It's All Relative


It's All Relative

April 3, 1998, was the first time the Dow Jones industrial average reached 9,000 points. Many people thought the index could not go much higher, while others believed in the irrational exuberance of the stock market. Regardless of what you thought at the time, the results since then point to the value of fixed indexed annuities.

At the close of business on April 3, 2014, the Dow closed at 16,572 points. The total rate of return equates to 4.14 percent over a 16-year period. If you consider the impact of capital gains on the investment, the return decreases to 3.52 percent. After assuming a 100bps investment management fee, the real rate of return is 2.52 percent. Fee and tax drag took away nearly 40 percent of the gross return.

Many advisors are telling me that the low cap environment prevents them from showing FIAs to their clients. If you consider that an index would only need to pierce a 4 percent cap 63 percent of the time to beat a 2.52 percent real rate of return, FIAs make a great choice for many clients. Considering there is no market risk associated with FIAs, the client would see a more consistent return than having been in the market over the same period.

Relatively speaking, FIAs have performed well over long periods of time against the general market, even in a low interest rate and cap rate environment. Give FIAs a look for the conservative portion of your portfolios. You might find that the FIA portion doesn't create drag in the overall return.