Two significant fallacies dictate many people’s retirement decisions; 1) you can’t make gains without risk, and 2) sampling bias. As far as investments are concerned, many of us still believe that beating inflation with returns requires putting your money at risk through equities markets – which is not true. Furthermore, those who invest money in these markets tend to focus on periods of high growth and ignore the years of losses that happen to be much more difficult to offset with earnings, hence the sampling bias.

Chart demonstrating how annuities save you money through the power of zero.

If you subscribe to these myths, you could potentially be costing yourself thousands in returns. With that in mind, let’s take a look at the difference negative years can make and how powerful making those losses into 0% gains can be for your bottom line in the long term.

What Do We Mean by The Power of Zero?

When we say “The Power of Zero,” we are really talking about the undeniable positive effects of eliminating potential losses incurred by risky investments. Investors tend to focus on gains when they evaluate their investment strategies, but not every year will yield a return – in fact, many years will show a negative stock performance.

One of the hidden truths that professional investors don’t talk about is that making back the money you lost on a net negative year requires more than just making back the percentage you lost just to break even.

That is to say that if you lost 30% in one year, you’d need a 43% gain the following year just to be back where you started. If you extrapolate this principle over multiple decades, negative years add up to an exponential loss because they would require historically good years just to break even by the time you withdraw your investment.

What Does This Mean for Your Investment?

The bottom line is that if you can turn losses into just 0% gains, while retaining the average growth of an investment, your total profits become exponentially higher. To paint a clearer picture, let’s take a look at what happens to a 10-year investment of $1,000.

Losses Set You Back More Than Wins Can Make Up

Let’s say you invest $1,000 and that you will gain 10% every odd year but lose 10% every even year throughout 10 years. You would think that this would add up to just having the same $1,000 by the end of your investment, right?

Unfortunately, the reality is very different. Losing 10% every other year would mean that by the end of your investment, you’d have $950 to show for it, $50 less than your initial investment!

What Happens if We Turn Those Losses into Zeroes?

Now let’s take those years of negative 10% and turn them all into zeroes. By the end of the 10 years, your total gains would be $1,610!

You can run the same experiment with your current investments. Market losses create financial pits that require much higher gains to get out of. This shows that making strong gains over a long time is more about eliminating losses than taking significant risks.

How Does This Apply to Annuities?

Annuities are a safe retirement investment option that does not expose you to the risks of the market. Yes, with equities markets, you may have years that yield 30% or 40% gains, and that might seem attractive, but what that doesn’t show is how many of those years it would take to get out of a string of negative 10% or 20% years.

Annuities offer reliable income and steady, predictable growth that is contractually guaranteed. That means you don’t have to risk your money and lose on your investment. By the time you reach your desired retirement age, you’ll start seeing all your returns without having to lose out on investments.

Next Generation Annuities Exemplify the Power of Zero

Next generation annuities are designed to maximize potential growth on your principal through 100% participation in a stock market index without exposure to potential market downturns.

For example, if you invested $100,000 in a Next Generation Growth Annuity and the stock market went up 10% that year, you would be credited $10,000 in interest and your account would go up to $110,000. If the next year the market went down 15%, your account balance would stay at $110,000. You don’t lose anything; you simply get credited 0% interest. However, when the market begins to rise again, your annuity will start rising from your high-water mark level of $110,000.

Do You Have More Questions About Annuities?

Annuity Authority is here to help! We have your best interests in mind and offer highly personalized advice to ensure the best possible financial outcome. Get in touch with our team today and learn more about our services!