Real World Scenarios: Sub-Accounts in Variable Annuities

The third entry in our series of Real World Scenarios follows.

I have been researching variable annuities and one of the things that attracts me to them is the fact that many will allow me to switch between the different sub-accounts without taxes or penalties. How do you feel about switching between the different sub-accounts, and specifically, “market-timing” in annuities?

I truly appreciate the fact that most variable annuities allow you a minimum of 12 switches per year and some even offer unlimited switching between the different sub-accounts without taxes or penalties. That said, we do not condone market-timing within variable annuities. We believe in good solid old fashion research based on company fundamentals, and those fundamentals do not tend to change dramatically over short periods of time. We believe that well-chosen, long-term investments produce the best returns for most investors, not timing the market.

A recent Dalbar Study regarding market timing, examines real investor returns from equity funds during the Jan. 1984 through Dec. 2000 time period. The average investor held their fund 2.6 years and realized an annualized return of 5.32%, compared to 16.29% for the S&P 500 Index. WOW!!! Timing decisions, driven by emotions, doom the average investor.

For more information on variable annuities, see our variable annuities page.

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