As a novice investor, you probably recognize that the market never moves only up and down, When you look at a chart for a specific stock, fund or index, they travel sideways as they travel the course of time.
Let’s pretend that each year there is an alternating 10% gain and loss. Could this really happen? Absolutely not. But this serves as a great teaching tool. Let’s also assume that the initial account value is $1000.
Here is what is interesting. If an account performed like this, with a 10% gain in year one, a 10% lossin year 2 and then alternated back and forth for 10 years, it’s average return at the end of the 10 years would be ZERO. But when we look deeper the ACTUAL return would be negative 4.9%. That’s right, you have now lost money in a ZERO average return performing investment.
But the market was flat. Right? Well, no. A flat market is defined as “A securities market in which there has been no tendency either to rise or to fall significantly. Also called sideways market.”The key is NO tendency to rise or fall.
The average return and the actual return will never equal one another when the negative numbers are factored into the equation. When you look at this example it would make more sense to have put the $1000 into a coffee can and opened the can 10 years later.
There are financial principals that protect your money in the exact example I have shown you above. This principal implements the power of zero in it’s calculation, protecting your principal and giving you a positive return in the end.
Year 1 +10% $1,100
Year 2 – 0% $1,100
Year 3 + 10% $1,210
Year 4 – 0% $1,210
Year 5 + 10% $1,331
Year 6 – 0% $1,331
Year 7 + 10% $1,464.10
Year 8 – 0% $1,464.10
Year 9 + 10% $1,610.51
Year 10 – 0% $1,610.51
How would it feel to live through the same situation and look at the account statement and see $1,610.51 int he account. That’s right. $1,610.51. $659.50 Actual money in the same Average period of time. Oh, by the way, that is an actual gain of 61% compared to an actual loss of -4.9% in a Zero average return market.
Add to this the effect of annual fees along with future taxes and you could end up with much less than you originally projected.
Do you see the power of Protected Growth Indexed Strategies? Are you starting to see how wealth is created? If you would like to learn more I will be happy to introduce you to an adviser that will help you out.