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Everyday we get reports in the newspapers, magazines and on TV about how you can make a ton of money in the stock market. You’ll hear how the S&P 500 Index closed at its highest point ever. How, if you had invested in this mutual fund, you would have made 46.84% last year. Or, if you had been invested in this mutual fund over the past twenty years, you would have made 349%.
Just a few months ago, in May 2008, we were reading headlines from the sensationalistic press like: “Broad S&P 500 Hits Record High!” (Washington Post); “S&P's Long-Awaited Milestone!” (Newsday); “New Record for a New Era!” (USA Today).
It’s time to tell the whole truth, and try to put investing in theStock Market into its proper perspective!
Let’s start by talking about what’s really happened with the three major US Stock Market Indexes over the past twenty years.
S&P 500 IndexAt the end of 1988, the S&P 500 Index was at 277.72. It started climbing rapidly during the 1990s, in one of the best times ever for the US stock market. The S&P 500 set a record high of 1,527.46 on March 24, 2000, at the peak of the dot-com boom, and then quickly lost 49% in less than three years. It hit bottom at 776, on Oct. 9, 2002. It took over 8 years to recoup all of the losses it experienced in 2000, 2001 and 2002. It didn’t get back to its original high point until May 30, 2008 when it closed at 1,530.23. And, now the market is plummeting again. As of October 31, 2008 the S&P 500 had dropped to 968.75. How much further will it decline? Who knows? How much money will people lose this time?
The S&P actual rate of return for the past 20 years, from 1988 until right now is 349%. That may sound like a lot, but it’s only 6.5% per year. And, remember no matter who’s mutual funds you have your money invested with there are annual fees that are reducing your returns, whether you make money or not.
Dow Jones Industrial AverageAt the end of 1988, the Dow Jones Industrial Average was at 2,169. The Dow closed at all time high of 11,722.98, on January 14, 2000 and then rapidly declined. On October 3, 2006 it closed at 11,727.34, to establish new high, taking 6 years 9 months to recover. It then climbed to a record high of 14,164.53 on October 9, 2007, and has been dropping since then.
As of October 31, 2008 the Dow is down to 9,325. That’s a 430% total return over the past twenty years, which equates to only a 7.63% annual return.
NASDAQAt the end of 1988, the NASDAQ was at 381.40. The NASDAQ reached it’s high of 4,696.69 in February of 2000 and then declined quickly over the next few years to its low point of $1,172.06 in September 2002. It never fully recovered from its losses, and has been hovering around 2200 for the past few years.
As of October 31, 2008 the NASDAQ was down to 1720.95. That’s a 451% total return over the past twenty years, which equates to only a 7.91% annual return.
85% Of The US
Stock Mutual Funds
It’s important to consider that the majority of all of the mutual fund managers are compensated mainly by how their funds perform compared to the S&P 500 Index. And it’s a historical fact, that on average, only about 15% of mutual fund managers are able to beat the S&P 500 stock index in any given year.
Let's compare the ‘US Equity Mutual Fund’ performance supplied by Morningstar against the S&P 500 Index for one, three, five, and ten-year periods, looking back from April 30, 1995. (Remembering that the 1990s was one of the best times in history for the stock market.)
The 1995 results: *
* Beating the S&P 500 Index with Market Timing, http://www.equitrend.com/equitrendbetter.aspx
"In 1998, only about 10% of U.S. equity funds beat the S&P 500, about the same as in 1997. But in 1997, when the S&P logged 33.7%, fund managers still earned a plump 24.1% total (including reinvestment of dividends and capital gains). In 1998, the total return of the S&P is 21.9% (through Dec. 11), but the average domestic equity fund could scrape together only 7%, according to Morningstar Inc., which supplies fund data to BUSINESS WEEK (table, page 156). That's the worst showing since 1994." The S&P 500 Index Fund, http://www.fool.com/mutualfunds/indexfunds/indexfunds01.htm
In more recent history, only 4% of diversified US stock mutual funds have beaten the performance of the S&P 500 Index over the past 10 years ending in 2007.
During the 1990s, in one of the best times in history for the market, the S&P 500 provided an annualized return of 17.3%, compared with just 13.9% for the average equity mutual fund. During the 1990s, the total shortfall between actively managed mutual funds and the market as measured by the S&P 500 was a whopping 3.4% per year. And, that doesn’t take into account the expense ratios, fees and loads in those funds. The expense ratio alone of the average mutual fund was about 1.3% during the 1990s.
In 1981, the expense ratio for the average stock fund was 0.97%. According to Morningstar, in 2003 the average expense ratio was 1.6%. When you add in turnover costs and other expenses such as 12b-1 fees, and the average stock mutual fund has annual fees that run as high as 3% a year. On top of that, scores of mutual funds carry load fees, of up to 5.75% on the front end or back end of a purchase.
Here’s what Stephen Schurr, TheStreet.com Senior Editor had to say; “Folks, the greatest thing you have working in your favor as long-term investors is compound annual growth. High costs are the mortal enemy of compound annual growth. Why? Consider this example from Vanguard founder John Bogle's great book, Common Sense on Mutual Funds. A $10,000 investment that grows at 12% a year for 40 years (good luck finding 12% a year for the next 40 years, but stay with me) would be worth $931,000. Now, lop off the two percentage points for a 10% average annual growth rate, and you're left with a $453,000 -- less than 49% of the value of the 12% return!” Four Things I Hate About Mutual Funds, http://www.thestreet.com/funds/stephenschurr/10103781.html
Warren Buffet, the world’s greatest investor, said it best; "I would not invest in mutual funds, but if I did, I would choose an index fund. For most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market."
So why do mutual funds continue to be so popular?
Well, there isn’t much money to be made long term by investment advisors who put their clients money into an indexed or fixed interest rate deferred annuity. They make a whole lot more money from mutual funds long term with their annual management fees. But investment advisors wouldn’t put their clients in an investment that performs worst just to make more money would they? Hmmmm
Why do the magazines, newspapers and television stations push investing in the stock market? Is it purely a profit issue? Will these magazines, newspapers and television stations lose money if they were to tell us the whole truth about investing in the stock market and the Investment Companies were to stop buying their advertising space? Hmmmm
Why do broker/dealers want to make indexed annuities come under the purview of FINRA? Do they want to protect the consumer, or their profits? Hmmmm
Does Wall Street want investors to focus more on short-term trading, and less on long-term planning? If investors trade more wouldn’t that increase Wall Streets' fees and commissions? Hmmmm
Based on the above data where would your prospects have fared better during the past 9 years…
$100,000 Invested On Dec. 1999 In A Typical S&P Index Mutual Fund…
(That probably would have outperformed
the vast majority of mutual funds)
Would Be Worth As Of 10/29/08 - $134,331 (Based On An 8% Cap Per Year)
$100,000 Invested On Dec. 1999 In A Typical Deferred Annuity Would Be Worth As Of 10/29/08 - $142,331
(Based On A 4%
Interest Rate Per Year) Who knows what the future will bring. Will the stock market continue to deteriorate? Will interest rates start to climb? Who knows? One thing for sure, most average middle income families can’t afford to lose what little money they’ve saved. So, with all the risks involved, do they really belong in the stock market?
We have a great opportunity to really help our prospects to weather this current financial storm. They need and want our help to achieve the financial security they’ve been dreaming about and deserve. Aren’t annuities a way for us to give these middle income families the safety and guarantees they are looking for?
Yours in Success,
Note:
The Standard & Poor’s (S&P) 500 is comprised of 500 of the largest
U.S. companies as weighted by market capitalization. Market
capitalization is simply the economic value of a company’s shares on
a given day, or the price per share times the number of shares
outstanding. The S&P 500 is a basket of stocks that collectively
make up more than 80% of the total U.S. stock market. The remaining
4,500 or so mid-cap and small-cap stocks make up the remaining 20%
of the total U.S. stock market. Want More Annuity Prospects And Collect $1,000,000 of Annuity Premiums Each Month...
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Prospecting Update…
Strike while the iron is hot!
Once you’ve found a new prospect that shows an interest in the
services you offer, it's important to make contact with them
quickly. Prospects are perishable. No matter how interested a prospect may appear, don't wait for them to call you! You must call them!
You are only one of the many businesses competing for your prospect's time and money.
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Well, that's it for this weeks Insurance Marketing and Sales Tips Mastery Newsletter. I hope you found the information interesting and helpful in your efforts to grow your business.
Lew and Jeremy Nason P.S. Do you have a friend or associate who is struggling in this business and needs help? Why not tell them about our Web site or better yet, forward this newsletter to them. They'll thank you!
©
2008, Lew Nason, RTIA, RFC, LUTC Graduate - All rights reserved
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