Beware Annuities

A lifetime annuity is where you pay a lump sum today and receive monthly payments for life.

Estimated amortization of a current lifetime annuity.

A recent quote from an A-rated insurance company for an age 65 $100K immediate annuity was $542.43 per month for life. This $542.43 is both a return of principal and interest. The insurance company's goal is to make exorbitant fees AND pay less over your lifetime than you pay in. The company keeps your money and makes payments for as long as you live. You COULD live much longer than the insurance company expects!

Of course, you could muck up your contract with complicated and costly riders including death benefits and/or continued payments to beneficiaries. These usually only confuse buyers and their main purpose is to increase fees. Buy and price each rider separately. So, no bundled riders!

How do we evaluate this quote?

One way is to look at a similarly rated corporate bond with the duration equal to your life expectancy. Using that measure, checking today's market, a 20-plus year $100K A-rated corporate bond pays about 4%, that is, $4000 a year or $333.33 a month. Bonds don't care what your age is, bond prices do not go up and down based on your age, annuities do!

$100K lifetime immediate annuity pays $542.43 monthly for life and zero at the term end.
$100K 20 year 4% bond pays $2000 every six months for 20 years plus $100K after 20 years.

Which deal is better?

Annuities have an illiquid secondary market. Bonds have an active secondary market.
Annuities are not quoted daily, bonds are.
Insurance company fees are opaque and huge. Ask agents what their total compensation is for selling annuities! Bond fees are much lower and transparent.
You lose your principal in an annuity. You keep your principal in a bond.
Annuities do not pass on to heirs upon death. Bonds pass on to your estate.
Annuity payments end upon death, Bond payments continue to maturity and accrue to your estate.

Note that lifetime annuity payments include interest plus a return of principal: $542.43 = $333.33 interest + $209.10 principal to start. With time, the interest portion will fall and principal will increase just as a mortgage would. If you live to your life expectancy, you may get your principal back.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Beware Zero-Fee ETFs-5 Reasons NOT to buy Zero-Fee Index Funds

1. Zero-fee ETFs require upselling.
2. Zero-fee ETFs are not sustainable.
3. Zero-fee ETFs will sell your information.
4. Zero-fee ETFs require expensive specialty skills.
5. Zero-fee ETFs are acts of desperation by the firms that sell them.

When markets decline, ads for annuities come out of the woodwork. When markets rise, as they have recently, a newer phenomenon of ads for "zero-fee" ETFs have sprung like weeds. Beware zero expense ratio ETFs and their mutual fund siblings!

Here's a recent Bloomberg story about Fidelity's "Fee War" with Vanguard.

So what gives here. What could possibly be wrong with major fund companies and brokerages (read Fidelity, Schwab, Blackrock and others) competing with Vanguard using"zero fees" or more precisely zero-expense ratios?*

Consider why this is happening. Vanguard, the father of equity index funds, is maybe the second largest fund manager in the world with over $ FIVE TRILLION in assets. This is "the house Bogle built" on plain vanilla broad based "passive" index funds (VFINX, VOO, VTI and the like).  Traditional active fund managers like Fidelity have seen their active managed assets evaporate in the face of indexing success.

Indexing is a highly specialized skill requiring knowledge and experience few have. The "tracking error" or difference between the index return and the index fund or index ETF return is everything for index investors. Be careful of what you actually are investing in.

It very well may be impossible for active management to beat indexing in any rising market. I suspect there's a proof for that. Active managers do outperform occasionally during market declines but this out-performance does not last, is inconsistent and unpredictable. 

*Don't confuse zero expense ratios with no-load funds. No-loads don't have sales charges. Zero-fee index funds don't compensate fund managers! Big difference!

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

The March of Indexing

Today's Wall St Journal story "Passive Investing Resumes Its March" is a cautionary tale for investors and investment firms alike.

Screenshot from Wall St. Journal.

Passive index funds outperform when markets rise to new highs (as they have done consistently for how many years? ah, maybe 200 or more). And active managers, may occasionally beat the indexes especially during bear markets.

The question remains, will markets continue their rise? Is passive investing an act of faith or is it based on more than just history? All one actually can know is the history.

There are counter-examples-a famous one of the investor in 1900 who spread his wealth among 10 different countries and lost everything except in the US and England.  Every other market, and currency for that matter, was destroyed due to war, inflation or depression.

There may be a conditional proof that indexing outperforms active management.  But, for most investors the decision is made.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Trading Day 619 Since Inauguration

Yesterday was the 619th trading day since Trump's 1/20/2017 Inauguration. The S&P500 is up 27%!
For the same period in Obama's first term, the S&P500 was up 52%.

Source: Yahoo Finance Historical data.

The above shows the Dow Jones Industrial Average and S&P500 stock index normalized performance (Inauguration Day = 1000) for the first 619 days since Trump's Inauguration and Obama's first Inauguration. Both have similar results.

Bragging is not polite but bragging rights are obvious in spite of the fact Presidents truly have limited effect on the stock market.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Commodity Market Lab for June 2019

The Commodity Market Lab pdf for June is posted.

With walkback on new tariffs, markets look to fundamentals of demand, growth and earnings for direction.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.