50/30/20 Is the New 60/40

September 30, 2024

Investors have enjoyed above-average returns in the stock market over the past five years. If the strong run in equity markets slows and bond performance doesn’t make up for lower returns, what’s your strategy? 

A fixed index annuity, or FIA, may be the right solution to help clients meet their financial goals. A FIA can complement a balanced portfolio and potentially improve results in challenging markets. A compelling strategy is to guide clients with a 50/30/20 allocation model. Instead of a typical 60% equity, 40% fixed income portfolio, consider a portfolio with 50% stocks, 30% bonds and 20% fixed index annuities. 

Here are four reasons to diversify a portfolio with a FIA: 

  1. A FIA can help preserve excess S&P 500® Index gains. 

    In the five years that ended in 2023, the S&P 500® Index experienced 14.40% annualized growth. This fund is a broad representation of the overall U.S. stock market. 

    This annual return was far higher than the 10.64% 100-year average return in the stock market, including dividends.1 For some clients, reducing equity exposure from 60% to 50% and protecting some of the recent outsized gains in a FIA may make sense. 
     
  2. A FIA’s annual point-to-point credit can turn a negative into a positive. 

    FIAs add interest to your account every year that the market grows, but never loses interest when the market declines. So even if the index it follows is down over five years, an FIA could still end up making money. 

    For example, this chart shows that the S&P 500® Index lost value between 2007 – 2011. However, a FIA using that index for annual crediting enjoyed a positive result. 

    Index and FIA Comparison: 
    Sample compound annualized total return rates for 2007 – 2011.

    -0.25%: S&P 500® Index
    4.61%: 5-Year FIA, S&P 500® Index, 10% cap, annual point-to-point crediting
     

  3. Unlike bond funds, FIAs protect clients against downside risk. 

    Bond funds enjoy capital appreciation when interest rates are declining. Bond funds often lose value in rising-rate environments, which is what happened in 2022. In contrast, FIAs don’t have the same interest rate risk. The worst outcome is when no interest is credited but no value is lost. In that sense, FIAs are a good diversifier when added to a balanced portfolio. 

    Look at this performance comparison for 2022. While the bonds fund lost value, the FIA did not:

    Investment FundChange
    iShares Core U.S. Aggregate Bond ETF (AGG)-13.02%2
    S&P 500® Index, 10% cap, annual point-to-point crediting0%
  4. FIAs offer tax control — and no fees, in many cases.

    With FIAs, taxes are not due on gains until money is withdrawn, which often happens once the owner is in a lower marginal tax bracket. Compare this to nonqualified bond or stock funds. These may produce taxable events, such as dividends or capital gains distributions, even if money isn’t withdrawn. Many FIAs have no annual fees, meaning gross and net performance are one and the same.
     

Download and use this sales concept flyer.

Thumbnail view of 50/30/20 flyer

50/30/20 Is the New 60/40 

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