All of the accounts we use have a built in “Floor” to protect you from stock market losses. You cannot lose money due to market downturns.
Floors can vary but the most common floor is 0%. This floor guarantees your retirement and investment dollars against loss. If the stock market is down 10%, 20% or 30% for the year, your account will show a 0% rate of return for that year. The trade-off for the safety is a “Ceiling” or maximum cap on gains. Caps can vary on different accounts and can change due to market conditions. As of May 2008 most caps are around 28.8% annually.
We never know what the stock market is going to due and a 28.8% gain right now is very unlikely. However, the market was doing very well from 2004 to the middle of 2007. During that time these accounts were crediting in 10-20% per year. That is a very high yield without risk or fees.
Here is some historical data. This chart shows a direct investment into the S&P 500 vs. one of our Equity Index Accounts with a cap and floor. In this example we are using a 1% minimum floor with a 15% cap.
Take a look at 2003. The market was up 40.25%. In the equity index account your gains were capped at 15%. The first response is to think “Wow, I’m losing out on a lot of upside.” But as you look closer, even though the market was up 40.25% in 2003, it was DOWN 45.5% from 2000-2002. Because of the floor, you didn’t take any losses in those years. You didn’t have to make up ground just to get back to even. You also had a lot less stress because you didn’t have to watch your portfolio loose over 40% of its value by the end of 2002.
