No. of Recommendations: 2
...That's not the case, though. The majority of the major annual rallies occur after significant down trends... and this has a major reduction effect on the benefits of capturing "all the rally upside" above caps.
Absolutely. You have grasped a point which eludes many many authors and writers. See:

Losses tend to cluster, and gains also tend to cluster. So the simple statistics that people toss about don't tell the whole story.

This is why a floor/cap hedge outperforms in volatile markets, and particularly excels when there are significant bearish periods. When there is a strong certainty of straight rally years greater than a particular cap, then going naked is better.
The challenge is designing a strategy that avoids the bad outcomes but keeps the good outcomes. This is extremely difficult.

The market risk is there. It is what it is. It cannot be eliminated, only shifted around. If A wants to get rid of risk he can only do so by sloughing it off to B. B will only take on this risk if he gets paid for doing so. Insurance companies are pretty good at pricing risk and rarely undercharge for it. They change the risk profile that A is exposed to, and they charge A for doing so.

And this whole discussion is more appropriate for the M.I. board than this board. ;-)

What is the rough probability of consecutive S&P rally years greater than 12%, without intermediary years below zero to wipe out the above-cap gains?
That's a good question.

The table I posted did not address sequence of returns, nor was it meant to.
The table merely answers the question, "So, how often did the historical returns fall into these various buckets, anyway? Just how many times were capped off?"
And secondarily, "What is the density of the returns in the buckets -- how much did each bucket contribute to the overall return?"

I put this in a different thread because it's really a separate issue from the IUL srategy, where the sequence of returns *does* matter.
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.