Life insurance and other financial services sectors have some math in common.
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.
- Indexed Account: A modeled 1-year S&P 500 point-to-point with a 0% floor and 10% cap.
- 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-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.
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.