Visualizing volatility: Custom indices can help smooth market ups and downs
This content is categorized as:For clients looking to reduce the impact of market volatility on their retirement savings, using indices with volatility control in a fixed indexed annuity can be a powerful tool.
Volatility can power anxiety
Price fluctuations are a natural part of the market but can make clients anxious. Almost all fixed indexed annuities (FIAs) have interest crediting strategies tied to the S&P 500庐 Index which can experience significant price fluctuations from year to year, or even over 10-year periods. That can lead to erratic returns for clients, or inconsistent participation and cap rates.
Smoothing out returns with a custom index
Adding a volatility control index to a FIA in addition to a benchmark index like the S&P 500庐 can help smooth out returns, especially if the index is decorrelated with the S&P 500庐, meaning the fluctuations in its returns tend to move in the opposite direction of the fluctuation in returns for the S&P 500庐.
Providing a way to more secure results
For clients looking to reduce volatility in their retirement savings, adding indices with volatility control to a FIA can be a powerful tool. Diversification 鈥� especially when the indices are decorrelated 鈥� can reduce the ups and downs of the market and lead to smoother and more stable results. The graphic below shows three-year returns for two indexes, one of which has a volatility rate of 7.5 percent, the other of 8.2 percent. But, when these decorrelated indexes are combined, the volatility rate drops to 4.6 percent, even as returns stay the same.
Making the journey smoother
Ultimately, price fluctuations are part of the market and there鈥檚 virtually no strategy that can completely remove them. But combining custom indices with benchmark indices can produce more stable returns, leading to less anxiety about market ups and downs and a smoother journey toward retirement.
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