Market Recovery Program
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Chapter 8
GETTING PART WAY THERE: THE INDEXED STRATEGY
What is this “third way” which combines the best of both the market-based and fixed strategies?
It’s called the indexed strategy.
You have the best of fixed investments because all the money you put into it -- your principal -- is guaranteed; so the safety factor is there.
But you also have the opportunity to participate in the stock market when it goes up. All interest earned is linked to what the S&P 500 stock index does, which for the past 80 years -- at least until the recent downturn -- has averaged more than a 10% return each year.[1]
You’ve mentioned the S&P 500 Index several times. What is it?
The S&P 500 stock index comprises 500 of the most widely held companies in the U.S. representing a variety of industries, such as technology, health care, utilities, etc.
How does the strategy work?
When the S&P 500 index goes up, you participate in that growth. It’s measured one year at a time; from the anniversary date of the beginning of your contract until that date the following year, and so forth each subsequent year.
When the market goes up, your account is credited with interest. Depending upon how the calculation is done you‘ll receive either a percentage of the gain; a cap on the total gain experienced that year; or a monthly average. These are the most popular crediting methods although there are a few others.
What happens in those years when the market goes down?
When the market goes down not only do you not lose any of your principal but you don’t lose any of the gains you’ve already made in previous years. You don’t make any money in those years when the market goes down but you don’t lose anything either.
Can you give me an example of how it works?
Let’s say that a few years back you contributed $10,000 to the indexed strategy, and let’s say the S&P 500 did 10% the first year, bringing the fund to $11,000 ($10,000 plus $1,000 which is 10% of the $10,000). However, your $10,000 grows to just $10,700 because although the market went up 10%, you’re in the indexed strategy and your participation means you getting only a portion of that gain which we’ll assume for illustration purposes is 7%. See Figure 7.
Figure 7
Let’s say in the second year the S&P 500 did 10% again, bringing its total to $12,100. Let‘s also say your indexed strategy is capped at 7.0%. So your account has grown
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