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If You Can't Beat Them: Join Them Invest in the Markets Without Being a Victim

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The equity markets around the world have recovered a large portion of their previous values. Yet, for most people they are not even close to their previous account values. It is simple math. If you ...

The equity markets around the world have recovered a large portion of their previous values. Yet, for most people they are not even close to their previous account values. It is simple math. If you lose 40% of your savings you have to earn 67% on what's left to get even.

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    If You Can't Beat Them: Join Them Invest in the Markets Without Being a Victim  If You Can't Beat Them: Join Them Invest in the Markets Without Being a Victim Document Transcript

    • If You Can't Beat Them: Join Them Invest in the Markets Without Being a Victim  <br />The equity markets around the world have recovered a large portion of their previous values.  Yet, for most people they are not even close to their previous account values.  It is simple math.  If you lose 40% of your savings you have to earn 67% on what's left to get even.  The faith in our markets that existed for generations is shattered.  United States Securities and Exchange Commission Chairman, Mary L. Schapiro, underscored the importance of the markets to our economy and every individual when she said:<br />Equity markets are a vital engine of economic growth. Our markets have a profound impact on the rate at which our economy grows and creates jobs. And, they have an impact on the welfare of millions of individual Americans looking to save for college or their retirement. From Speech Given at Economic Club of New York, New York, September 7, 2010. <br />The recession has been over since June 2009 according to the National Bureau of Economic Research, and the S&P index (as a measure) gained 22% over that time period.  Yet there is a strong and persistent sentiment that we are still suffering though challenging economic times.  The uncertainty caused by the shock to the financial system has pervaded every aspect of the financial world.  The result is that many investors who would normally be putting their money to work in the markets are sitting on the sidelines holding cash.<br />Chairman Schapiro went on to say,<br />But, if the equity market structure breaks down — if it fails to provide the necessary and expected fairness, stability, and efficiency — investors and companies pull back, raising costs and reducing growth.<br />The equity markets are still the most efficient vehicle for investors to realize gains on their investable assets.  Economist Eugene Fama said,<br />I take the market efficiency hypothesis to be the simple statement that security prices fully reflect all available information.<br />Economists refer to this hypothesis as the efficient market hypothesis or EMH.  The bottom line of EMH is that stock pickers cannot gain a superior return once the costs of achieving the gains, including salaries, information costs, and trading costs, are factored in.  Warren Buffett summed it up perfectly when he wrote in his letter to Berkshire Hathaway investors,<br />The burden of paying Helpers may cause American equity investors, overall, to earn only 80 percent or so of what they would earn if they just sat still and listened to no one.  <br />The dilemma facing investors today, especially in light of the lessons learned over the last three years, is how to access the markets which are efficiently priced and will provide predicable long term returns without the costs of " Helpers" or unacceptably high risk of loss. <br />The answer comes in the form of indexed funds which aim to replicate the returns of an index such as the S&P 500.  There is nothing groundbreaking in the concept of indexed funds.  The first indexed fund was started in 1975 to track the S&P index.  The fund started with $11 million of assets and by 2010 had exceeded $86.8 billion.  You would recognize it as the Vanguard 500.  Indexed funds allow the average investor to remove the cost inefficiencies of stock or mutual fund selection from their investment process, while still gaining access to a diverse portfolio of underlying equities.  Warren Buffett, who has accumulated a fortune in excess of $37 billion dollars making savvy investments through Berkshire Hathaway, strongly recommends indexed funds and has stated so publicly on numerous occasions.  He even discussed it with Matt Lauer on June 2, 2010 on the Today Show.  When asked if he only had $1,000 to invest and what would he do with it, Buffett replied that he would put it into an equity indexed fund and sit on it for 20 years.<br />As good as index funds are for the average investor, there was still the problem of being exposed to large loses should the index experience a correction like it did in 2008 and 2009 when many people suffered losses of 40% or more.  The solution came from a surprising resource:  Insurance companies. <br />Insurance companies already offered annuities and life insurance with various yield formulas tied to equity indexes.  Then they added to their existing products a minimum guaranteed earnings rate, commonly known as a " floor return."   The result was an investment vehicle that takes advantage of the efficiencies of equity indexed funds, but eliminates the potential for huge losses, all with the backing of a highly regulated institution which must carry sufficient reserves to honor its commitment to investors.<br />I analyzed numerous client portfolio performance over the last ten years, compared with other clients who had put their dollars into equity indexed annuities and life insurance over the same time period.  The results were eye opening.  A client who invested $100,000 in December 1999 into an unprotected portfolio had an average account value of $65,000 in December 2009.  The best cases we found showed the client's account value over the last ten years ended right where the client started, at $100,000.  Perhaps you've heard of the " lost decade" ?  When you factor in inflation over the last ten years, $100,000 of 1999 dollars was worth only $76,000 in <br />2009, inflicting a loss of 24% on the clients who " broke even" over the last ten years.  Clients that heeded conservative advice ten years ago and put their savings into an efficient indexed annuity or life insurance policy that provided a guaranteed minimum crediting rate ended the decade with average account values of $166,000, a cumulative gain of 66% versus zero or worse for other clients.<br />Now, more than ever, investors face serious challenges when investing in the equity markets.  The Helpers that have built an industry out of trying to beat the indexes may still have a place in certain circumstances, but serious questions exist about their performance and cost over time when compared to equity indexed investing models.  When you add the guarantees that insurance companies provide to equity indexed yields, a compelling case of the best of both worlds can be presented — upside equity yields of 8% to 12% with protection from loss.<br />The use of equity indexed products as a reaction to losses suffered in the market is widespread and the trend is gaining momentum.   More than 50 percent of equity indexed life insurance is already used by boomers, according to a 2009 Milliman research study on universal and indexed universal life.  See “Baby Boomers Change the Course of History"  by T.J. Agresti.  The simple answer to why so many are using equity indexed life insurance is the safety and security of asset with protection of principal on the cash building up, which can be used while still living and the comfort that the legacy desired for beneficiaries will also be there.<br />Bottom line:  When you need an investment vehicle for retirement or to build wealth, consider equity indexed annuities.  Consider equity indexed life insurance when you need life insurance for your estate plan, income replacement, buy-sell plan, deferred compensation plan, or charitable giving plan.  There are a wide range of annuities and life insurance choices.  The Aegis Group of companies can facilitate your planning and help you decide on the right vehicle for you and your family to achieve your goals. <br />___________________________________________________________<br /> <br />More information on Thomas Agresti can be found at http://aegiscompanies.com.<br />T.J. Agresti, CEO, Founder, and Chairman of the Board, Aegis Holdings, Denver, Colorado<br />Thomas Agresti, JD, LLM, from Denver, Colorado, began a successful career as a tax attorney after finishing an extensive and well-planned education that included the University of Maryland, <br />Seton Hall University School of Law, University of Parma School of Law in Italy, and University of Denver School of Law.  He is currently registered with the Bar of Colorado. <br />In law school he focused on taxation and transactional law.  He also went to Italy to understand the intricacies of international law and finance, again with a focus on taxation and transactions.  He then took his taxation skills to the ultimate level, receiving a Masters in Taxation from the University of Denver School of Law.  He immediately became a highly sought-after professional with a rare educational background.  He chose to work with a large multinational public accounting firm, due to the extensive tax and transactional experience he could gain in a condensed time period.<br />While a taxation specialist for a " Big Six" international accountancy firm, he specialized in domestic and international strategic tax planning or, quite simply, how to reduce a client's overall tax burden.  His responsibilities also included financial and estate planning, income, gift, and estate tax reduction, compliance for individuals, trusts, and estates, partnerships, corporations, and tax-exempt entities.  After leaving public accounting he practiced tax law with a boutique law firm before forming his own firm.  He has lived and worked overseas representing a broad range of clients.  He has practical experience planning and implementing multi-national transactions, sophisticated wealth transfer planning, sophisticated life insurance structures, captive insurance, private equity, and structured debt instruments.<br />