A chart showing that a 3-month moving average strategy beats the indexed account returns in the time periods shown. (Chart: Mark Whitelaw/Winged Foot Partners)

Life insurance and other financial services sectors have some math in common.

(Related: The Life Insurance-Other Financial Services Sectors Communications Gap)

Here’s a look at an investment and emotion risk management strategy from the financial services side, expressed in a manner consistent with how the life insurance sector works.

Negative Return Risk

Indexed accounts have become popular because they address the emotional and financial consequences of a negative return, by setting a 0% floor.

In the financial services sector, negative return risk is addressed using the Simple Moving Average management strategy.

Let’s compare modeled historical returns for three types of strategies.

  1. Indexed Account: A modeled 1-year S&P 500 point-to-point with a 0% floor and 10% cap.
  2. Unmanaged S&P 500 Total Return Index (S&P 500 TR) Fund: A fictitious fund with returns equal to returns from the S&P 500 TR Index.
  3. 3-Month (60-Day) Moving Average: The modeled 1-year returns from using the Simple Moving Average calculation as a crossover between being invested in the fictitious S&P 500 TR fund or earning the Vanguard Total Bond Market Index Fund (VBMFX) gross return.

The Moving Average End-of-Month Calculation and Allocation Rules:

  • If the S&P 500 TR share price is greater than the moving average – Allocate assets to the S&P 500 TR fund.
  • If the S&P 500 TR share price is less than the moving average – Allocate assets to the Vanguard Total Bond Market Index fund.

The Chart

In the chart above, I compare the results, as of April 30, for the end-of-month S&P 500 TR share price, versus the moving average of the last three end-of-month share prices (60-day period), versus the indexed account with a 10% cap.

Both the 10-year return and the 15-year return were higher for the 3-month moving strategy than for the indexed account.

The Worst Years

Note that, during the last 10 years the worst 1-year returns were:

  • 3-Month Moving Average: -10.93%.
  • Unmanaged S&P 500 TR Fund: -32.57%.
  • VBMFX Bond Fund: -2.76%.
  • Indexed Account:00%.

The Takeaway

Indexed accounts may be a passive method of risk management.

Simple Moving Average may achieve similar objectives in a semi-active manner for separate accounts offered in a variable insurance product.

The life insurance-financial services sector communication gap is a two-way street. Both sectors offer consumers options to address their protection and accumulation needs within the Internal Revenue Code Section 7702 pricing and tax structure.

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Mark Whitelaw (Photo: Mark Whitelaw)

Mark Whitelaw is head of design at Winged Foot Partners. Whitelaw specializes in investment analytics for and administration of life-insurance-funded executive benefits, trust-owned life insurance (TOLI) and individually owned institutional life insurance plans.