Fixed Indexed Annuities (FIA) may have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio.
With bond yields at such low levels, people are looking for other ways to avoid the risks of the current market and the overall economy, especially as they approach retirement. In his latest research, Roger Ibbotson, the economist known for his Stock, Bonds, Bills and Inflation chart click here for article, argues that fixed indexed annuities have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio, given their downside protection.
A fixed indexed annuity is a contract issued and guaranteed by an insurance company; it is a tax-deferred accumulation vehicle whose growth is benchmarked to a stock market index, rather than an interest rate. In good years, when the market has positive increases, you may realize positive growth; In part because, you are limiting your equity exposure due to the index. And when the stock market is very risky, you may limit downside risk by have the peace of mind knowing that the returns will never fall below 0%.
Ibbotson simulated different portfolios to demonstrate how they would perform in below median bond return environments—which he believes we’re heading into—versus above median bond return environments. During below median bond return environments from 1927 to 2016, a 60/40 (stocks and bonds) portfolio returned 7.6 percent, on average. That compares to 8.12 percent for a 60/20/20 (stocks, bonds, and fixed indexed annuities) portfolio and 8.63 percent for a 60/40 (stocks and fixed indexed annuities) portfolio .
Does a FIA make sense for your portfolio? It may, or it may not. The point is, everyone's needs, risk tolerance, and goals are different. Investment recommendations and decisions cannot be given or made until the whole picture is reviewed. Let’s start that conversation to allow us to help you determine what is best for you by examining where you currently are and where you want to be. Once we know that, we can assist you with putting a plan in action that fits you.