fixed indexed annuities

Why Mutual Funds Can’t Protect Against a Stock Market Crash

 (originally published October 21, 2013 on

(This article was written for Financial Advisors, but I thought everyone would benefit from this advice.)

Why mutual funds can’t protect against a stock market crash

 By Roccy Defrancesco, The Wealth Preservation Institute

I recently saw that the stock market was crashing due in part to the government shutdown and the looming debt-ceiling extension, and I thought it was the perfect excuse to talk about how it’s nearly impossible to protect money from a crash if it’s invested in most mutual funds.

The fact of the matter is that most Americans use mutual funds for some part of their investment portfolio. This, of course, is because we have a broker-dealer-driven industry.

If you’ve been reading my recent articles, you know I’ve been trying very hard to change the discussion in our industry from using historical rate of return to investments to asking the following much more important question: What risks are you taking to achieve your expected rate of return?

Mutual funds stay invested in stocks, even when the market is crashing

Most investors don’t know that most mutual funds stay invested in stocks even when the stock market is crashing (and most advisors who sell mutual funds don’t seem to think about the ramifications).

Don’t believe me? Go to and look up the symbols of two of the more popular mutual funds. On the profile page, you can find the percentage (%) of how much each fund is invested in the market. I’ve listed it for these two funds.

-FBGRX (Fidelity Blue Chip Growth)          80 percent invested

-AEPGX (American Funds EuroPacific Gr A)     80 percent invested

The by-product of being invested in the market with 80 percent of the fund’s assets is that when the stock market crashes, so does the mutual fund. In other words, the fund managers will not go to 50 percent, 75 percent, or 100 percent cash, even if they know the stock market is crashing. It’s proven true by the numbers. Look how each of the above funds did during the crash years of 2008, 2002, 2001, and 2000:

-FBGRX: 2008 = -38.60%; 2002 = -25.32%; 2001 = -16.55%; 2000 = -10.54% Total losses = -91.01%

-AEPGX: 2008 = -40.53%; 2002 = -13.61%; 2001 = -12.17%; 2000 = -17.84%  Total losses = -84.15%

It’s crazy to think that these and many other mutual funds would stay invested in the market when it’s crashing, but that’s the reality — a reality that most clients are unaware of.

Because the mutual funds themselves do not protect clients when the market is crashing, who does that leave to protect the client? The local financial planner. Is it realistic for a local advisor to recommend that clients go to all cash? That would be nice, but most think they already did their job by picking the “best” mutual funds.

Using tactically managed strategies

How would your clients have liked the following returns during the crash years?

2008 = +8.03%; 2002 = +7.04%; 2001 = +7.55%; 2000 = +2.07%

Total returns in crash years = +24.69%

These returns look a lot better than the negative returns of the above-listed mutual funds. Would it help you to know that the tactically managed strategy with the above listed returns has not had a down year in the last 21 years and has had an average net rate of return in excess of 9 percent?

If this article doesn’t make you wonder if mutual funds are the best place for your client’s money and consider learning about truly tactically managed strategies, then I have failed.

Alternatives to mutual funds

What are the logical alternatives to growing wealth with mutual funds?

1. Tactically managed investment strategies — These are strategies that are managed to limit downside risk and capture gains in up markets. One of my favorite managers has a 21-year audited track record of no down years and net returns in excess of 9 percent. So, for the money a client should have “in the market,” being in a tactically managed strategy is the way to go.

2. Equity indexed universal life insurance (EIUL) — As many of you know, this is one of my favorite wealth-building tools for clients under the age of 55. Gains are locked in, no downside risk due to negative markets, tax-free loans, etc.

3. Fixed indexed annuities (FIAs) — I don’t like to say FIAs are a replacement for a market driven portfolio; it’s comparing apples to oranges. However, especially for clients 55 and old, using an FIA (especially those with guaranteed income riders) can be a much more prudent decision than using what most financial planners would recommend — an asset allocated portfolio.

Bottom line

Mutual funds will not protect your clients’ money during stock market crashes. They need to know this so they can make informed decisions about whether to use them or whether they should seek out other tools to grow their wealth in a truly protected manner.


Why Mutual Funds Can’t Protect Against a Stock Market Crash Read More »

Annuities Guide from Money and CNN

Review of “Ultimate Guide to Retirement: Annuities” on

I was reading through this guide and thought there was a lot of good, simple information in it. But I also found some gigantic misstatements and exaggerations.  I’ve compiled a list of the errors I found –

  1. The “Guide” contains no mention of Fixed/Indexed Annuities, which are commonly abbreviated as FIA.  The FIA offers a mix of fixed growth and/or growth tied to the growth of a stock index like the S&P 500.  The mix you choose can be reviewed and changed annually.  The main benefit of the FIA is that there is no possibility of loss due to market forces, but when the stock index goes up, your account value goes up.  Imagine a blackjack table in Las Vegas where you get to keep most of your winnings when your bet wins, but you also get to keep all of your bet when it loses.  Over time, your bankroll would only go up, right?  How long would you sit at that table?
  1. Repeatedly through the “Guide”, it talks about “notoriously high expenses”, “agent’s commissions”, and other “hidden fees” and this is badly outdated information, at best.  Some of this information does apply to VARIABLE annuities, which are NOT normally sold by life insurance salesmen because they require a securities license due to the risk of loss of principal.  I don’t have a securities license, don’t offer variable products, and don’t offer any annuities that charge fees to the buyer except for specific riders.  And I don’t offer ANY annuities where the buyer is charged a commission.  I’m not saying insurance companies don’t pay commissions; I’m saying the buyer doesn’t pay them.  Finally, there are NO hidden fees in the FIA annuities that I sell.  EVERYTHING is fully disclosed in the application and the FIA that I sell either have no fee, or have low fees (.5% per year or so).  FIA typically have LOWER fees than mutual funds and perform better, as well.  Bad information about the fees charged by insurance companies for annuities may be the most common mistake made by financial writers, who rarely have personal experience on which to rely because they usually DON’T HAVE ANY MONEY!
  1. The “Guide” talks about surrender fees and is correct in saying that annuities typically have surrender fees.  So do cd’s and many other financial tools used to save money for a period of time.  If you want to save money but think you may need to access more than 10% of the money in any year, then you should not put it in an annuity.  An annuity is a tool for saving money over a period of years, then converting it to an income stream, unless you are buying an immediate annuity, which converts a lump sum into an income stream immediately.  In the annuity business, we are constantly confronted with one major issue – SUITABILITY.  Insurance is a highly-regulated field and insurance agents are closely scrutinized to make sure we are offering and selling products that are appropriate for our customers.  Surrender charges are disclosed in any application for an annuity, so make sure you are aware of them.  Over time, they get smaller until they are gone.  But you CAN access up to 10% of the money annually without surrender charges in every FIA that I offer.  I can also offer annuities with no surrender charges, but the upside potential is lower.
  1. The “Guide” mentions that you can buy annuities with no fees or surrender charges with “direct sold annuities.”  The same thing can be done with most life insurance agents.  Just tell them what you want, ask questions, and read the application!  Any GOOD life insurance agent is going to ask a lot of questions about WHY you need an annuity, or even a life insurance policy, because this is the ONLY way they can make sure you get the right product for your needs.
  1. The payout options for annuities in the “Guide” is missing the most important option – a lifetime income benefit rider (LIBR).  For a small fee (as low as .5% per year), the insurance company will track two separate cash values for your annuity.  One value is the actual cash value plus interest or credits.  The second value is the rider value, which increases at a fixed rate that is normally higher than the growth of the actual cash value.  The rider value typically increases at 6-6.5% per year (depending on the company and specific product).  When the time comes to convert your account value to a stream of income, the rider value will typically be higher (often much higher) than the actual cash value.  The insurance company will calculate your income stream (annual or monthly) on the rider value, resulting in a higher income than if it had been based on the actual cash value.  Each year, the actual cash value will be lowered by the amount paid out as income, EVEN IF THE INCOME PAID EXCEEDS THE CASH VALUE SAVED!  This will be done as long as the buyer/owner of the annuity lives, and if the buyer/owner dies, any amount remaining in the actual cash value will be paid to his or her heirs.  Try that with your qualified retirement plan (401(k) or IRA)! Using an FIA with an LIBR results in faster growth with low fees, a higher income that cannot be outlived, plus the safety of an insurance company (no life insurance companies have failed to pay a legitimate claim in the history of the U.S., including AIG, whose exotic investment division failed and caused the company to require a bailout a few years ago, NOT the life insurance division).
  1. In several places in the “Guide”, they compare annuities to mutual funds.  As I mentioned above, FIA typically have lower fees than mutual funds and HIGHER growth rates, with MUCH higher levels of safety.  I’m not saying that every annuity will beat the performance of every mutual fund every year, but if you’re looking to put away money that consistently grows and safely builds a retirement income that cannot be outlived, there’s a good chance that an annuity is the best option.  But this can ONLY be determined by a careful consultation with a good life insurance agent that asks a lot of questions.
  1. One whopper of a misstatement in the “Guide” is that you can count on tax rates not going up in the future.  If you look at any chart showing the history of income tax rates in the U.S., you’ll see that tax rates are currently at the low end of the scale, despite massive budget deficits.  I believe there is a good chance that income tax rates will go up in the future and I also believe that it’s criminal to tell people to count on lower tax rates in the future.  Some of us will have paid off our homes and our kids will have moved out by the time we retire.  This means we will also have lost our greatest tax deductions.  Even if our income has gone down and rates don’t rise, losing tax deductions means we may not be paying less in taxes.
  1. The “Guide’ says annuities may not be good in your IRA and that’s a mistake.  It’s true that the growth in the cash value is tax deferred already, which is a large part of the appeal of an IRA; but the growth rate is often superior to the growth rate in many of the alternatives and it CANNOT GO DOWN.  I bet you know somebody that lost a large portion of the value in their 401(k) or IRA during the last 6 years, don’t you?  If the money had been in an FIA it would not have gone down at all during the bad years, but would be growing during the good years.  When is that a bad thing?
  1. There is one BIG final omission from this guide.  Many insurance companies are offering bonuses for buyers of fixed/indexed annuities right now.  These bonuses can range up to 12% of your deposit.  Please tell me where you can invest your IRA money and get an immediate 10% bonus, applied to the cash value of your account as soon as you open it, with no expenses?

If you are 50-65 years old and are not ready to take large distributions from your investments or your qualified retirement account, then let’s talk about how an annuity MIGHT be a good financial tool for you.

Michael Goodman  (714)585-2371

Annuities Guide from Money and CNN Read More »

Verified by MonsterInsights