• Harry N. Stout

228- Spike Disappointment by Setting Realistic Expectations


Written by: Cary Carney, Vice President of Sales at Kuvare, Guaranty Income Life Insurance Company, a Kuvare company.


I recently returned from attending the boys’ national volleyball tournament for teams 18 and under. My son’s team entered the competition ranked 13th nationally; and the coaches, players and parents were excited to see how the team stacked up against the rest of the country. Unlike teams from California, Illinois, Ohio and other states that play year round in high school, on clubs or on the beach, Iowa doesn’t have those opportunities or following yet.

Prior to the tournament, the goal was to reach the gold bracket or the top eight teams from the 36 qualifiers. However, the expectation was to improve its national rank. Although some felt disappointment after losing on the second day and knowing the gold bracket wasn’t within reach, expectations were exceeded by capturing the silver bracket championship and avenging a close loss from earlier in the week. That win also earned the team a national ranking of nine, four spots better than prior to the tournament. The boys were ecstatic, and everyone considered it a successful week.


So, how does this relate to setting expectations for a fixed index annuity? Defining success typically centers on realistic expectations, correct? If you expect the unachievable you will always feel disappointed or if you expect far lower than what you can achieve, you will always feel successful. However, do low expectations reduce your overall sense of accomplishment?

Setting realistic goals for fixed index annuity returns is more important today than ever. A typical buyer of a fixed annuity is someone close to or who has retired and desires a return without risk of losing any principal accumulated through the years. With a fixed index annuity, the owner is a little more risk tolerant and can accept no return in a year or two without risking any principal. This person would like to earn better than what other standard safe money alternatives, such as a fixed annuity, CD or bond could deliver. Year over year, fixed index annuities have been able to achieve just that. They typically outperform most other safe money alternatives during the same timeframe.


The challenge is keeping practical expectations regarding fixed index annuities. With so many index strategies available, it is easy to get caught up in the hoopla of double-digit return opportunities. However, if you consider the typical characteristics of a fixed annuity purchaser, they are frequently more risk adverse and don’t want much volatility in their returns. They are still looking for a way to gain more than other standard fixed alternatives provide, without losing principal or experiencing significant volatility. Many of today’s newer index options, such as volatility-controlled index strategies, will show back testing of double-digit returns.


While these returns are attainable, it’s rare to enjoy that on a consistent basis. Sure, you may get 12% one year, 0% return the next three years, 6% in the fifth year, 0% the sixth year and finally 10% in the last year for a total return of 28% over the seven-year period. As an annuity owner, I am elated years one, three and seven but I’m a bit disappointed in four of the seven years, even though I averaged a 4% return, which exceeds a CD or standard annuity. The disappointment stems from expectations that were set too high. Although the expectations were potentially met in two of the seven years, some disappointment may set in when in four of the seven years you didn’t realize a return.


Now let’s volley to a similar scenario with expectations for consistent gains year over year, rather than the higher double-digit returns with greater inconsistencies. I’m speaking not only of the standard S&P 500 strategies but also some of the more conservative, volatility-controlled indices with fewer fluctuations and more consistent year-over-year-returns. With these strategies you still can anticipate higher returns than a standard fixed annuity or other safe money alternatives, but you can also expect fewer years with no return at all.

For example, you may earn 3% year one, 5% year two, 7% year three, 0% year four, 6% year five, 4% year six and 3% year seven. In the seven years you saw a 28% total return but only experienced one year with no return. For the other six years, you enjoyed a return that was better than most other safe money alternatives.


While in my examples the total returns are the same at the end of seven years, those who set realistic expectations of performance are likely happier in the long run than others with potentially inflated expectations although the two outcomes may result in a tie.

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