The Worst Investment You Can Make
Last week’s column was advice about how to handle and prepare for the next bear market.
That prompted a response from a reader in the comments section that investors should bail out of the stock market now and put their money into annuities.
He warned, “When the market goes south it takes 16 years to recoup your losses because you lost the interest on the money you lost also.”
There’s a lot of bad advice on the internet, but this is about as wrong as I’ve ever seen.
Sixteen years? He must live in Colorado or California because he’s clearly smoking something.
If you had impeccable timing and took $100,000 out of the market at the very top in 2007 and put it into an immediate fixed annuity that guaranteed 6% growth per year, you would have avoided the meltdown in 2008 and generated $8,487 in annual payments.
Ten years later, the principal would be worth $64,168. Add that to the $84,870 received in payments and you’d have $149,038. You’re also guaranteed another $84,870 in payments over the next 10 years, at which point your money is gone and the payments stop.
Compare that with if you had left your money in the market. In 2008, your $100,000 was worth a lot less. But in less than five years, you were back to breakeven – and that’s breakeven from the top. You probably didn’t put all of your money into the market at the very top.
But if you did have lousy timing and invested right at the very top of the market in 2007, your $100,000 would be worth $225,220. And more importantly, your principal isn’t guaranteed to decline every year as it is with an annuity.
If your $225,220 was invested in a portfolio of Perpetual Dividend Raisers – stocks that raise their dividends every year, with an average yield of 4% per year – you’d earn $9,008 in income. As the dividends increase each year, so does your payout. And better yet, after 10 more years, you’ll still have all of your principal.
Markets go up over the long term. We know this. In fact, over rolling 10-year periods, the market has been down only seven times over the last 80 years. And those down periods were the 10 years ending in the middle of the Great Depression and Great Recession.
But usually, if you waited just a year or two, you made money again.
In the 10 years ending in 2008, the S&P was down 9%. Same with 2009. But if you had invested starting in 2001 and ending in 2010, you not only suffered the gut punch of the 2008 financial crisis, you also bore the brunt of much of the dot-com collapse. Yet you still would have finished the decade up 12% (including dividends).
Granted, 12% isn’t much over a 10-year period. But after two epic bear markets, a positive finish shows you how resilient the market is.
Annuities, on the other hand, are terrible investments. They cap your upside and are very expensive. The fees and commissions are huge and lower your return. And some annuities don’t pay your family back all of your money if you pass away before the annuity is completely paid out.
I can already hear the clatter of the keyboards from people who sell annuities and those who’ve bought them and believe in them.
Here is the proof that these investments are garbage.
In April 2016, the Department of Labor issued what is known as the fiduciary rule. It means that brokers must act in their clients’ best interest. Surprisingly, that’s not the case right now. Brokers can sell you anything. The good ones already act in your best interest, but not all brokers are good ones.
The rule was expected to be implemented in 2018, though the Trump administration has postponed the law until July 1, 2019. It is expected that the president will get rid of the rule entirely by then.
After the rule was passed, annuity sales fell 8% in 2016. In the fourth quarter of 2016, sales of annuities tumbled 18%. And variable annuities, which are the worst of the worst, saw sales crater 22% in 2016.
Keep in mind, the law hasn’t even been implemented yet. Even so, annuity salespeople are running for the hills rather than selling these BS investments to people for whom they’re not appropriate.
If these were such great products, we would not have seen such a rapid decline in sales after this rule was passed.
For some people who need the certainty of guaranteed income and no risk to their capital, annuities serve that purpose, albeit very expensively.
For everyone else, you’re better off keeping your long-term money in the market and taking out any funds you’ll need in the next three years. Your money will continue to grow, and you’ll wind up with more over the long term.
P.S. I write extensively about the danger of annuities and other popular investments in my new book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners. In it, besides steering you away from rip-off investments, I detail unique and simple ways you can generate income and reduce expenses. I don’t tell you to downsize your house or clip coupons. Rather, these are easy ways to save money while still doing the things you like to do, the way you like to do them.
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