Successful wealth accumulation is often attributed to luck and good timing. Think of the stories you've heard of people who became millionaires simply because they got in early on such companies as Dell, Microsoft, or Google. Without a doubt, many of those stories involved both of these happy traits.
Unfortunately for the average stock market participant in an equity-based mutual fund, neither luck nor timing seems to be on their side. According to an annually updated study released by the independent Boston-based financial research firm DALBAR, the average equity mutual fund owner underperformed the broad stock market as represented by the S&P 500 Index by more than 500 basis points annually for the 20-year period from 1990 to 2009. The average equity mutual fund investor earned an average annual return of 3.17 percent in that period, compared with the 8.20 percent-per-year average annual return of the broad market.
The reason for this huge underperformance is pretty simple: When it comes to the stock market, people tend to operate on fear and greed, and these two motivators tend to compel people to enter or exit the markets at inopportune times.
As I write this, there is plenty of fear on the horizon, stirred by everything from the tensions on the Korean peninsula to the headline news about the European Union's $115 billion bailout of Ireland. Both stories appear to overshadow the good economic news here, in which early reports from the retail sector indicate that the holiday shopping season is off to a strong start.
The good news for indexed annuity owners is that they don't need to rely on luck for their success, or worry about what happens on the Korean peninsula, or in Ireland, or Spain, or Portugal, or any number of places in which doom and gloom are in good supply either economically or politically. The mere fact that indexed options are designed to, at the very least, return the principal sum to their owners provides the impetus to stay put. Staying put means indexed annuity owners will have the opportunity to take advantage of any upside potential offered by the product. While that upside potential is more limited than what could be achieved in a pure equity product, it may also be better than what the average equity investor has earned, according to the DALBAR analysis.
