pie-vs-pyramid-3

<div class="main-container"> <div class="top-section gray-graid"> <div class="div-row"> <div class="col-12"> <div class="all-com-img"> <img src="https://robertlotter.com/wp-content/uploads/2019/03/logo-strip-1024x45.png" class="image wp-image-6988 attachment-large size-large desk-img" alt="" style="max-width: 100%; height: auto;" srcset="https://robertlotter.com/wp-content/uploads/2019/03/logo-strip-1024x45.png 1024w, https://robertlotter.com/wp-content/uploads/2019/03/logo-strip-300x13.png 300w, https://robertlotter.com/wp-content/uploads/2019/03/logo-strip-768x33.png 768w, https://robertlotter.com/wp-content/uploads/2019/03/logo-strip.png 1308w" sizes="(max-width: 1024px) 100vw, 1024px" width="1024" height="45"> <img src="https://robertlotter.com/wp-content/uploads/2019/03/all-logos-1.png" class="image wp-image-7368 attachment-full size-full mobile-img" alt="" style="max-width: 100%; height: auto;" srcset="https://robertlotter.com/wp-content/uploads/2019/03/all-logos-1.png 500w, https://robertlotter.com/wp-content/uploads/2019/03/all-logos-1-300x72.png 300w" sizes="(max-width: 500px) 100vw, 500px" width="500" height="120"> </div> </div> </div> <div class="div-row"> <div class="col-left"> <h2 class="first-heading" style="color: #414143;">Why 400 Billion Dollars Is Leaving Managed Mutual Funds</h2> <h2 class="second-heading" style="color: #414143;">How To Win The Battle of Risk and Reward in your Portfolio</h2> <div class="iframe-video"> <iframe src="https://player.vimeo.com/video/325320221?api=1;title=0&byline=0&portrait=0&color=d01e2f&autoplay=0" width="500" height="281" frameborder="0"></iframe> </div> </div> <div class="col-right"> <div class="first-image"> <img src="https://robertlotter.com/wp-content/uploads/2019/04/tools.jpg" class="elIMG ximg" alt="" data-imagelink=""> </div> <h2 class="second-heading" style="text-align: left; margin: 0 0 20px; color: #414143;" >Get Your Free Financial Health Analysis and access to your FREE tools!</h2> <div class="dr-contact-form"> [contact-form-7 id="7636" title="PVP4"] </div> </div> </div> </div> <div class="sec-section gray-graid"> <div class="div-row"> <div class="col-8"> <div class="div-row"> <div class="div-left"> <h2 style="margin-bottom: 0;">The Story of the Pie vs. the Pyramid</h2> <h3 style="margin-top: 0; margin-bottom: 10px;">Annuities Verses Mutual Funds - Risk and Reward</h3> <p>You’re most likely reading this article because of questions or concerns surrounding types and benefits of annuities or your considering mutual funds verses other investment strategies. While this article is not a comprehensive treatise on financial and retirement planning, it is a definitive look at risk and why it makes no sense to carry unnecessary risk into your pre-and post-retirement years. If, at any time you want to cut to the chase and get a quick primer on the bottom line, please take 2 minutes and watch my Pie Versus the Pyramid video. Then come back and finish the article for a more in-depth discussion.</p> <p>What you’re about to learn comes from 40 years of experience in providing financial advice, retirement plan administration, and product development. In this 40 year span we have provided financial services to over 500,000 people, mostly in the public employee sector. Currently, we work with over 300 employers, which include unions, schools, municipalities and small and medium size companies. We also provide administrative services to over 50 different financial institutions. 40 years is plenty of time to study and understand the effects of Annuity and Mutual Fund investing.</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>A Brief Discussion on Annuities</h2> <p>First, what is the difference between a Variable Annuity (VA) a Fixed Annuity (FA) and a Fixed Indexed Annuity (FIA) and why is someone recommending you invest in one of these instruments? An Annuity is a Life Insurance Contract which provides for tax deferred accumulation and various guaranteed pay out options during retirement. Here is a comprehensive article on Wikipedia that explains how Annuity contracts work <a style="color: rgb(12, 156, 125);font-weight: 700;" href="https://en.m.wikipedia.org/wiki/Annuity_(American)">https://en.m.wikipedia.org/wiki/Annuity_(American)</a></p> <p> For the purposes of this article however, I want the reader to become aware of the significance of each type of annuity and how that relates to risk. </p> <p>The riskiest of all annuity types is the Variable Annuity. The Variable Annuity is essentially a Mutual Fund placed inside an Annuity. The underlying values of the assets in a Variable Annuity are not guaranteed to preserve your initial investment, and you could in fact experience negative returns.</p> <p>Both Fixed and Fixed Indexed Annuities provide guarantees which preserve or protect your underlying investment. The big question is, which provides a better rate of return. In comparing Fixed and Fixed Indexed Annuity (FIA) types, the FIA wins hands down. The FIA provides a percentage of participation in the markets with an underlying minimum guaranteed interest rate. If the markets do well, the overall performance is improved and if the market doesn’t do well, there is still the underlying guarantee.</p> <p>Things get dicey when insurance agents and investment advisors suggest that Variable Annuities outperform Mutual Funds and Fixed or Fixed Indexed Annuities. Since a Variable Annuity is essentially a Mutual Fund inside an annuity, we need to examine the actual statistics behind Mutual Funds and how they perform in the real world. Furthermore, I can argue that the term “Variable” means there is definite risk in the portfolio, and the key question is how much. It’s also not only the potential of negative returns, but also about what percentage of your savings should you risk for these rumored higher averaged returns and does your age play a role in this decision. Again, I recommend you take 2 minutes and watch this video which will very quickly demonstrate fundamental issues that play a role in making the right decisions on where to invest your retirement savings. In any event, read on to dig into some real statistics that will very likely change the way you view Variable Annuities and Mutual Funds, information you’re not likely to hear elsewhere.</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>What Causes Markets to Fail and Investors to Lose Money?</h2> <p>Statistics often have the effect of dulling our sense of reality. When government and businesses toss out percentages and lump us into pre-determined demographic groups, it's hard to internalize whatever message they're trying to convey. We get lost in the coldness of the data. The impersonal nature of raw numbers. Unless, of course, the statistic is so startling, so verifiable, it makes you stop dead in your tracks and nod in bewildering agreement. Case in point: 80% of Americans lost half or more of their entire portfolio at the height of the 2008 market crash.</p> <div class="wrap-img"> <img src="https://robertlotter.com/wp-content/uploads/2019/04/crash.jpg" class="elIMG ximg" alt="" width="350"> </div> <p class="wrap-text">If you're a part of that 80%, no doubt the reporting of this statistic is a painful reminder of your losses. While we're often taught to learn from our mistakes, in the case of investing it's difficult to know both where we went wrong and how to prevent it from ever happening again; after all, we're not experts...And we're not expected to be. So to find out the answers we likely turn to the people who are, namely, the money managers and stockbrokers who recommended these failed investment strategies. Of course, talking to the experts will likely yield several different reasons for a plummeting portfolio. From 9-11 and war to the plethora of recent and past corporate and mutual fund scandals, you'll likely see fingers pointed in every possible direction. Yet, a closer look reveals these events might not have contributed as much to these losses as initially thought. In fact, this phenomenon may actually be the result of something much more insidious and less obvious.  But to get there, we first have to examine why those otherwise accepted scapegoats are merely excuses which hold little or no veracity.</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>An Investment Gut Check</h2> <p>It's no surprise that many Americans with retirement portfolios languishing at levels from a decade ago are wondering how they could have lost so much, so quickly, and wonder if it could happen again. Incidentally, 77% of the accumulated wealth in this country is held by people over age 55, so it's no secret what group was left most devastated by the losses. They were all likely scratching their heads in disbelief at this sudden, and significant drop off; after all, these investors had been assured by their brokers and planners that they were properly "diversified." Diversification teaches investors to avoid putting all of their eggs in one basket, and it's intended to help protect investors from market fluctuations. But if investors were truly diversified, why did 80% lose at least half or more of their entire portfolio?</p> <p>We've already established it wasn't solely caused by the scandals currently breaking in the mutual fund industry, or 9-11, or the war, or corporate fraud...So what did happen? Risky investments, that's what. As John Bogle, the founder of Vanguard Funds, one of the most prominent mutual fund companies in the world, explains, "We exploited the idea of a tech-led 'new economy,' and created some 500 new, and risky, aggressive growth and sector funds." But if these investments were as risky as Mr. Bogle notes, how could investors have been convinced they were properly diversified? The proof may be in the pudding...Or rather the pie.</p> <p>When purchasing mutual funds, many investors are shown an asset allocation model in the form of a pie chart. Asset allocation is the process of dividing a portfolio among major asset categories, like bonds, stocks, or cash. While the fundamental purpose of the model is to reduce risk by diversifying the portfolio, it is mostly used to illustrate a person's allocation in regard to mutual funds, only--funds that are comprised of non-guaranteed investments. If you own mutual funds, you'll likely find a pie chart right on your brokerage statement. The pie chart advises investors to spread their assets throughout the slices of the pie to diversify a portfolio and shield against substantial losses (Figure 1 illustrates a typical Wall Street asset allocation model). It is, in effect, designed to sell mutual funds. Whether you agree with the strategy or not, it seems to have worked quite well. The Securities Industry Association reports that 75% of U.S. financial assets are invested in securities-related products (stocks, mutual funds, bonds, etc.) and 49.5% of U.S. households are invested in either individual stocks or stock mutual funds.</p> <p>The gung-ho attitude that led to increased investment in riskier vehicles was based on three fundamental principles: returns, returns, returns. The prospect of higher returns was the fuel that drove us to risk larger percentages of our portfolios, especially with the knowledge that the pie chart would protect us. But was it worth it? During the past 20 years, the U.S. stock market has earned a return of 13% per year, while the average "pie chart" mutual fund investor has only earned a return of approximately 2% per year!</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>Risk and Reality</h2> <p>Regardless of the actual returns earned, if any of the investors who were flirting with high-risk investments had stopped to take a look at their true risk diversification they might have recognized the potential danger lurking behind their pie chart. Keep in mind, from a strict school of investing, the pie chart found on a brokerage statement is intended for asset allocation, only, and is rarely used to represent the risk diversification within your entire portfolio. Risk diversification is an overall investment strategy that mixes a wide variety of investments in your financial plan to minimize the impact of any one investment on overall portfolio performance.</p> <p>This is an important point, since many investors tend to believe they are properly diversified merely because they are invested in various types of mutual funds, but this couldn't be farther from the truth. Sure you can be diversified within mutual funds, but that alone does not represent true risk diversification. It would be like having a barrel of oranges and claiming you have a lot of fruit. Sure you have lots of fruit, but only one type. What about produce of the non-citrus variety?</p> <p>If you're wondering if there's any model that can help you determine your true risk diversification, the good news is there is...the oldest, most widely-accepted risk diversification model: the Investment Pyramid. Unfortunately, too many investors have never been introduced to this fundamental concept. Figure 2 illustrates the Investment Pyramid, a pyramid that is built according to the level of risk. Safe, or guaranteed, investments comprise the foundation and as you move up the Pyramid the riskier the investments become-moving from guaranteed to secure to growth, all the way to speculative at the very top. Each investment type is categorized in the pyramid according to its level of risk. For example, a checking account would be found in the foundation, while arts and collectibles are located in the Pyramid's tip. This model is one of the first concepts taught to aspiring financial planners and brokers. It is, after all, based on the most stable geometric structure–think about the pyramids of Egypt. But why is it so important to investing?</p> <p>Examine the Pyramid, closely, and you'll notice there is a ratio between the area allocated for guaranteed investments to the area reserved for secure, growth, and speculative investments. This relates to the percentage of a portfolio that an investor would earmark for certain types of investments. In other words, you wouldn't want your portfolio to have a higher percentage of speculative investments than guaranteed investments, right? Doing that would skew the Pyramid by enlarging the top and minimizing the bottom until the structure becomes dangerously unstable.</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>Pie vs. Pyramid</h2> <p>So if the Investment Pyramid represents true risk diversification, what does the pie chart diversify? Plot a mutual fund pie chart out on an Investment Pyramid and you'll find it doesn't represent the entire Pyramid, but rather just a small portion of risky investments (see Figure 3). It focuses on the secure and growth sections of the Pyramid, without taking into consideration a solid foundation. That being said, it should come as no surprise that at its market peak, the mutual fund industry took in $555 billion in new money invested in speculative, high-performance funds. As Bogle reveals, "during the great bull market, mutual fund firms have prospered in an era of salesmanship, organizing, offering, and promoting risky funds at the best time for distributors to sell them and the worst time for investors to buy them." And the pie chart was their key selling tool.</p> <p>If the investors who relied solely on a mutual fund pie chart to diversify had plotted their assets within the Investment Pyramid they would have found something that resembles Figure 4. Not exactly the very definition of stability. This method of investing actually negates all of the structural properties that make pyramids a good basis for a risk diversification model. In reality, the pie chart is more akin to profit diversification, since it diversifies the potential return, not the actual risk.</p> <p>It should also be noted that brokerage firms offer numerous types of pie charts, but determining which one is right for you is not an easy task (keep in mind, there's only one Investment Pyramid). Unless you've plotted your assets out on the Investment Pyramid you can never be sure that the pie chart you're using is properly diversifying you in relation to your age and investment goals. Sadly, the statistics suggest that many brokers and financial planners relied on a risk-heavy pie as a client's sole risk diversification model. And using a pie chart model without comparing it to the Investment Pyramid and the distribution of all of your assets is like driving in a fog with zero visibility...</p> </div> </div> <div class="div-row"> <div class="div-left"> <h2>Financial Future Shock</h2> <p>In all fairness, it's not a question of whether or not you should invest in mutual funds, equities, and securities...It's a question of quantity. How much of your portfolio should you put at risk? If 80% of Americans lost half or more of their entire portfolio, it would seem clear that too many of us risked too much. Of course, we thought we were diversified. And diversification was supposed to protect us. But that's all just spilt milk now. The true test will come in the actions we take in the future. As we move ahead, we'll likely be more sensitive to the level of risk in our portfolios and we may even want to consider some of those cold statistics. This isn't meant to disparage the pie chart, when used in relation to solid financial planning it could be helpful, but it should always be compared to an Investment Pyramid to ensure it reflects your particular needs.</p> <p>The Financial & Health Research Institute has created a revolutionary tool to help you determine the level of risk in your portfolio using the Investment Pyramid (Check out page 20 to read "Diversifying with the Investment Pyramid: F&H's Foolproof Way to Understand Risk"). Regardless of your investment strategy, educating yourself about financial planning advice is a safe bet no matter what the investment's risk. And now that you're armed with the Investment Pyramid, you'll know whether that pie you're presented with is in fact just half-baked.</p> </div> </div> <div class="div-row"> </div> </div> <div class="col-4"> </div> </div> </div> </div>