“What do you know about defined outcome investments?”, a member recently asked.
While he didn’t have any specific investment products to refer to I ran with what I know.
When I was a wee-high financial advisor these things were pretty popular.
It was right after the Great Recession and people were scared silly.
So an investment product that GUARANTEED a return was pretty enticing.
Most of these products would cap the downside to 3%. So even if the market tanks you STILL get 3%.
But if the market takes off, you only get 7%. So even if the market jumps 20%, you still only get 7%.
If the market’s historical long-term return is 10% and only 3 out of every 10 years is negative, then it doesn’t pass the sniff test.
But don’t take my smell for it.
I ran a simple spreadsheet model comparing what you’d get investing $100,000 in the S&P 500 since 1928.
Just riding out the market waves would get you $27M.
But if you took the defined outcome investment, you’d have less than half – $13M.
Over the last 30 years, you’d have $1.1M riding out the market vs. $510k in guaranteed returns.
And those calculations don’t include the heavy fees guaranteed investment products charge.
That’s just more proof that nothing outperforms a very patient, buy-and-hold, low-cost investment strategy.
