While driving over the last few weeks and listening to the radio, I have come across 2 different shows (really infomercials) for retirement planning touting the benefits of purchasing annuities. On both shows, they frequently quoted Newton’s third law of motion saying “what goes up must come down“. While annuities do have a place for retirement planning, DON’T MISUSE SCIENCE as part of a sales pitch! Yes, these are sales pitches!
Origin of What goes up must come down
First of all, let’s review the comment “What goes up must come down”. This is derived from Newton’s 3rd law of motion that every action has an opposite and equal reaction. However, Newton’s 3rd law doesn’t explicitly say “What goes up must come down”. It more so describes the interaction of forces between two objects, not gravity. As an example, if you hit a baseball, there is both a reaction of the bat to the ball and the ball to the bat.
How do laws of motion apply to finance? THEY DON’T! It is a catchy sales line that reels in the gullible. While physicists are finding careers in finance, they are evaluating correlations in the market, not applying the laws of physics.
The Stock Market does have ups and downs, but it is not impacted by gravity. In fact, looking at the historical performance, it has risen more than fallen. The below chart from macrotrends illustrates the overall rise of the market.
It is true that retiring right before one of the market falls would be challenging for your portfolio. Imagine thinking you were set to retire in 2007, then to have the market fall in 2008. If you didn’t adjust your withdrawals from your portfolio, it could have a dramatic impact on your nest egg. This still does not justify the comparison to a law of physics!
While these retirement planning sales pitches seem convincing on the front end, please remember they are simply that…sales pitches. I have been taught and believe that one should be their own financial advisor and use critical thinking and judgement before jumping into any investment.
I could see myself potentially purchasing an annuity in the future for guaranteed income as part of a diversified portfolio including stocks, bonds, cash, and real estate. However, it will not be as a result of a certain sales pitch!
What are your thoughts? Have you hear similar sales pitches that have no scientific basis?