Even though I have many clients utilizing fixed indexed annuities (FIA) as a bond alternative, I am convinced that too many FIA pundits have cost clients a huge part of necessary growth and compounding under the auspices of “zero is your hero."
This year, we are celebrating the 50th anniversary of the emergence of the original Mouth of the South who, in 1964, kept his vow to punch heavyweight champ Sonny Liston into kingdom come. One of Muhammad Ali’s greatest attributes was his ability to wear opponents out by hanging out on the ropes during a match and taking a series of blows that would ultimately wear his opponent down. Then, Ali would craftily “float like a butterfly and sting like a bee” on the way to another victory.
Today’s stock market has climbed a wall of worries since the inception of the millennium. It has taken a series of blows and come back strong. It will stumble again. As a recent "Financial Planning" study shows, an investor who employed both depth and breadth in a portfolio would have been richly rewarded despite two devastating bear markets if he had held on to core assets.
Even though I have many clients utilizing fixed indexed annuities (FIA)
as a bond alternative, I am convinced that too many FIA pundits have cost clients a huge part of necessary growth and compounding under the auspices of “zero is your hero." Yes, indexed annuity participation rates have been around 40 percent for years, so too little has been employed in stocks and bonds with no caps to fund an adequate lifestyle for many clients. This has left many ideal indexed annuity middle-income clients with too little for retirement. One has to wonder if this had been the case with the following exposure.
The "Financial Planning" article showed that FIA professionals cannot be like the “Cinderella” Atlanta Hawks that keep missing the ball in the first round and seventh game of the NBA playoffs when the market is soaring. In chasing the ball of ideal diversification, a portfolio with seven assets would have produced a 15-year return of 7 percent with 33 percent less risk, according to Lipper. On a $10,000 investment, that would mean nearly 80 percent more dollars over the last 15 years, or $27,458 versus $19,852 with only the S&P 500 as the sole asset. With more than 80 percent of the fixed indexed product out there still linked to the Dow or S&P 500, welcomed is the option of new indices that have the potential to eke out some additional returns. It does not negate the importance of having a well-diversified portfolio that is mostly uncapped and capable of producing returns necessary in order to produce adequate returns to support a retirement lifestyle and meet growing needs for health care
and increased lifespans.
The major benefit of a guaranteed lifetime income is important and obviously relevant to retirees and semi-retirees, but it should not be the prime reason for portfolio design if this asset class does not produce enough income. Now may be the time to sell in May and go away, but as the last 15 years have showed, sometimes it’s time to stay, go gray and make hay with a broadly diversified portfolio
. If clients are looking to develop income from an asset that will provide a lifetime income that offers tax deferral and possible benefits for sickness, chronic illness or confinement, there are hybrid annuities that stand the test of time when a gray day in May comes along or the sunshine is fine. In fact, one of the leading index annuities combines seven or more assets, so the above diversification benefit is utilized and converted to an income that cannot be outlived with inflation protection as well.