What are the options in the world today for investing? Let’s talk about the US Dollar, Real Estate, Bitcoin, Bonds, and Annuities at a higher level and break down the important notes about each in today’s video.
There are so many options today for things you can invest in, that’s for sure. As a licensed financial professional, I make it my job to learn about the constantly changing landscapes of today’s markets. These are essential basic concepts to understand first about investments and even the currency itself. The US Dollar is the worldwide standard and has been for a long time now. The world is getting smaller, the global economy is changing, and we are starting to see cracks in the supremacy of the US currency; for the first time. Saudi Arabia is seriously considering using the Chinese Yuan instead of the US Dollar to sell its oil as it’s been done now for over 30 years. To make matters worse, according to Nasdaq.com, as of March of 2021, a year ago basically, “all-in money printing totaled $13 trillion: $5.2 for COVID + $4.5 for quantitative easing + $3 for infrastructure. Mountains of money cause inflation. Inflation causes increases in interest rates, lowering bond prices. And increases in interest rates cause reductions in stock values.” When inflation goes up, you can think of it as an invisible tax on your money, that additional 7 or 8% inflation is a permanent tax on all Americans’ money that you now have to account for when you do your budgeting henceforward. It’s why your money is actually not growing but actually decreasing in value when you leave it in the bank at 0.05% interest or less with a lot of banks. Any country can essentially also keep printing or making available more of their local currencies, therefore, making them less and less valuable over time.
I like investments that are a finite resource, meaning they can’t make any more of it. Examples of this are apparent, like gold, silver, and other precious metals. Less obvious to many is Real Estate and one other that I will mention later. Real Estate, by the way, is a finite resource because we only have so much land on earth, and people want to live in locations where that land area that can be developed is shrinking rapidly. Think of areas like the Silicon Valley in the San Francisco Bay Area for example where if you can find a 3 bedroom 2 bath house for under $1.5million then it’s a steal. A research note from last year from Deutsche Bank ranks Bitcoin in the top three world currencies by market cap of its circulation, behind only US Dollar and the Euro. I didn’t know this until recently, but Bitcoin is also a finite resource because when 21 million Bitcoins have been mined, that is it. Not a single Bitcoin can be mined ever again after that. This makes even Bitcoin a good hedge against inflation and a reason I have started adding it to my own personal portfolio as I have with the aforementioned precious metals and Real Estate.
Another two types of investment that I would like to mention today are bonds and annuities. According to Forbes Magazine, “The older and closer to retirement you get, the less risk you should be taking in your portfolio, generally speaking. The old rule of thumb was to take your age and place that much in bonds and the rest into an equity portfolio. And over the last 30 years or so, bonds have done well in an environment with steadily declining interest rates. Bonds and interest rates have an inverse relationship: If interest rates go up, bond prices will decrease in value, thus having the portion of your assets underperform or even have negative returns, which can’t keep up with inflation. Of course, if interest rates continue to go down, bonds would actually rise in value. This is the scenario we’ve seen over the past 30-plus years. At the time of writing this article in December 2019, the 10-Year Treasury is yielding 1.83%.” The problem is, now the forecast is for interest rates to start climbing again, at least for the next year in 2022. So even before the interest rates started to climb, the Forbes article asked the question, are Bonds the best investment to prepare for retirement today? The article continued on to say this, “The closer you are to retirement, the more likely you are to place more of your portfolio into a more conservative financial vehicle that can still grow some but is also protected from market fluctuation. One way of doing this is by purchasing a fixed index annuity. Over the last decade, fixed index annuities which from here in out I will refer to them as FIAs have become a popular financial vehicle for many who are either at or close to retirement. So if you may be wondering if a fixed index annuity would be beneficial to your retirement portfolio, so let’s look at the pros and cons.” Because I always like to share the pros and cons of any investment to see if it’s right for either you or me.
So let’s first review the pros. “Fixed index annuities have the ability to earn interest tied to the performance of an external market index, such as the S&P 500, without ever being invested in the market. These products have limits on what you can earn, so you don’t receive all of the index gains, the interest you receive will likely be less than the index, and indices do not include dividends. FIAs are conservative financial products and are often used to protect a portion of your principal. When your market index goes down, the worst that can happen is you have zero interest for that year. If the index goes higher on your contract anniversary, you can participate in a portion of the gains through index credits. Most fixed index annuities offer several index and fixed accounts options. You can choose to change indexes or move to fixed accounts as often as once a year. Additionally, fixed index annuities usually do not have annual management fees. The issuing insurance company employs caps, participation rates, or spreads to limit the amount of interest credited to your account in exchange for protection from stock market index losses. Bear in mind, however, that some FIAs offer optional benefits or riders such as guaranteed income or payout rates indexed to inflation, which might come with annual fees. Outliving your income is a primary concern for many retired investors. A core feature of FIAs is a lifetime income rider that in many cases can be for single or joint lives usually starting around 5% per year and up based on the age of the investor.”
Ok, those were the pros; now time to review the cons. “With all the benefits of less market risk, there are a few drawbacks to owning a fixed index annuity. A risk of purchasing an FIA is a loss of buying power. Your principal is always guaranteed by the insurance company, so in the years that the index has negative returns, your principal does not go down, your investment has zero interest gains.” Now although this sounds like a con, consider that if this money was in any other account outside of the FIA invested into say for example the S&P 500, then you would have to eat those losses. I would rather have my money locked in at 0 gain that year and not lose a penny than to have it drop a larger cash value than it had made the previous 10 years in just one bad year, think 2008 during the mortgage crisis.
OK, back to the article. “Once you purchase an annuity, you are locked into the product for a set number of years, referred to as the surrender charge period; this is dependent on the specific annuity, but you can expect any length of time from three to 10 years. Should you choose to withdraw any of that money, you will be subject to what is known as a surrender charge or surrender fee. Also, all withdrawals from your annuity will be subject to ordinary income taxes. Surrender charges, based upon the length of time you choose to keep your money in the annuity, cause you to lose money if you surrender the contract prematurely. There is generally an amount you can withdraw each year, usually 10%, without surrender charges. If you decide to purchase an annuity, be sure to have some liquid money set aside should an emergency or situation arise that would require immediate funds. With interest rates and bonds yielding almost inflation-like returns (again back when this article was written), fixed index annuities are becoming a popular alternative for part of the fixed income portfolio. If you believe a fixed index annuity could benefit your retirement needs, talk with an experienced financial professional today!” And that’s right; I am a licensed financial professional now in multiple states, California, Texas, North Carolina, New Jersey, and now Florida.
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