Money Advice Guide

I have been reading articles on variable annuities lately and they are all saying the same thing, variable annuities under perform the market. What about variable annuity sub-account performance, do they really under perform? This is a great question.

Variable annuities have been beaten up and torn apart by the critics who say that variable annuity sub-accounts do not perform as good as regular mutual funds, specifically index mutual funds. Well, where is the surprise in this revelation? There is none. Sub-accounts are not mutual funds; this may come as a surprise to many of the variable annuity bashers out there. Sub-accounts are mutual fund like investments, a good example of this is you do not own shares you own units instead.

The investments may be very similar to the mutual fund it mimics, but all in all they are different. Mutual funds tend to have more cash on hand to prepare for liquidations; sub-accounts have a longer retention rate of investors so they do not have to plan for mass liquidation if the market goes down. If you look at Fidelity’s Contra Fund, this is a popular sub-account clone in variable annuities; you will see that the sub-account, mimicking the mutual fund, holdings are basically the same, but not exactly. This is one reason why variable annuity sub-accounts perform differently as compared to mutual funds; it is an apple to orange comparison.

I can also recall many mutual fund companies wholesalers saying how much better their variable annuity sub-accounts out performed the mutual fund counter part. AIM used to make this comparison back in 1997 and 1998. It is true that in many cases the sub-account clone can perform better than the mutual fund it is mimicking. The biggest reason is typically the cash position of the investment. Mutual funds, again, tend to hold more cash as compared to a sub-account.

Let’s talk about all the people that say, “The S&P 500 is the only way to go”. It is true that over the long term very few mutual funds actual out perform the S&P 500. The exact number is about 98% of all mutual funds do not out perform the S&P 500. So, why would you make variable annuities bear the brunt of this argument? I just said 98% of mutual funds do not out perform the S&P 500, not variable annuity sub-accounts. Because mutual funds cannot outperform the S&P 500 where is the surprise that variable annuity sub-accounts do not outperform the S&P 500? There is no surprise it is a given.

Why do mutual funds and sub-accounts not out perform the S&P 500? First you have to look at the composition of the S&P 500, what makes up this index. Most say it is a broad based diversified index, which it kind of is. I mean, you have 500 different stocks, it pays a dividend and there are tons of different sectors in the index. Look at the top holdings in the S&P 500.

The S&P 500’s top holdings are large cap technology holdings, just because it pays a dividend does not mean it is a value index, just look at the price to earnings ratio. It is a large cap growth fund period. This is why it did so well in the 1990’s and sucked wind in the early 2000’s when value stocks were hot. These couch experts say invest in the S&P 500 it has less risk, what are they talking about? It got hammered like everything else in the early 2000’s.

What is even worse is everyone compares everything to the S&P 500. You cannot do that. How can you compare a growth and income fund, traditionally a value portfolio with bonds in it, to the S&P which is large cap growth? You should not. If you are going to argue points do not argue it with a factious argument. The S&P 500 is what everyone compares variable annuity sub-accounts to, how can you do that and think it is a real comparison?

Can or do variable annuity sub-accounts perform well against mutual funds? Yes they do. Are they exactly in sync with mutual funds? No, sometimes they do better sometimes worse. Are there portfolios inside a variable annuity that also rock the S&P 500? Without question there is.

American Skandia/Prudential offers Pro-Fund investments which leverage your money to outperform the S&P 500. They also offer First Trust unit investment trust, also known as UIT’s. These portfolios are target portfolios, which means they buy stocks at the beginning of the year and hold them for a set period of time then they sell them. This buy and hold philosophy has lead to surprising results. Over a 20 year time period a diversified portfolio of these UIT’s crushed the S&P 500, by very noticeable margin. Jackson National also offers these types of investment options, although they are not First Trust that act the same way and are very similar.

There is also The Hartford Leaders which offers American Funds, Franklin, AIM and MFS sub-accounts. The Franklin and American Funds portfolios offered all have funds, inside the annuity, that out performs the S&P 500. There are several more variable annuities that offer great sub-accounts; you just have to do the research on them.

My point to all of this is the people writing these articles say just invest it in an index fund and forget about it. Index funds offer no more security than mutual funds, or sub-accounts. Index funds are undiversified investments, so how can they recommend this? Yes, you can buy various index portfolios, but that would need a larger amount of money to do that.

To make a blanket statement and say variable annuities under perform is ridiculous. They are really reaching to try to make their point, which is clearly biased. In order to do a true comparison between sub-accounts and mutual funds they must do 2 things:

First, know the difference between a sub-account and a mutual fund, which in some cases I do not think they do.

Second, do an apple to apples comparison, not a growth and income or bond fund against the S&P 500.
They must also remember most people buy variable annuities for the tax deferral and the living benefit guarantees. Since they buy variable annuities for these reasons they often know the fees are higher. Also, since variable annuities offer these guarantees it will keep people invested longer. It will entice people who need equities, but are afraid of them, to invest when they otherwise would not invest.

To learn more about variable annuities please go to www.annuityiq.com.

Scott DeMonte is a widely respected expert in variable annuities. Scott has worked as both a financial advisor and as an executive for 2 of the best selling variable annuity contracts sold in America.

With over 12 years experience in the financial services industry, Scott decide to start his own company, http://www.annuityiq.com. Through his expertise he evaluates and rates variable annuity contracts.

By educating both brokers and consumers, Scott’s goal is clear: Get the right information, the first time.

Tags: annuity, mutual funds, tax deferral, variable annuityannuity, mutual funds, tax deferral, variable annuity

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When guests walk into someones house they typically say “You have a wonderful home” and begin the process of looking around at the decorations lying or hanging around. In most cases the room or house may have a motif or theme that includes collections of one type or another.

In my house each room has a different theme which includes the many types of collectibles that I have saved over the years. One room is dedicated to nautical items. Having spent many years in the Navy, this is pretty self-explanatory to visitors who know me, but other collections have less to do with what people know about me and more about the side of me that people exploring my house find as a new and refreshing aspect of me.

Collecting is a great way to explore yourself and is a hobby that is nothing short of amazing as a pick-me-up when life seems to get the better of you. I make my weekly trips to the flea markets, farmers markets, local auctions, yard sales and often do nothing but look around and see what catches my eye.

After giving the tour of my house and explaining why I collect what I collect, I often ask people what they collect. The answers range from nothing to a long list of collections. This often turns into an ice breaker which is a useful tool for those of us who are not great conversationalists. You talk about what you collect, and give the often interesting stories of why you started collecting those items as well as where and how you acquired your pieces. Your guests often will go into how they did the same with their collections and by the end of the night you have learned things that rarely come out to the public at large.

One aspect of collecting that is often overlooked is its character-building application for your kids. Believe me, having raised three teens, I know that finding a way to interact with the modern kid is sometimes tasking. Finding out what interests them beyond their computer or playstation is often difficult since they are preoccupied. Take them with you on one of your trips and let them look. Help them out by showing them what interests you, while at the same time give them a chance to explore on their own. If they find something…help them out the first time and buy it. My son found a “neat” cigar box once and told me that it would be great to put his Pokemon cards in. It turned out that he not only wanted the one box, but when we went on future trips he would find new and different boxes which now make up a rather large display in his room. None of them have the Pokemon cards in them anymore as that fad has passed, but he is now making sure that when we make our trips he has enough money saved up just in case we happen upon a new box for his collection.

So why is having a son who collects cigar boxes a great thing? He has learned some valuable lessons by having this interest. He has learned to save money, he has learned to protect his collection and most importantly he has gained an interest in something that is always questioned by people who visit his room. Have you ever heard of someone whose child breaks something of theirs and says “That’s why I can’t have anything nice around”? Not so in my house. My son has friends over, but he makes sure that he lets them know what they can touch and handle as well as what they need to leave alone and look at from a distance.

Is it Junk or is it a treasure? Well, I guess that’s up to you as beauty is always in the eye of the beholder.

Tags: collecting, investment, self improvementcollecting, investment, self improvement

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