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August 11, 2002 at 08:00 PM
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Back in 1999, many financial counselors were urging clients to “take some money off the table.”
I also spread this refrain in my turn-of-the-century presentations on index annuities, reminding financial counselors that $100,000 invested in an S&P 500 index fund five years earlier had almost tripled in value.
My advice then: Tell clients to take half their investment money and place it in a vehicle that protects principal. The ideal choice for providing this principal protection would be fixed index annuities, I said, but fixed rate annuities or even certificates of deposit would be fine, too, as long as they protected at least some gains.
If a client objected–because theyd have to pay taxes on these gains–I cheekily suggested the agent respond, “Fine, Ill be back after youve lost $100,000. Then, youll have less to pay taxes on.” (As it turns out, my estimate of loss was, in some cases, conservative.)
My response wasnt meant to be flippant. It came only from the recognition that sometimes you need to treat a client like a Missouri mule and give a verbal 2×4 between the eyes to get his attention.
My point? The index annuity story told three years ago was that it would be prudent to invest in such a product to protect gains and principal from market risk while providing the potential for higher returns. Today, the story is the same.
Yet, some clients may hesitate anyhow, because they feel the stock market may keep on struggling for several more years. These individuals completely dismiss the rationale for index annuities–the potential in the product to pay excess interest linked to an equity index.
What is an advisor to say to such clients? Instead of arguing over which version of the future is correct, I suggest showing how the index annuity concept would have fared in another troubled time in the market. (See chart)
In 1972, the S&P 500 Index closed at the highest year-end value up to that time, and it didnt reach that level again until 1980. If you could have bought the index at the end of 1972, you were under water for the rest of the 1970s. Even at the end of 1979, the S&P 500 was still 9% below its 1972 high. That means, for over seven years, the S&P 500 closed at a loss from its 1972 value.
