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How to Invest in the Stock Market and Not Lose Money

Updated on April 22, 2014
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Pump and Dump

In a perfect world, you buy a stock low and sell it high, unfortunately that is not the reality of the stock market. The stock market is a never ending roller coaster of ups and downs.

The 2007/2008 stock market crash was devastating, wiping out trillions of dollars of pre-retirees and Baby Boomers alike. The suffering caused by this stock market collapse was overwhelming to many and some even committed suicide over it.

At present, six years later, the stock market has eclipsed 2008's high... but we're still seeing way too much turbulence. The Dow Jones Industrial Average (DJIA or the "Dow") is at an all-time high, and the only reason for that is because the Fed keeps pumping money into the market. One day that will come to an end and the wealthy will dump their stock, leaving the common man to sink with the ship. It's the perfect storm.

Black Jack

Let me ask you a question. Since you seem to be the gambler type, investing in the stock market and all. If you were to sit down at a Black Jack table and the worst you could do was to "Push" with the dealer, would you ever get up from the table? No, you wouldn't. What if you could have just "Pushed" and lost nothing in 2008? Then in following years of recovery, receive the lion’s share of the gains. There are products out there that will help you do just that.

This type of product that I am describing are being offered by certain banks and insurance companies. Banks offer this product as indexed linked Certificates of Deposit. These products measure the growth of the stock market on an annual point to point basis. The contracts have a maximum annual cap on earnings and a minimum interest floor. The point is, that you will receive the lion's share of the stock market's gains without the risk of losing your investment. Over all this product will perform at better than current C.D. rates. Instead of getting a half of percent, you could earn as high as 5 - 8%

Fixed Indexed Annuities and IUL

The insurance companies call their products fixed indexed annuities and fixed indexed universal life or IUL. Depending on the status of your money, your health, and your age will determine which of the two products is right for you. Just the same as the C.D., these products are comparable with a couple of distinct differences. First, fixed indexed annuities and IUL are tax-deferred. You do not pay taxes on the money until you take the money out.

Secondly, IUL provides a tax-free death benefit and some companies allow you to use the death benefit to pay for chronic illnesses and long term care stays.

This all sounds good but how are the banks and insurance companies able to offer a product like this? That is easy, they buy "Options". Options trading is an investment strategy that is not available to every investor. Options can be very risky for a person who doesn't know what they are doing. Basically the Banks and Insurance Companies purchase an option in a given index and at the end of the period, they measure the growth of the stock market gain. If the market goes up, you participate in the gains. If the stock market goes down, the worst you can do is "Push" 0% interest on your money that year. Not a bad trade off.

Do you think taxes are going up or down in the future?

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Taxes

Before choosing any investment, you better look how it is going to affect you tax wise! So let's explore the difference between a taxable investment and a tax-deferred investment. First of all, with a certificate of deposit, you have to pay taxes on all gains each and every year, where tax-deferred annuities and IUL do not pay taxes on the gains until you take the money out.

Let's play a game. Let's start with a dollar and double it 20 times. So in year one we would have $1, year two $2, year three $4, $8, etc. By year twenty, we would have a whopping $1,048,000 in a tax-deferred account. (I.e. annuity / IUL). Let's do the same thing again, but this time we subtract 25%, which represents Uncle Sam's cut. After twenty years in a taxable account, shockingly there is only $74,000. I know your probably thinking, we have to pay taxes on the money one day right?

For tax years 1944 through 1951, the highest marginal tax rate for individuals was 91%, increasing to 92% for 1952 and 1953. Currently, 35% is the highest marginal tax rate for individuals. Even if we paid taxes on the $1,048,000 the tax-deferred account still out performs the taxable investment. After paying $964,160 in taxes, your account would still be worth $83,840. In today's times, paying the highest marginal tax rate for individuals, you would retain $681,200.

Don't discount the Death Benefit

Lastly, let’s talk about the second distinct difference between a Certificate of Deposit and the IUL. That difference is the death benefit. Death Benefits of life insurance policies are Tax-Free. So if you built up $1,048,000 in cash inside of an IUL contract, it would not be uncommon for the death benefit to be at least twice as much. That is if you die! Let’s talk about the living benefits of an IUL.

Living Benefits

The living benefits is such that life insurance policies can provide tax-free loans which can be used to supplement retirement income needs and also help avoid paying taxes on your social security but that is a story for another day. Some companies will allow you to use a portion or all of your death benefit while you are alive to pay for unforeseen expenses caused by a chronic illness such as a stroke, heart attack, or cancer or even pay for a long term care stay because you are unable to perform 2 of 6 activities of daily living.

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