The Tortoise and the Hare, Revisited


The Tortoise and the Hare, Revisited

As kids, we all learned the story of the tortoise and the hare. As a matter of fact, I ran across an old Bugs Bunny cartoon last week, and it took me back to my childhood. Anyway, the hare reminded me that this story can be used in today’s economic environment.

If you can eliminate the downside of any portfolio, you don’t need to have nearly the upside possibility to keep up. Let me explain.

You have an equity portfolio of $100,000, and the market is up 12 percent in the first year. What’s your balance? One hundred percent of people answer correctly: $112,000.

But if the market is down 12 percent in the next year, most people will answer that they still have $100,000 left, because the average return mathematically is zero. The answer is actually $98,560 – you’ve lost 12 percent of the $112,000, which is $13,440.

Now, throw a fixed index annuity into the mix with a 5 percent cap rate. On the surface, it’s not terribly exciting, like the tortoise. But the beauty is that in the first year you lock in the 5 percent gain, and your balance, even with the down 12 percent year, is $105,000. It beats the equity portfolio by $6,440.

I’m not here to tell you that an FIA will beat a market return in the long-term. What I am saying is that a percentage of every client’s portfolio should have the protection of an FIA to smooth out market fluctuations.

The Bottom Line: If you can eliminate the risk of losing money with a portion of your assets in an FIA, you don’t need the full upside of the market to keep pace.