Working hand in hand with the floor to protect you from losses are two very important features of these accounts:
Annual Lock In of Gains
and
Annual Reset of
Your Index Position
Annual Lock In of Gains
Every year you will receive a simple annual statement. This will show the interest credited into your account based on the performance of your chosen index. ( S&P 500, Nasdaq 100, FTSE 100 etc.)
Any gain you receive now “Locks In” and becomes part of your principal. They are now part of your account and cannot be lost in future years due to market downturns. You automatically get to keep the gains from the up years and take none of the losses from the down years. This is very important because what good are short term gains if you are only going to lose them long term?
Here’s an example: One of our clients recently had a gain of 9.69% from April 2006-April 2007. Those gains now “Lock In”. Next, from April 2007-April 2008 the index dropped nearly 8%. So instead of wiping out the gains from the previous years, they didn’t take any losses, kept the gains from the previous years, and took a zero for that year.
Annual Reset Of Your Index Position
In the previous example our client took a 0% return for the 2007-2008 period instead of the actual 8% market loss. Now their Index Position automatically resets to the low point. So, in 2007 their index starting value was 1437.77. Their ending value in 2008 was 1369.31. This becomes their new starting point and they are automatically positioned to take advantage of market rebounds.
In a traditional investment like stocks or mutual funds, you have a long way to go just to get back to even. Here’s a simple example: You bought a stock at $100 per share and then it dropped to $80 per share. You are not making any money until you get back to the $100 per share price you started at. You need a 25% increase just to get back to even.
But in the equity index account you don’t have to make up any ground. You would “Reset” to the low value at $80 per share and be able to capture all the gains on the way back up. You are automatically positioned to take advantage of a market rebound and any returns you get in the future are actual gains.
