With indexing, you don't lose.
In this episode, I'm going to address the topic --Index Funds Versus Indexing: What's
The Difference?
Get ready, I'm going to share with you some insights that many financial advisors simply
do not understand.
So, I'm going to explain the difference between indexed funds and indexing which is a strategy.
An index fund is just a commodity.
So, my name is Doug Andrew and I've been a financial strategist for more than 4 and a
half decades.
When indexing as a strategy came out in 1997, first with annuities and then indexed universal
life, I saw the opportunity there.
And it has been my favorite vehicle to accumulate money safely and experience upside potential
in the market without any risk if the market crashes.
This is a game-changer but it's totally different than an indexed mutual fund.
So, as we proceed here, I want you to understand an indexed mutual fund is just a commodity.
It's simply a mutual fund that puts your money in several different types of investments.
And if they use an index like the S&P 500, they're putting your money diversified into
the S&P 500.
But your money is still at risk in the market.
It's simply diversifying in an index.
Maybe the Dow Jones, the Top 30, the S&P 500, the Russel 2000, the Mutual Fund is just spreading
it out what those indexes measure.
But see, if you use indexing, has nothing to do with money being in the market.
It's a strategy.
So, I'm going to explain what indexing is and how powerful it is and how it has helped
me to raise my internal rate of return on my max-funded insurance contracts from about
7.2%, 8.2% up to 9 and 10 percent by using indexing and rebalancing.
And we're going to share with you how to diversify.
Be sure and check out other YouTubes on this channel to understand how this dynamic concept
of indexing can help you.
So, let me explain to you the difference by showing you a chart of the actual S&P 500
during the worst 10-12 year period since the Great Depression.
And you will be able to understand the difference between an indexed fund and indexing.
Okay?
So, the worst 10, even 12-year period since the Great Depression started maybe November
8, 1999.
Just before the turn of the century.
And so, this chart shows going until actually November of 2012.
We call it the Lost Decade.
Why?
Because I've often described the stock market is like a person with a yo-yo hopefully walking
up some stairs.
Well, during that 12-year period, it was the worst period since the great depression, that
person with the yo-yo was walking across the flat surface.
At the end of 12 years, the S&P, the Dow Jones, the stock market was basically where it was
12 years earlier.
So, people didn't make any money during that time period.
And in fact, they lost up to 40% or more twice during that decade.
It was horrible.
Now, if you don't understand the impact of losses, see, market after the terrorist attacks
of 9-11 of 2001, the market dropped 3 consecutive years.
Here 35% on the S&P, the average American suffered a 40% loss.
Some suffered a 50% loss.
Now, if you experience a 40% loss, let's say that you saved your entire lifetime and you
had a million-dollar here and it was in yet-to-be-taxed IRAs and 401(k)s in the market.
That million-dollar nest egg may be dwindled in value down to 600,000.
Now, a 40% loss has to be followed by a 67% gain to get back up here to break even.
See, 600,000 has to grow by 400,000.
That's 67% gain to make up for a 40% loss.
And so, it took 4 years until 2007 for people to finally have their million-dollar next
egg back.
They had to put off retirement 7 years.
They felt like they had lost their future here.
Well, they were ready to retire again.
And then as Warren Buffet put it, he said in 2008, when the tide went out, it revealed
who was swimming naked.
What he meant was people were not protected.
Their money was still in the market because their advisor said, "Hang in there.
The market will always come back."
They lost 40% again in one single year.
And it took 4 years to come back to where they finally had 1,046,800 for the million
they started with.
The sad thing is, that 1,046,000 didn't even buy...
It didn't have the same purchasing power as the million did 12 years earlier because of
inflation.
Now, that is what you would've experienced had you had an indexed mutual fund based upon
the S&P.
Because your money isn't at risk in the market.
That's not what I'm talking about.
So, may advisors think what I say indexing that I'm talking about indexed mutual fund.
No.
Indexing is where my money is not in the market.
I'm linking the returns.
And you're going to see that during this time period, during these downturns, people following
what I'm going to show you indexing didn't lose a dime due to market volatility.
They may not have made very much but they didn't lose.
And so, when the market turned around, they started to make money at this point and made
money.
Instead of losing here and started to comeback here, they made money from this point forward.
They didn't lose.
And Warren Buffet is the one that said, "There's 2 rules for investing money.
Rule number 1, don't lose money.
Rule number 2 is don't forget rule number 1."
So, let me show you how people double or even triple their money during this time period
by using indexing and how it works.
So, perhaps you know somebody or maybe it was you who lost money in 2008.
So, pay close attention.
Share this video.
Watch very close because I'm going to empower you to never lose money again due to market
volatility.
So, with indexing, what you're doing is you're linking your returns to an index.
But your money is not invested in those stocks or those mutual funds.
Now, my favorite place to deposit serious cash is a max-funded indexed universal life
insurance policy.
Did you hear that?
Why?
Because it's the only vehicle in the internal revenue code that allows you to accumulate
your money tax-free, access that money tax-free, and when you ultimately die, it blossoms in
value and transfers income tax-free.
People say, "I've never seen an insurance policy earn very much interest or rate of
return."
Well, you haven't seen an indexed universal life that is maximum-funded.
Meaning, you take the least amount of insurance the IRS will let you get away with and you
put in the most money the IRS allows as fast as they allow.
It turns into a tax-free cash cow.
You're going to see here, I've average returns of 7, 8, 10 percent.
Some years, I've earned 16, 25 percent.
So, I'm going to be very conservative here.
Let's say that I have a million dollars in cash value inside my insurance policy.
Many clients have a million.
Some have 100,000.
Some have 10 million.
Just extrapolate from this example.
So, if I have a million dollars of cash inside my insurance policy, what is the insurance
company doing with that?
They are keeping it in their general account portfolio.
And that is made up of triple-A and double-A bonds.
If they ever loan money on skyscrapers and shopping malls, they only loan like 50-60
percent loan to value.
They don't loan 80% loan to value.
If they ever have to foreclose on a skyscraper, they come out smelling like a rose.
And so, the general account portfolio of insurance companies, usually in a high-interest environment
back in the 1980s when universal life first came out, they were earning between 11 to
15 percent because mortgage rates were high, bonds were high.
Banks were paying CDs over 10%.
The last couple of decades, we've been in a lower interest environment.
So, let's say from 2000 to 2012, most insurance companies were earning about 6% on their general
account portfolio.
That's what this is.
General account portfolio.
And so, over a 30-year period, this is been the returns.
The range was 5 to 17.
They had averaged between 8-9 since 1980.
But the last 10 years, that period I'm talking about, they were earning maybe 6.
They need one of those percentage points for them.
And they were netting 5.
That's what they pay me.
So, any time I want, if I have a million bucks in there, I can tell the company, "This year,
just pay me the general account portfolio rate, 5%."
That's 50 grand.
Now, it's tax-free.
I can take it out as tax-free.
I can leave it there.
And now I have a million fifty thousand growing tax-free.
So far, so good?
But the insurance company allows me to link to an index if they offer it.
And the ones that I choose do.
So, if I link to an index, what I'm doing is I'm saying, "Okay, I want you to pay me
whatever the index that I choose or indices."
Let's use the S&P because that's the example I gave you.
So, if I link to an index, now, my money has to stay safe in the insurance company, the
million earning 5.
But they have to pay me whatever the S&P does if the S&P makes money.
So, for example, in 2011, November 2011 going to 2012, it was an election year.
So, I knew my chances were pretty good that the economy would grow more than 5% because
of incumbance.
Obama, he wanted to make the economy like vibrant, dynamic and growing.
So, he did all kinds of smoke and mirrors with the economy of physical and monetary
policy to get re-elected.
I knew that.
Now, it could've been a terrorist attack that caused the market to dive.
But I would've not lost.
Here's why.
The S&P 500 let's say was 1,000 at the beginning.
1 year later, let's say it's 1,100 which is pretty close to what it was back then.
That's a 10% increase.
The insurance company must pay me 10%.
They must pay me 100,000 on my million.
How can they afford to do that if my million is not invested in the market?
What am I relinquishing?
The for sure 5.
The 50,000.
I'm saying, "Don't you dare put my million at risk.
I want to have that preserved in your company.
The interest you're earning, the 5%, the 50,000, do whatever you need to do with that to have
the wherewithal to pay me if the S&P goes up."
So, what do they do?
They take that 50,000 and they buy upside options in the S&P.
This is a no-brainer.
They're the number 1 purchaser of options in the world.
So, they buy options.
And if the S&P doubles, that 50,000 doubles to 100,000.
It didn't cost them anything.
They're big boys and girls.
People say, "How can they afford to do that?"
They're not having a cuffed up money.
50,000 of options doubled to 100(thousand).
Many times, it triples to 150,000.
But they usually have to cap it because they don't have your million to put out in the
market.
I don't want them to.
They only take that interest in my million to buy options.
So, they have to cap it.
So, what happens is, that's called the 0-percent floor.
If the market went down, the options expire worthless.
I lost the for sure 5% but I didn't lose my million.
But see, why do I do that?
Because on the average in a 10-year period, there'll be 7 up years compared to 3 down
years.
I'll come out way ahead.
That decade, that worst decade, 2000 to 2010, there were 5 down years, only 5 up years.
And I doubled my money.
Here's how.
7.23%.
If they cap you at 15, and by the way, I had one year they capped at 17 and a year they
capped it in 16.
I'm going to put the cap at 15.
If the market goes down, I don't make anything but I don't lose.
But when the market goes up, they'll pay me whatever the S&P does up to 15.
They can't pay me way up to nothing because they don't have enough money to buy options
to do that.
So, zero sometimes is my hero.
So, 5 of the 10 years, I earn zero.
The other 5 years, I made money up to 2 of the years 15%.
My average was 7.23.
7.24 divided into the rule of 72, my money doubled.
A million doubled to 2 million when most Americans barely had their million back.
That's by using indexing instead of an indexed fund.
Are you getting it?
Now, that's not all the choices you have.
I can choose a 2% floor if the market goes down.
Now, they've used 20,000 to keep there and the other 30,000 they buy options and they
lower the cap.
Your average in that one is 8%.
Sometimes, I take a zero-percent floor and up for a 13% cap because they will pay me
140% participation of whatever the S&P does.
If the S&P only goes up 5, I get 7.
Because they pay me 140% because they're using the whole 50,000 for options and they're keeping
the cap at 13.
Sound complicated?
Not when you study it in my most recent bestselling book.
Which one do I use?
All of them.
By diversifying, I actually earn 9.62% in that worst decade, okay?
Now, here's what I am sharing with you.
Get ready.
If I went too fast, let me show you the results, okay?
So, I super impose that S&P chart, if you had your money in an indexed S&P fund, okay?
Index to the S&P 500, your money here, 100,000 would've done this.
Goes 2 dips after 9-11, In 2008, and in 2009, it came back.
Okay, I'm going to stop right here in April of 2009.
Your 100,000 is still is only worth 68,000.
Now, it started coming back up again.
But let's take that snap show in time.
Using indexing...
And I'm just going to use the zero-percent floor.
15% cap, okay?
I made 10% just like people in the market.
But during these 3 years, I didn't earn anything.
Zero, zero, zero.
Then I made 15, then 5, then 6, then 9.
When the market dove 40%, I made zero, zero, zero and then I locked in 15.
I had 178,000 when this one was still only worth 68,000.
I still haven't recovered my 100,000 at the beginning.
See the difference?
This is an indexed fund.
This is indexing.
This is linking to an index, the S&P which means you're only putting the interest the
insurance company is earning at risk.
They're buying upside options.
So, zero becomes your hero.
5 years, I didn't lose anything but I didn't make anything.
The other 5 years, I made money.
And as Will Rogers once said, "People get more concerned about what the return of their
money instead the return on their money when things get bad."
In an indexed fund, they haven't even gotten their money back yet.
Are you getting it?
So, whe you link to an index, what your're doing is you're using the index, the S&P500,
the Dow Jones, the Russel 2000.
I've had many clients choose to put 20% of their money allocated to the S&P.
20% to the Dow.
20% to the Budbii, The Burclays US Dynamic Balance Index.
Maybe the Russel 2000.
And the last 20% stays there in the insurance company earning 5.
And they'll usually average 7, 8, 9, 10 percent rates of return by diversifying in superior
vechicles.
So, this is very powerful.
I want you to understand it.
I have several other educational videos.
But this is where you will gian the most information and knowledge about how this can help you.
It's in my most recent bestselling book.
It's called The Laser Fund.
I want to gift you a free copy of this.
It's 300 pages.
200 pages contain charts and graphs and explanations about how you can use indexing tax-free.
I call it the Laser Fund because laser is an acronym that stands for Liquid Assets Safely
Earning Returns.
And so, this side has all of those charts and graphs.
But if you learn more by stories, you flip over to this side.
This book has 12 chapters with all kinds of stories and examples of how you can use indexing
as strategy with your universal life insurance contract to accumulate, access and transfer
your money totally tax-free.
Participate when the market goes up and not lose when the market goes down due to that
volatility.
So, go to Laserfund...
(L-A-S-E-R) LASERfund.com and you contribute a nominal amount towards the shipping and
handling.
I'll cover the rest of that and I will pay for the book, fire it out to you and begin
to get educated on what indexing is and you'll know more than 99.9% of financial advisors
out there.