Advisor Today - November/December 2015 - (Page 27)

product spotlight INVESTMENTS By J. Leland "Lee" Davis, LUTCF Protecting the Downside with Allocation Adjustment Here is how to help your client limit losses and maximize gains for his retirement. A s a financial advisor, what if you could help your clients invest directly in the U.S. stock market and at the same time protect their principal from precipitous future declines? Even more, what if in doing so, you improve their odds of not running out of money in retirement? As you know, major mutual fund companies have marketed mutual funds that mimic the S&P 500 index (an "S&P 500 fund") for decades. For investors preferring tax deferral, insurance companies routinely offer variable annuities that utilize these and other fine investment companies with similar subaccount constituents. Millions of investors have wisely placed billions of dollars in these products. The reason: excellent average annual returns. From 1928 to 2014, the average annual return for the S&P 500 was just over 10%, a fact investors often cite with glee. But some of those same investors have learned a very painful lesson during steep market declines. For example, let's take a hypothetical client we'll call Mark. He retired and invested his $1 million nest egg in an "S&P 500 fund" on March 24, 2000. By October 9, 2002, Mark had seen the index decline some 49%, and watched his $1 million investment plummet to just $510,000. The plans Mark may have had for his retirement, especially if he needed a portion of the money annually to supplement his income, would have been in tatters. Or what about a hypothetical client we'll call Mary, who retired on October 9, 2007? Her same $1 million dollar kitty would have witnessed a 57% reduction in value by March 9, 2009, less than 18 months later. With only $430,000 remaining from her million dollars, Whether in a VA structure or used with mutual funds or ETF portfolios, the allocation-adjustment method can be very effective. her retirement plan would have been devastated, as well. So how could Mark and Mary have navigated such tumultuous times and preserved their capital? By watching and responding to a simple data point: the one-year moving average of the S&P 500 index. This method, called "allocation adjustment", moves equity investments to the relative safety of money market funds when the S&P 500 index closes below its one-year average as of any month end. When the S&P 500 index subsequently moves above its oneyear moving average at any future month end, all funds go back into equities. Importantly, the strategy is not "market timing", since it relies on only one data point with entry and exit parameters clearly defined. If it sounds simple, it really is. To gain a perspective on the effectiveness of this method, the chart below illustrates the strategy results since 1995 after a 1% annual management fee, plus a subaccount fee of .35% for a total of 1.35% in fees: cont'd on page 28 November/December 2015 | ADVISOR TODAY 27

Table of Contents for the Digital Edition of Advisor Today - November/December 2015

From the Editor
New Products
In Step with a Winner
Finding Success in the Chinese-American Market
Dealing with Client Confidentiality
Hashtag Your Way to Social Media Relevance
Starting the LTCI Conversation
From Term to Perm
Protecting the Downside with Allocation Adjustment
Jules Gaudreau: A NAIFA Success Story
Helping Clients Cope with Market Volatility
NAIFA Government Relations
Working with Single Women
Financial Planning FAQs of Small-Business Owners
Three Retirement Conversations to Have with Clients Today
The Advent of Robo-Advisors
Moving into the Retirement Space with 401(k) and 403(b) Plans
Moving the Sales Process Forward
Cultivating the African American Market
The Lighter Side of LIfe
Advertiser Index
Back Page

Advisor Today - November/December 2015