September 17, 2008, 6:00 am

How Can Some Mutual Funds Offer A Guaranteed 7% Return As A Retirement Income Solution?

by: The Financial Blogger    Category: Investment, Market and Risk,Types of Financial Products
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Life is beautiful. You just turn 55 and you are finally able to say “bye bye boss!”. You have accumulated enough money to trade your office for a golf cart and your pen for a Callaway X Driver (that’s my dream anyway!). You thought you would have to work until the age of 60 but that cool guy from that mutual fund company you met at a “informative retirement meeting” told you about a revolutionary product.

This amazing product is a well balanced mutual fund giving you 5%, 6%, or 7% guaranteed in your pocket year after year! Is it because they were able to clone Buffet brains? (Actually Validea Capital is trying to do so). Do they found the last GIC on earth giving a 7% yield? Or are they simply not telling you the whole story? GOT IT!

I recently met a client with this “wonderful product” in his portfolio. He told me how the “financial analyst” who presented the product answered all his questions and that everything seems pretty good. In a world where the stock market is diving faster than Michael Phelps during the Olympics, who would ignore such investment proposition?

So the guy invested 50K in early 2006. He never made a single withdrawal (the 7% return was deposited in his cash account which he used to buy more shares of the same fund). So technically, his investment should worth 59K (50K*7%/12month*32 months). However his investment portfolio was showing 55K! Where the other 4K disappeared? What happen? Where is that 7% return Guaranteed?

The 7% return is actually a fixed amount of $3,500 (7% of 50k) that the client did receive in his cash account. When the fund is not making 7%, where to do you think they found the money to send the client 3,5K? A Donation? Return on Capital (ROC) !

Imagine, you are receiving 7% return and you are not even fully taxed on it! For someone who doesn’t understand ROC, this sounds like a perfect world. Unfortunately, there is no free lunch in finance. The poor guy was getting his capital back to buy more shares of a fund not making the promised return.

The idea itself is not bad, but you must be aware that you might touch your capital and that the nice graph showing 8% returns might not happen. I know, life sucks and financial advisors are part of life 😉 Fortunately, you have The Financial Blogger to help you out seeing those things before they happen to you!

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I though I knew some shady people. That’s just wrong.

by: The Financial Blogger | September 17th, 2008 (6:46 am)

Shady people would probably call it “making my numbers” 😉 hahaha!

“Making My Numbers” and “Screwing the pooch” are too different things. This falls into the latter.

But you are right, shady people would call it “Making my numbers”

Btw, love the reference in your last comment. It’s a good one.

Guys like this give us advisors a bad name. It’s bad enough he referred to it as a guaranteed return as opposed to “steady income stream” , but to allow the guy to turn around and reinvest the money in the same fund borders on criminal!

Well, if its too good to be true..

Just because it sounds too good to be true, does not mean it’s not. In this case, promises are made that are not feasible.

[…] No such thing as a guarantee […]

by: Sanjay Sethi | September 22nd, 2008 (3:44 pm)

Plan A : If Bailout package is approved as-is in congress with little enhancements to it.

This plan A approved by the Congress will be the most foolish task to do in US history, as it will permit the banks to escape, big executives get free money in terms of bonuses, same employes who cooperated in past sub-prime mortgages ( I call them accomplices) will re-do the similar acts. The general public, is the one who gets the Invoices in terms of higher tax income/proerty/sales rates. The consequences of this bill, will be the biggest problem i.e. reduction in US Dollar’s value to nose-dive, which in turn raise oil prices to $3250-300 per barrel ( mark my estimates here) in next 2 years of time after passage of this bill. The inflation pressures will sky-rocket to so high so the general public will have no income to support the economy in general. So we are coming back to bad to double-worst economy on which (after 2-4 years of this bill) rest of the world and big executives will enjoy the benefits and look at general US people, and say how stupid these people are to let us enjoy with decisions made by the elected officials with wide-open eyes.

Here is the what my model looks like :

1. Bill passes with Senate/Reps houses with some smaller enhancements, regulatory measures.

2. Banks in trouble will benefit, shareholders will enjoy, general public pays the bill. Same croooks will search for new ponds (markets) to
fool the government/public.

3. US Dollar values comes down internationally, daily items will cost 4-7 times more than they do now.

4. Oil pricess will atleast quadruple in next 2 years i.e. $10/gallon retail prices, with milk $9/gallon. This will force change of mortgage formula
for new mortgages i.e. 70% of salary will be required to calculate PMI in future.

5. House prices will go down drastically, as there will be fewer (than now) buyers can afford.

6. Health costs will jump up in same proportions to oil jumps.

7. Commodity costs will jump up in same propertions to Oil jumps.

8. Keep it mind, Iraq war helped Bush to pocket some change, now Henry Paulson and others as well will pocket BIG change.

9. Similar analogy : If one has too much loans, his/her credit history allowes the banks to stop lending or renting, means general public will be
having hard times if too much loans are on their credit history. What will happen to US as country in international
market. Other countries will stop lending and dumping US dollars which will be the collapse of US as power and new
power will emerge, I believe China will be the next Economic power first and then militarily as well.

10. International Market confidence in US assets will plummet heavily. USD will nose-dive.

11. Very shakey U.S. assets will force Oils to sky-rocket, and other OPEC members will starting deviating from U.S. Dollars.

12. Time is now to take an action by the US public to oppose the bill, and let the banks fail, so they learn historic lesson and others will in future
give example of this era.

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Here’s our market view on American stock market for 10th October, 2008

The stock market has collapsed – since Sept. 19 the DJIA is down 25% and the S&P 500 is down 28% and down 42% from a year ago.

How can this happen so quickly and so dramatically when so many good things have occurred? Oil is down to $82 a barrel; interest rates are very low; the dollar is up; valuation levels are extremely attractive among many blue chip stocks.

What’s the real problem? The problem that is killing the stock market is a lack of hope about the future.

Hope springs from optimism that is based on facts and history. Look at the history of America and really all of mankind. Life is full of setbacks and problems – that’s just the deal. But this too shall pass, as all scary periods have.

Doomsayers have been around forever and their batting average is zero. Buying stock is based on hope – hope for the future. If one doesn’t have hope, they shouldn’t be in this business.

So what is the best service we, as professionals, can provide for our clients?

First, discuss the fact that we are dealing with serious problems but it is not at all like 1929. The Federal Reserve and the Treasury Department are doing many things to restore confidence in the financial system. There is global coordination in attacking the problem, which is lack of confidence.

Tell your clients to look at history of our great nation and what has happened since 1776 when we faced very serious problems. The stock market actually rose steadily about six months after Pearl Harbor and until the end of WWII even though the outcome was not at all clear for several years.

No one knows when the stock market will bottom and a new bull will commence. We do know that stocks and mutual funds offer the best values we have seen since Black Monday, Oct. 19, 1987.

Almost all Americans have hope about the future of our nation, but they need help to control their normal fears. Team
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