One of the biggest fears people face in retirement is running out of money. Even people with high savings have this concern. With the recent market swings due to the Corona Virus (Covid 19), these economic fears are becoming more pronounced.
As a financial planner, our job is to help people face these concerns and reduce the risk associated which will reduce some of the fears they face.
Investing in Today's Market
When looking at investing in the market, people often consider the DOW Jones or the S & P 500. The Dow Jones Industrial Average is a market index of 30 blue-chip U.S. companies covering most sectors of the economy, except transportation and utilities. The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies.
In looking at past performance of the S & P 500, you will notice the average return ranges from 9.3% to 10.8% depending on your holding period (how long you leave the money in the market). The range of returns is another story, the shorter the time frame, the larger the range of results. The method of measuring this range of results is called Standard Deviation.
Standard Deviation is useful when measuring relative risks. If you can assume a normal distribution of results, 66% of the time you get a return within 1 standard deviation from the mean or average. 95% of the time the results will be within 2 standard deviations. Therefore, if you know what the average and standard deviation of an investment is, you can get a feel for the likely hood of achieving a result.
If you plan on leaving your money 'in the market' for 20 years, you can expect an average return of 9.3%. But remember, 1/2 of the time you should expect to get less and 1/2 of the time you should get more. In order to feel more confident in your projection, you should lower your expectation of return. For example, you have an 80% chance of beating a 6.7% return.
What Can Your Clients Do to Reduce Risk?
One can reduce risk by diversification. I would leave that to the investment experts. However, there are few if any options you have that can protect you from losses.
What if there was a way you can put money away that gives you a guarantee that you wont lose money when the market drops, but gives you some of the market upside? The insurance industry has such products. Index Annuities and Indexed Universal Life products provides an upside gains with downside protection. Another form of diversification would be to consider moving some of your assets into products that provide that protection.
Advantages of Insurance as an Asset Class
Most of us have experienced a market correction, and feel that we will experience more of them in the future. Wouldn't it be nice to be in a position where we can benefit from the next one?
After a correction is the best time to put money in the market. If you had some of your money in an indexed account, one that gives you the ability to borrow at any time, you could be in a positions to mitigate some of its affect.