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Subject: Re: Retirement, college, and Obamanomics  Date: 1/1/2013 9:09 PM 
Author: Rayvt  Number: 71178 of 78166 
If you are going to point out that the "cap" on gains is a negative because the S&P often rises more than 15%, you must also point out that the "floor" (no loss of principal) is a positive  as I believe the S&P returns are negative about 1/3 of the time. Some more actual data, because there's nothing on TV and I'm bored. ;) Spreadsheets are fun... I downloaded the S&P500 monthly prices since 1971 and computed all the rolling 12month gains. That's a total of 480 12month periods. (All calculations here exclude dividends.)
Not quite 1/3 of the time, the 12month return is a loss. So the floor of a IUL comes into play and you don't get hit by those losses. But...well, look at that, 1/3 of the time the return is above 15%, so you hit the cap (assuming a 15% cap), and you miss out on all the gain over 15%. Not so good. You get the 15%, which is good, but nothing more. Sooooo, just how much gain is foregone? Surely it couldn't be much, right? Wrong. But first, let's look at those 28% of the time when the S&P had a loss. The average loss was 13.6%. Cool  about a third of the time you ducked an average loss of 14%. Yipee. Okay, so how about the magnitude of the gains in excess of the cap?
Hmmmm. Onethird of the time you got capped at 15% and left 11% on the table. You do a little happydance, but it's rather muted because you didn't get that other 11%. Hmmm, I wonder where it went? The market returned 26%, I got 15%, but where did that other 11% go to? Maybe it went to offset the losses when the floor got hit? S.W.A.G. = 33% of the time the excess gain was 11% and 28% of the time 