Thread by @roncaruthers

1. The power of indexing for your investment strategy.

Thread.

One of the themes I try to write about is NOT having all your money in the stock market.

The last 3 or 4 weeks should give you a good idea why.

Markets go up....until they don't.

So, what do you do with the rest?

2. I use a strategy called 'indexing'.

NO, it is NOT buying index funds, because they just follow the market.

Here is how it works:

You have to set up this strategy with an insurance company.

Before you respond about 'hating insurance', you might want to read this

3. Here it is in a nutshell:

You get several strategies to choose from that all have one thing in common:

You get the upside of the market (when there is one) & your gains are locked in each year.

When the market goes down, the worst you get is a 0% rate of return.

4. So, in those years, you don't make anything, but you don't LOST anything either.

Including what you've already made.

AND, each year the strategy resets, so, if the market suffers a big loss one year, you keep all your money.

Better still:

5. Each year, the index resets, and your gains the following year are measured from the lower starting point.

So, and this is super important: YOU DON'T HAVE TO WAIT FOR THE MARKET TO GET BACK TO BREAK EVEN TO MAKE NEW GAINS.

Yep, I DID just go FULL CAPS on you.

6. Again, you get the upside of the market, none of the downside, your gains are locked in each year, and you can make NEW gains, while everybody else is still trying to get back to break even.

What's the catch? Of COURSE there is a catch.

Here it is:

7. Anytime anyone is going to limit your losses, they're going to put restrictions on your gains.

So generally speaking, you get none of the downside of the market, and maybe 60% of the upside.

Market goes up 20%, you get 12%.

But market drops 30% (like it just did), u lose 0.

8. So, here is an example of a TERRIBLE indexed account that caps all of your gains at 5%

(this is NOT the type of indexing I use for my clients at all....I'm just making a point.)

9. If you put $100,000 into an account that gives you a max of 5% a year tied to the S&P 500 gains,

but no losses,

And you put the same $100,000 in a Vanguard 500 index

(remember, this is different than indexing where you're protected. This just buys 'the market')

10. Starting in 1999, here is how it would have worked.

For the first 3 years, the protected account would have had 0% returns.

So you would still have your $100k

The mutual fund would have lost 41% of its value, so you would have $59,000.

11. The next year, the market rebounded, so you would have gotten a 26.4% return with the mutual fund.

But only on $59,000...so, you're back at $76,000.

Your indexed account made 5%, but on $100,000, so you have $105,000.

12. The following years the market made 9%, 3%, 13.6% and 3.5%

With the mutual fund, you've had 5 years in a row of gains, 2 of them double digit gains...

......and you're not even at breakeven.

You have $99,939.

Then 2008 hit, and the market dropped again by -38.5%

13. You're right back to $61,477.

Back where you were 5 years earlier.

It's like playing Chutes and Ladders, but with your money.

How did the Indexed account do over that time period?

Well, over those same years, you would have gotten 5%, 3%, 5%, and 3.5%.

On ALL of your 💰

14. So, when the next market crash hit, you would have had $123,445.

And you wouldn't have lost a penny of it.

And they cycle would repeat itself:

Another 5 years to get back to the money you started with over a decade earlier, vs. making new gains consistently.

15. It would take until the end of 2017 before the mutual fund would finally (17 years!!) catch up to my protected account.

But, remember what happened the end of the 2018?

How the market dropped 25% over the 4th quarter?

So, the MF would drop back below the protected account.

16. Final score at end of 2018:

'Safe' account: $173,700

Mutual fund: $170,621

And, the safe account was ahead of mutual fund for 18 out of 19 years.

And, remember, I use strategies that are NOT capped at 5%, so the real difference would be much, much greater.

17. It's like Warren Buffett said: The first rule of money is 'don't lose money'.

The second rule is NEVER forget the first rule.

Or as another famous American (me!) said:

You win more by losing less.

BTW, that applies to more than just your money.

18. You can put this strategy to work inside an IRA or a 401k, or you can set it up with after tax dollars.

And I'm somewhat caught up, so if you have questions, feel free to ask here, or DM if you want to discuss specifics.

I'm booked for next week, but have space after.

19. Another time, I'll explain why I use this strategy in the place of bonds, and I why I hate bonds.

But this isn't for ALL your money, but for example, if half of your money is here, you've reduced your risk by half, while coming out with a very similar return.

20. Like I said:

Win more by losing less.

/end