The Worst Investment You Can Make

Last week’s column was advice about how to handle and prepare for the next bear market.

That prompted a response from a reader in the comments section that investors should bail out of the stock market now and put their money into annuities.

He warned, “When the market goes south it takes 16 years to recoup your losses because you lost the interest on the money you lost also.”

There’s a lot of bad advice on the internet, but this is about as wrong as I’ve ever seen.

Sixteen years? He must live in Colorado or California because he’s clearly smoking something.

If you had impeccable timing and took $100,000 out of the market at the very top in 2007 and put it into an immediate fixed annuity that guaranteed 6% growth per year, you would have avoided the meltdown in 2008 and generated $8,487 in annual payments.

Ten years later, the principal would be worth $64,168. Add that to the $84,870 received in payments and you’d have $149,038. You’re also guaranteed another $84,870 in payments over the next 10 years, at which point your money is gone and the payments stop.

Compare that with if you had left your money in the market. In 2008, your $100,000 was worth a lot less. But in less than five years, you were back to breakeven – and that’s breakeven from the top. You probably didn’t put all of your money into the market at the very top.

But if you did have lousy timing and invested right at the very top of the market in 2007, your $100,000 would be worth $225,220. And more importantly, your principal isn’t guaranteed to decline every year as it is with an annuity.

If your $225,220 was invested in a portfolio of Perpetual Dividend Raisers – stocks that raise their dividends every year, with an average yield of 4% per year – you’d earn $9,008 in income. As the dividends increase each year, so does your payout. And better yet, after 10 more years, you’ll still have all of your principal.