Compound Interest vs. Compound Losses
COMPOUND LOSSES
A 100K Investment into a Stock Fund, Mutual Fund, or Variable Contract
Purchasing 10,000 shares of a Fund at $10 per share. All GAINS will be calculated from that purchase price.
** After the first year there was a 10% increase, bringing the price to $11 per share.
*** Your account value is now 110K
** After the second year there was another 10% gain, bringing the price to $12 per share. The gains you are being shown are SIMPLE INTEREST GAINS since they are being calculated based on the purchase price of $10 per share.
*** Your account value is now 120K
** After the third year there is another 10% gain, bringing the price to $13 per share. Again you are being credited SIMPLE INTEREST GAINS since they are calculated since the purchase at $10 per share.
*** Your account value is now 130K
** After the fourth year the fund experiences a loss of 20%. Here is where you will have to deal with COMPOUND LOSSES. The 20% Loss is realized from the fund value of $13 per share. 20% of $13 is $2.60. This brings your per share price from $13 to $10.40. The stock has a VALUED LOSS of 20%, but you have REALIZED a LOSS of 26%! SIMPLE INTEREST CREDITING, COMPOUND INTEREST LOSSES.
*** Your account value is now 104K
COMPOUND INTEREST
The Same 100k Investment into an Equity Indexed Annuity
There are no shares to purchase with an Equity Indexed Annuity. The issuing company purchases call options in order to INDEX your money to a leading market index. If the market goes UP, call options are exercised and the index credits interest to the contract. If the market goes DOWN, the options expire worthless, in many cases new options are purchased, and there is a new start date for the leading market index and the contract.
Let’s take the same 4-year scenario as in the FULL RISK FUND, and we will even look at the returns in a conservative light for this illustration.
** After the first year there was a 6% increase in the monthly average of a leading market index.
***Your Annuity value is now 106K
** After a second year there is a 7% increase in the monthly average of a leading market index. However, since we are working with an Annuity that LOCKS IN THE GAINS, the increase is figured from the 106K.
*** Your Annuity value is now $113,420
** After a third year there is an increase of 5% in the monthly average of a leading market index. The value is added to the already locked in gains within the contract.
*** Your annuity value is now $119,091
** After a fourth year, the leading market index average has a LOSS of 10%. You NEVER experienced that loss, since there is never any risk to principle. You locked in your gains.
*** Your Annuity value is $119,091
It is important to note that the TOTAL INTEREST of the account was 18%. With compound interest, and the locking in of gains, the EFFECTIVE INTEREST YIELD of the account is 19.02%
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SECURITY PLANNING GROUP, INC.
Joseph Adelizzi
Admitted USTax Court, 1987
Cal. Ins. Lic. 0768932
IRS CAF No.: 036-45708R
866-296-2889
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