GMWBs and the Permanent Portfolio
The following is in response to our article, Understanding Variable Annuities with GMWBs, which appeared on March 1.
Thank you for the above article.
It was well written and I agree that most rational investors are better off with a passive well diversified 70%/30% equities/fixed-income portfolio.
As background, I am a fee-only advisor who is in his 16th year of practice. Along the way I have worked for a larger company, started an independent commission-based practice, and finally a fee-only RIA. So, I have sold annuities in the past and I have friends in the business who still do. Currently, the bulk of my practice is passively managed portfolios constructed of Dimensional funds and Vanguard funds.
The crux of the issue is what happens with investors in real-world situations.
The first flaw in almost all studies is that we assume that investors are rational and can handle the drawdowns of the market. I have come to realize over the years that my job for my clients is to keep them from shooting themselves in the foot. All too often clients make the worst decisions at the worst times, such as when those drawdowns occur. Unfortunately, a good portion of advisors do the same.
In the bear market of 2000-2002 I had a few clients in well diversified portfolios who wanted to go to cash. I explained to them that in all probability that would be a bad idea, but they insisted and I relented. After all, it is their money and I can only offer probabilities.
Of course, we know how that story ended. If they would have just stayed put they would have recovered. Most recently, in the bear market of 2008 I did not let my clients go to cash and the majority of them have more than recovered to the highs they had in 2007.
Let me go through a recent client situation. The value of this client’s portfolio in 2007 at the peak was around $480,000. He was a new client and invested about $450,000 in the summer of 2007. I invested him in a 60-40 well diversified portfolio of DFA funds. He called me once a quarter for the last three years very scared about his portfolio and the overall economy. I had to constantly calm him down and reassure him he was doing the right thing. Needless to say, his account value recovered to about $479,000 at the end of February 2011. He was due for a client meeting.
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