How the Rainbow Strategy Works

In these times of high volatility, people are looking for ways to diversify their portfolio in order to protect their nest egg and try to capture as much of the upside as possible. But what exactly is diversification? Is it choice? A Jelly Bean Store can have thousands of different choices of colors and flavors but everything you buy is still a jelly bean. True diversification is a mixture of uncorrelated, or lesser correlated, items. When looking for diversification for where you put your nest egg, you want to be spread out across the different economies around the globe.

Where do you think we are going to see the economy improving in the next ten years? China? Europe? Japan? America? How would you like to be in a position where you would not have to guess which economy will grow the fastest to be able to take advantage of that growth? That is what the new “rainbow crediting method” does. Many of the experts familiar with this strategy say it is like being able to bet on the race after the horses have run. Here is how it works. The strategy uses four indices from around the world: the Hang Seng in China, the Dow Jones Eurostoxx 50 in Europe, the Nikkei 225 Index in Japan, and the S & P 500 in America. This strategy is not only diversified using economies from around the world, but it is also weighted so that most of the money is going to the indices that are producing the best results. At the end of the year, the rainbow strategy allocates 40% of the money in the strategy to the index that has grown the most, 30% of the money to the index which came in second, 20% of the money to the index which came in third, and 10% to the trailing index. This means that the 70% of your money is allocated to the top two highest growth indexes. It then adds up all of these results and multiplies the total by 60%. A 1.5% free is subtracted. If the result is positive, your account is credited with the earnings. If the result is negative or zero, your account remains unchanged from the prior year. So in up years, your account is growing at a substantial rate and in down years your principal and past earnings are protected.

By: Phil Wasserman, JD

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