

Social Security FAQ: What You Need to Know

1- When Am I Eligible To Receive Benefits?

Depending on what year you were born, retirement benefits may begin as early as age 62 for partial benefits and as late as age 67.

  • If you were born before 1938, your age for full eligibility is 65.
  • If you were born after 1960, your age for full eligibility is 67.
  • People born between 1938 and 1942 reach full eligibility age on graduating scale two months per year.
  • People born between 1943 and 1954 become eligible for full benefits at age 66.
  • Those born between 1955 and 1960 become eligible based on a graduating scale increasing two months per year, finishing with an eligibility age of 67 for those born in 1960 or later.

2- How Is My Eligibility Determined?

Social Security eligibility is based on “credits” that you earn from working. You usually need to have earned 40 credits in order to qualify. As of 2011 you earn one credit for every $1,120 in earned income per year, up to a maximum of four credits.

 

3- How Much Will My Monthly Benefit Be?

Your Social Security benefit is calculated by averaging the earnings from your 35 highest income years. The average monthly payment is $1,082. As of January 2012, the average monthly benefit was increased by 3.6%, which works out to an additional $467 per year or an average benefit payment of $1,549 per month. It depends on your unique situation. You can calculate your Social Security benefit at www.ssa.gov.

 

4- Must I Quit Working to Receive Social Security?

You can continue to work without negatively impacting your Social Security benefits once you reach your full retirement age. Prior to full retirement age you are permitted to earn up to $14,160. $1 is withheld from your benefits for every $2 in earnings over the limit. You may earn up to $37,680 in the year you reach your full retirement age, then $1 is withheld for every $3 in earnings over the limit until the month you reach your full retirement age.

5- How Does Social Security Work For Married Couples?

If you both have worked long enough to qualify for Social Security, you both qualify for full benefits. If your spouse’s earnings record qualifies them for a benefit from Social Security that is less than half of your benefit, their benefit will be increased to a rate equal to half of your amount.

 

6- What If My Spouse Dies?

Provided the surviving spouse has reached their full retirement age, they are entitled to 100% of the deceased’s basic benefit amount. Prorated survivor benefits are paid to surviving spouses who have not yet reached full retirement age. The survivor will receive the higher benefit amount if the surviving spouse was receiving Social Security benefits and the deceased’s benefits were greater.

 

7- Is Social Security In Trouble?

Social Security is a “pay-as-you-go” system, so money paid in by current taxpaying workers is spent to pay benefits to current retirees. As the ratio of current workers to current retirees drops, fewer people will be paying into the system while more will be receiving benefits. People are also living much longer than when Social Security began in the 1930s, stretching out the payments which millions of Americans will be receiving. While some fear the end of Social Security, it is generally agreed that the U.S. government will not allow the Social Security program fail. That, however, does not mean that the program will be able to continue in its current state. Legislators have increased the eligibility age for receipt of

full benefits from 65 to 67 for people born in 1960 or later. Reductions in benefits, additional increases in the age of eligibility, or both, will likely to be needed in order to get the program back on solid ground. Another possible, although unpopular, course of action is raising taxes to fund the system.

When Should You Apply for Social Security Benefits?

When to apply for Social Security benefits is one of the most important issues you will face during your retirement. Most people simply apply for Social Security whenever they decide to retire, instead of taking into consideration what age will give them the maximum lifetime benefit. But can they afford to wait? It depends. Navigating Social Security can be a complicated process so it’s critical to take the time to evaluate your specific situation with a financial professional whom you trust.

Should I Take My Social Security Benefits Now or Delay?

Every individual’s situation is different. The best timing depends on your financial situation, including a thorough evaluation of critical income needs versus luxury income needs. You may be able to delay taking benefits, or need them sooner, depending on whether you or your spouse is working. Understanding how spousal benefits work, and using strategies to maximize your benefits can save you thousands of dollars over a long period of time. At age 66 you will receive full retirement age (FRA) benefits, but you are eligible to receive 75% of your full benefits if you apply at 62. Also, if you delay the onset of benefits past age 66 you can delay until age 70 and actually earn 132% of your FRA benefits. The longer the primary earner delays, the more the monthly income will increase. Theoretically, if you begin receiving Social Security early, you will receive a smaller monthly benefit for a longer time, and if you delay, you will receive a larger monthly benefit for a shorter time. There are “break-even calculators” which can be use to figure out how long you would have to live to make delaying worthwhile. Consult your financial professional to assist in this process. Calculating spousal benefits can be more complicated. Married couples have to consider how the retired worker benefit, spousal benefit, and survivor benefit will affect benefits and life time maximums. More information is available.

What You Don’t Know Could Cost You Thousands in Lost Benefits…

After having paid taxes on your hard-earned income over dozens of years, did you know that you may face even more taxes on your Social Security benefits?

Prepare yourself: up to 85% of your Social Security benefits could be taxable.1 However, with proper retirement planning, you can reduce or eliminate your Social Security tax liability, saving you a significant amount of money in your retirement.

How to Avoid the Social Security Tax Trap

Avoiding taxation of your benefits can only be accomplished in a couple ways.

  • First, you can reduce your overall taxable income
  • Second, you can use tax-deferred savings options, such as annuities.

Discuss with your financial professional. When properly structured, tax deferred annuities can increase your income while reducing taxes on your Social Security benefits. Income distributions are subject to regular income tax, and any income taken before age 59 ½ are subject to a 10% federal tax penalty.

To learn more, Please call 855-740-3140

 

Source: (Athene Annuity)

Are you an emotional investor?

Annuity and life insurance marketing organization

Some people make emotional financial decisions based on the messages and advertisements presented to them from the investment community.

Does this describe you?

We’ve created a test so you can find out! Let’s go through this fun little exercise together. Below you will find a series of historical performance charts. Imagine these charts display a highly diversified stock portfolio from leading publicly traded companies.

Are you an emotional investor?

Some people make emotional financial decisions based on the messages and advertisements presented to them from the investment community. Look at each graph on the left below and circle the number that best represents your feelings
about the chart. Helpful Hint: Be emotionally honest with your reaction to each chart.

Did you notice the charts not only performed differently but they also looked different?

This was done intentionally to simulate advertisments designed to trigger your emotions. Even though you were being presented with facts, the feelings were present and possibly part of your decision making.

Making investment decisions based on past performance can be a painful experience. The investment community has consistently tried to deliver this message to Americans. You have probably read the following statement hundreds if not thousands of times, “Past Performance Not Necessarily Indicative of Future Performance.” For those who advise on investments or sell investments, this statement is a required warning to the clients they work with.

 

Now ask yourself the following question and… be completely honest with yourself.

“Do I believe that past performance IS a good indicator of future performance of my mutual fund?”
YES or NO

 

If you answered, “YES” to this question it turns out you are not alone. If you believe past performance IS a good indicator of your investment’s future performance than you are in the same club as countless Americans who have the same belief.
In fact, many investors are influenced by ads illustrating a high past performance within mutual funds. According to Forbes, “(Mutual) Fund firms pay to run these ads for the simple reason that they work. Investors flock to funds that have performed well in the past–especially to those that are advertised as such. In fact, studies show that past returns may be the primary factor investors consider when choosing among funds.” Emphasis added. (Source:http://www.forbes.com/2010/04/16/fund-performance-adspersonal-finance-sec.html)

While advertising and the average individual investor uses past performance information and data, the investment community continues to issue their standard warning.

“Past Performance Not Necessarily Indicative of Future Performance.”

Regulators like the Securities and Exchange Commission (SEC) continue to issue warnings like the one below about the advertising practices that influence people’s important financial decisions.
“This year’s top-performing mutual funds aren’t necessarily going to be next year’s best performers. It’s not uncommon for a fund to have better-than-average performance one year and mediocre or below-average performance the following
year. That’s why the SEC requires funds to tell investors that a fund’s past performance does not necessarily predict future results.” Emphasis added. (Source: http://www.sec.gov/answers/mperf.htm)

 

Does it sound like a conflict to you?
Does it sound like double talk?

On the one hand, mutual fund advertisements draw customers with stories of outstanding historical performance yet this very performance is likely not an indicator of future results according to the same investment community. Are mutual funds trying to deceive people or are they just promoting the value of their product?
If you were evaluating a mutual fund without looking at the past performance chart or graph, on what would you be basing your decision? If you did not look at a historical chart at all, would you send your money to that mutual fund?

Information is powerful and it can trump emotion.

Mutual funds advertisements often pick attractive periods to show just how well they can do when times are good. Rather than argue if that is an honest and balanced approach, let’s consider at how it might affect your judgment. Think back to the charts you reviewed earlier in this report. Did the charts going up make you feel better than the charts going down? That’s what advertising is all about; peaking your interest and emotions. Financial decisions, on the other hand, should be based upon information. So let’s examine some more information.
Think back to the four charts again. Here’s some more information about those charts. Each of those charts was actually tracking the very same thing! That’s right, regardless of how you felt about each chart, they all tracked the S&P 500 Index. The investment, in this case, never changed but the manner in which it was displayed to you did. Now we will zoom out and look at a longer period of time.

 

 

The chart above spans 173 months or 14 years, 4 months and a handful of days. The good news is that the index is up over all from where it began. What often surprises people is the actual return. Many people, seeing the advertising and
short-term charts find this fact surprising…

S&P 500 Index has only grown by an average compound annual return of 1.8% during this period that extends more than 14 years.

Exploring Other Options

Equipped with this knowledge, it is reasonable to consider other ways one might grow their money without exposure to volatility.

Certificates of Deposit. According to the Securities and Exchange Commission (SEC)

“When looking for a low-risk investment for their hard-earned cash, many Americans turn to certificates of deposit (CDs). In combination with recent market volatility, advertisements for CDs with attractive yields have generated considerable interest in CDs…”

“When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned…”
(Source: http://www.sec.gov/investor/pubs/certific.htm)

Fixed Indexed Annuities.

These low risk savings vehicles are issued by insurance companies.

According to the National Association of Insurance Commissioners…

“Money in a fixed indexed annuity earns interest based on changes in an index. Some indexes are measures of how the overall financial markets perform (such as the S&P 500 Index or Dow Jones Industrial Average) during a set period of time
(called an index term).”
“The insurance company uses a formula to determine how a change in the index affects the amount of interest to add to your annuity at the end of each index term. Once interest is added to your annuity for an index term, those earnings are usually locked in and changes in the index in the next index term don’t affect them.” (Source: http://insuranceca.iowa.gov/life_annuities/files/AnnuitiesBuyersGuide.pdf)

 

This chart tracks the actual performance of one Fixed Indexed Annuity that was purchased in 1998 through 2013.

*This graph is based on actual credited rates for the period shown on the Index-5 product which is no longer available for sale. Past performance is not an indication of future results. Please call your American Equity Agent for new product information. Check out product disclosure for specific information.

During this period, this specific Fixed Indexed Annuity earned greater than 4.5% (In Green Above). You can also see in the chart above that the Fixed Indexed Annuity enables the owner to sit out negative movements while participating in a
portion of the positive movements in the index (In Yellow Above). You can also clearly see the value of the minimum guaranteed rate (In Blue Above) compared to the performance of the index and the Fixed Indexed Annuity contract value.

 

Get all the facts!

Before selecting any financial product, be sure to meet with a fully licensed and experienced representative so that you understand the benefits and costs associated with the transaction you are considering.

 

Our office stands ready to help you. Just give us a call!

855-740-3140

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Figure 1: This chart tracks the S&P 500 Index from March 20, 2000 through September 30, 2002 as the index moved from 1527.46 to 800.58.
Figure 2: This chart tracks the S&P 500 Index from September 30, 2002 through October 8, 2007 as the index moved from 800.58 to 1561.80.
Figure 3: This chart tracks the S&P 500 Index from October 8, 2007 through March 2, 2009 as the index moved from to 1561.80 to 683.38.
Figure 4: This chart tracks the S&P 500 Index from March 2, 2009 August 11, 2014 as the index moved from 683.38 to 1978.34.

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