One of the great mysteries in America today is the credence we give to the predictions of economists, radio personalities, and weather forecasters, without holding them responsible for the actual results of the things they predict. This is an anomaly, and it certainly does not apply to the world of financial services. When it comes to their money, clients have much better memories and aren't anywhere near as forgiving – and like it or not, they shouldn't be.
Those of us who have been in the business for the past 20 or so years have seen three distinct products ignored, criticized, and chastised when they came to the market. The majority of planners and advisors never bothered to conduct anything resembling due diligence with regard to these products. Yet all three of these markets have since become widely accepted and are considered viable tools in both pre- and post-retirement planning. And, interestingly enough, it's hard to find any planners who will openly share that, for a number of years, they refused to look into these products, and even actively discouraged clients from considering them.
Chief among these products? The indexed annuity.
The following chart shows the actual returns over a 10-year period of the Standard and Poor's 500 Index compared with the actual returns of an indexed annuity I personally own. The time period covers the 10-year period from January 2000 through the end of 2009. I put $10,000 into the annuity, so I'll use that same dollar amount for the S&P. I did get a 7 percent first-year bonus on the annuity, and included that amount in this comparison.
The first conclusion drawn here is that if we take a snapshot of the past 10 years, there are indexed annuities that have outperformed the index itself.
To those producers who offer indexed annuities, it should come as no surprise that my IA outperformed the S&P 500 over the past 10 years; after all, the S&P did suffer through losses of 9.11 percent, 11.98 percent, 22.27 percent, and 37.22 percent in four of those years. Then again, this should come as no bigger shock to advisors who have used indexed mutual funds, as those funds have produced less than stellar results over that same 10-year time period.
In an effort to put a face on this, I have constructed the following chart that compares seven index funds, widely considered the top-performing funds in that category, with my indexed annuity.
As you can see, the IA substantially outperformed the index funds. It is important to take into consideration that the funds used to make this chart were chosen because they outperformed the index over that period. I am not saying the funds used in this chart are the top seven, but they are the top seven I could find.
Conclusion number two: Over the past 10 years, there were indexed annuities that significantly outperformed many – if not all – S&P index mutual funds.
In order to take a broader approach and quantify my research even further, I decided to compare the IA to 10 highly regarded mutual funds, each from a different family of funds, and all carrying four- or five-star ratings.
Granted, you could argue that, because of the vastly different components that make up mutual funds and indexed annuities, it can be difficult to make a direct comparison between the two, let alone one specific EIA and 10 different mutual funds. With that in mind, I do think the following chart accurately represents the change of these products over a 10-year period. Of course, it goes without saying that the past performance of any insurance or investment product should never be used to suggest future results.
