A couple weeks ago a fellow financial professional was telling me that one of his client’s husbands was repeatedly giving his client a really hard time about using one of our secure retirement tools to protect her money.
Her husband had ONE year where he experienced higher gains than her and apparently that qualified him as a genius in the world of finance.
That same day, my friend also shared a comment with me that he saw on social media where someone said their money would be better off sitting in the S&P 500 than in the tool my friend’s client was using. People say all types of things online and will often attempt to portray that they’re speaking with some sort of authority on subjects they actually know nothing about.
Well, the funny thing about both his client’s husband’s repeated nagging comments and the social media comment is that we can actually run the numbers and see who is right. So I did. 😉 (See below)
LET ME TELL YOU ABOUT THE TOOL IN QUESTION…
As simply as I can explain it, you don’t expose yourself to ANY of the losses in the stock market. That means that if the S&P 500 has negative returns then it doesn’t affect you at all. You don’t have any gains, but you also don’t have any losses like your friends can have who are in the market.
Because you can’t take any losses, you can’t also expect to take all the gains. That wouldn’t be fair. So to make it fair, your gains are capped.
The tool my friend’s client is using has a cap of 10% on the S&P 500. Here’s what that means…
- If the S&P returns 7% then his client receives a 7% gain.
- If the S&P returns 12% then his client receives a 10% gain (because 10% is her cap rate).
- If the S&P returns -20% then his client receives a 0% gain (because she can’t take a loss).
With his client’s 10% cap rate in mind, I ran the hypothetical 10% cap from the year 2000 all the way through 2023 and the results didn’t disappoint.
*Important note: I do not know what the cap rates were for his client’s particular tool in the year 2000. I only know what they were from the time she started using it to now (which has been 10%). One other thing, the S&P 500 isn’t the only index she can follow. She can use multiple other indexes and even some without any cap on gains, BUT to keep things simple for an illustration, I ran the numbers as if she followed the S&P 500 all 24 years with the same cap rate of 10% and here are the results:
In red you can see the actual price return of the S&P 500 from 2000 to 2023. In blue you can see the actual S&P 500 returns with a 10% cap.
Each year where the S&P 500 experienced a loss, the tool using the S&P 500 with a 10% cap just stayed flat (because the losses are capped at 0%).
Each year where the S&P 500 experienced a gain of less than 10%, his client would’ve received that entire gain.
Each year the S&P 500 experienced a gain of more than 10%, his client received a 10% gain.
In both scenarios, the client started with $100,000 and at no point in the entire 24 years would his client have been better just putting her money into the S&P 500 in this hypothetical.
HERE’S WHY THAT’S THE CASE…
When you take losses, you have to have to make up for those losses before you can start experiencing gains and in the years 2000, 2001, and 2002 the S&P 500 experience a series of negative returns. It also had a massive negative return of nearly 40% in 2008. So from 2000 to 2013, if you had invested in the S&P 500, you would’ve spent nearly 13 years just getting back to breakeven.
We don’t have to look back that far though to determine if the opponents of this tool are right. We can just look back over the past year and a half (when my friend’s client began using this tool) to determine if her money would’ve experienced better returns in the S&P 500 or in the tool she’s using had she allocated all her money in this tool to follow the S&P 500 with a 10% cap. I ran those numbers too and guess what, so far, she made the right choice in this scenario:
As you can see from the chart, I used the same hypothetical $100,000 for each option. In year one (2022), the S&P 500 dropped by 19.44%, which means had she invested her money in the S&P 500 she would’ve lost nearly $20,000 right away. With the tool she’s using, she didn’t lose a dime because she isn’t subject to market volatility. Her losses are capped.
In year two (2023), the S&P 500 gained 24.23%, which means had she invested her money in the S&P 500 she would’ve recouped her losses, but she would ONLY have a net gain of $80 over two years! With the tool she’s using, she would earn 10% (the full amount that she can earn). She didn’t have to spend 2023 making up for the prior year’s losses. She started experiencing growth right away and in this hypothetical she is up $10,000 instead of the $80 she would’ve been had she invested her money in the S&P 500.
We are halfway through 2024 and still, as of July 1, 2024, she would still be ahead using the tool she’s using. In fact, she’d be roughly $6,500 ahead and she doesn’t have the stress and worry that comes along with being exposed to market volatility.
If you’re interested in exploring what this tool could look like in your portfolio, let’s talk.
