The Next Big Short

The Next Big Short

January 11, 2016 – I watched the Screen Actors Guild and Golden Globe Awards nominated film The Big Short over the weekend.

The movie made me feel anxious all over again.

Prior to the Great Recession, investors were accustomed to seeing their account values rise and fall with some degree of regularity when exposed to the stock market whether doing so directly or through mutual funds.

Ups and downs notwithstanding, the trend line was always upward.

winnond“Markets will always have ebbs and flows,” financial professionals reminded us.

But The Big Short only reminded me it was all ebbs back then.

The film brought back all those feelings of dread that I remember feeling when I saw my own 401(k) balance reduced by more than 60%.

Those kinds of wholesale losses were Armageddon-like. And it hurt!

As the movie and thisĀ 60 Minutes episode from April, 2009 remind us, this market crash affected EVERYBODY. Even if you didn’t invest in the market yourself, you were affected.

Could It Happen Again?

According to Michael Burry, the protagonist of The Big Short portrayed by Christian Bale and the first to see the housing debacle coming, “we are right back at it.”

That’s right. As unimaginable as it seems, another financial catastrophe could be on the horizon according to this prescient economic trend seer.

Nobody can accurately predict the future, or course. But are you willing to bet against this guy after what he saw coming?

So, go watch The Big Short if you haven’t already to remind yourself how close the financial world came to irreversibly imploding.

(Suggestion: Bring a handful of Tums along with you. You might need them!)

Then, think about your own future and think about how much money you can afford to lose.

Safety First

You know who didn’t lose money during the Great Recession?

People with money in guaranteed accounts or any of the clients I’ve worked with over the past twenty-five years who were receiving or were promised guaranteed income from structured settlements and fixed indexed annuities (FIAs) didn’t lose money.

Market risk is inherent in the stock market.

Market risk is absent in a properly designed structured settlement or FIA retirement annuity.

This doesn’t mean you should never invest in the stock market or you should always choose annuities. As a practical matter, a combination of annuities plus traditional investing often results in the optimal outcome for most people.

But it’s shocking how many people often lose site of one of the cardinal rules of financial decision making:

Don’t risk money you cannot afford to lose

Despite what some who make broad, unflattering statements about them say, life annuities are proven to be the “most cost effective and least risky asset class for generating retirement income for life” and I have met very few people who couldn’t benefit from having guaranteed lifetime income.

Cost effective. Least risky. Sounds like a recipe for happiness to me.

So if you’re ready to settle a personal injury claim, keep whatever cash you think you’ll need in the next few years andĀ whatever you’d be comfortable losing.

Invest that money.

Take the rest and set up a structured settlement to help meet your basic living needs.

If you’re focusing on your retirement assets, try this simple math assuming a typical working life:

W/R, where,

W = Number of years since you started working

R = Number of years until you plan to retire

If the resulting number is less than 1.0, you’ve probably got enough time to weather any storms even if we do enter into an Even Greater Recession.

If the number is 1.0 or greater, watch out! You should give serious consideration to limiting your exposure to the market. The larger the number, the less time you’ll have to make up what you lose if the market tanks again.

BONUS: Paradoxically, by annuitizing a portion of your retirement assets to meet your known cash flow needs, you’ll be able to invest some of your portfolio in the market with less worry.

Everyone needs guaranteed income. Don’t wait until it’s too late to get yours.

Postscript

I plan to vote for Christian Bale when I fill out my Screen Actors Guild Awards ballot in a few weeks. He was that good in his supporting role.

(Disclosure: As you can see from my IMDb profile, it’s been a little while since my network television debut and I remain, quite possibly the most under-exposed professional actor member of the Screen Actors Guild)

But I’m not voting for The Big Short although it was deserving of its SAG Award nomination.

And even if I were a Hollywood Foreign Press Association member, I still wouldn’t have used my Golden Globe Best Comedy or Musical vote on it.

Call me old-fashioned, but I just don’t think there’s anything all that funny about seeing people lose their life’s savings.

Photo courtesy of winnond at FreeDigitalPhotos.net

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