INDEXING STRATEGY EXPLAINED

“What goes up must come down.”

This up-and-down phenomenon is not limited to physics—it happens quite frequently on the stock market as well. We can have some exhilarating rides up only to suffer financial broken bones when the market comes crashing back down. But it doesn't have to be that way.

In this article, I’m going to show you how you may just be able to defy market gravity. One of the most exciting things is that you can supercharge the cash value portion of your investment by using a special Indexing Strategy. The Indexing Strategy can allow you to enjoy the upside growth of the market without ever risking your money to market losses! (You can go up without coming down!) In other words, the Indexing Strategy could give you double-digit returns on up years when the market gains, without the downside risk!

This means when the market goes up, your money can grow (I’ll explain more in just a second) but when the market goes down, you are protected and your money cannot be lost. This can be extremely beneficial during times of market turbulence. In years when the market goes up, so does your cash values, and when the market falls, you are protected against that loss. Your money is locked in so you don’t lose!

Now, why is this so important? Because inflation is one of the biggest threats to growing your money and wealth. If inflation is running at 3-5% (or even higher, depending on the government’s monetary policy) it’s important to have your money outpace inflation. If your money is growing slower than the rate of inflation, you aren't growing your money—you are actually decreasing the value of it over time! The Indexing Strategy can allow you to outpace inflation by capitalizing on potential double-digit growth in the years when the market goes up.

During the good years, the stock market is still the best place to get great returns on your investment, but according to historical data the stock market crashes or "corrects" 3 times in 17 years.  These corrections are what will destroy your stock portfolio and can be devastating if it happens just prior to, or during your retirement years.  The experts all tell you not to worry, the market will come back, and IT DOES, over time.  Time you may not have.   While you're waiting for the market to return, you're actually losing valuable time to grow your money.  There's a great short video from Brett Kitchens that explains exactly how much money you're losing while waiting for the market to return.  See it here.

So how does the Indexing Strategy work?

You can either choose one specific strategy or a combination of strategies that a company may offer. Insurance companies usually offer several different strategies but the majority of them involve the S&P 500 or some other index of your choice.  You sign a contract with a company but your cash is not actually invested in the market. That way, your money is always safe and guaranteed by the insurance company.

I'm sure you can remember the different plunges the market had taken over the years and how long it took to recover and return to even. Using the Indexing Strategy you don’t have to deal with that at all! Your money is protected from any market loss because it is not directly in the market, but at the same time, you participate in the growth of the S&P 500 up to a limit or cap.

Let’s say the upside cap is 12% (this can vary from plan to plan). This means even if the market goes up 14% or more, your cash value growth would be limited to just 12%. Having a cap is actually a good thing because this is what allows the insurance company to protect you against losses in those years when the market goes down. Let’s look at a picture that will illustrate this point.

This is a hypothetical example of a typical stock market strategy vs. an Indexing Strategy. So, let’s say you start out with $10,000. And in the first year, the S&P 500 grows by 10%. The first year, there is no difference, and you have $11,000 in either account. In year two, your money grows another 10%. Now you have $12,100 in either account.

But let’s say that in year three, the S&P 500 drops 20%. Can that happen? Sure it can. The last few years of the 2000s were worse times than that! Now you would have about $9,600 if had you invested directly in the S&P 500. However, in the indexed strategy, your principal and interest are protected against market loss. So, now instead of $9,600, you hold at $12,100.

In year four, the market drops another 17%. Now, instead of having $9,600, you have around $7,900. In the indexed strategy, you’re still on hold at $12,100.

Now here’s the million-dollar question: Do you want $7,900 or $12,100? That’s quite a difference, and it’s clear from this example that losing principal can be financially devastating. That’s why Warren Buffet said, “It’s not so much about the return on your money as the return of your money.” When you lose principal, you've got to get big-time results to bring it back to even.

Now let’s look at what happens when the market rebounds. Let’s say in year five, the market grows by 15%.

In the stock market strategy, the $7,900 would get the full 15% growth, which is about $1,100, so your cash value would climb back up to a little over $9,000. In the indexed strategy, your money would only grow by 12% (remember we have a cap) to $13,550. But even with the capped growth, you have $13,550 versus $9,000! Again, quite a difference.

In this example, the downsides of the stock market strategy were:

• After five years, you end up with less money than you started with. 
• From the end of year 4 to year 5, it would take a 30% return to get you back to your original $10,000 (and how likely is that to happen in one year?) 
• Even if you did get the 30% you needed, it will only bring you back to $10,000. You just lost five years and you are just barely back to even. 

Can you see why the Indexing Strategy is so exciting? Now you can have your money growing when the market goes up, you could outpace inflation with potential double-digit gains, and you never have to worry about losing money when the market goes down. What kind of peace of mind would that give you, knowing that your money is always safe?