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Finding some truth in financial fables

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The mountebank and the teacher
A large crowd of reporters and financial columnists had gathered to watch a new presentation by the famous Wall Street mountebank. As the beguiler walked to the center of the stage, the crowd grew silent.
“Ladies and gentlemen,” he began, “we on Wall Street have created a level of protection never seen before in the financial world.

He continued, “The first is called a Return Enhanced Certificate that gives you a chance to earn up to 7 percent a year and will even cover you for the first 10 percent of loss if the index goes down (but the next 90 percent of loss would be borne by you) The second is the Digital Option Certificate that guarantees 5 percent if the index does not fall and protects your principal (unless the index falls more than 50 percent). These safety instruments offer an unprecedented mix of earnings power and principal protection and show how much Wall Street cares about consumers.”

These pronouncements were met with thunderous applause by the financial media and with murmurs of how wonderful it was for Wall Street to offer all of this safety with upside potential. As the applause died down, a teacher in the back of the crowd spoke up. “I’ll show you an instrument with a much better mix of earnings power and principal protection,” he said and bounded to the stage.

“My safety instrument also gives you the potential to earn 5 percent to 7 percent each year, but unlike Wall Street’s offerings, my instruments protect both the consumer’s principal and credit losses regardless of how far the index falls.”

“That sounds great,” responded the media crowd. “What is your creation called?” Replied the teacher, “It is an index annuity.” “Boo!” yelled the media crowd. “We don’t like annuities. Bring back the mountebank.”

The teacher stood even taller. “You fools,” he cried, “an annuity is what Wall Street keeps trying to build, but because Wall Street only understands risk reduction and not risk avoidance, they will never be successful! The next time you in the media write a story about annuities, judge the facts instead of reporting your prejudices!”

Moral: Do not denounce something genuine only to applaud an imitation.


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