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Are “More Bonds” the Answer to Retirement Safety?


Pre-retirees and retirees with money invested in the stock market often have the majority of their investments held in bonds after they reach age 50+ because in general, bonds are considered “safer” than stocks.


A common financial industry principle called “the Rule of 100” uses age to determine how much of a client’s portfolio should be held in bonds versus stocks. The rule works like this: When you are 60 years old, 60% of your portfolio is in bonds (with 40% in stocks), when you’re 70, 70% in bonds (with 30% in stocks), etc. The shift to more bonds and less stocks with age happens automatically in many 401(k) “target date” funds as well.


Conventional financial thinking is that stocks and bonds tend to behave in opposite ways; when one goes up the other goes down. This “negative correlation” supposedly offers a “parachute of safety” and easy diversification over time, making a default to a 60/40 portfolio during the accumulation phase of life (60% stocks and 40% bonds) a “prudent” way to invest.


Two well-known economists disagree that bonds provide more safety in the retirement portfolio than a relatively new alternative introduced in 1995—the fixed indexed annuity or FIA. Here’s what Robert Shiller and Roger Ibbotson have to say.


“Barclays Bank and Yale Economist Robert Shiller Research Showed Fixed Indexed Annuity With CAPE Index Would Have Outperformed Bonds”


Shiller and Barclays’ research found that a well-designed FIA (fixed indexed annuity) can address both market risks and behavioral traps, offering a solution to the nation’s retirement savings problem. The team analyzed 10-year returns for stocks, bonds and an FIA linked to the Shiller Barclays CAPE™ US Sector USD Index, a smart beta index that incorporated Professor Shiller’s value investment philosophies.


“The simulated series of returns accounts for the interest rate environment and index performance and found that:

  • In every 10-year period, the FIA outperformed bonds
  • The long-term nature of FIAs constrains irrational investor behaviors
  • By providing a principal guarantee and market participation, FIAs offer a unique risk/reward profile
  • In simulations, FIA returns were less correlated to the broader economy than stocks or bonds, offering a potential diversification benefit”


About Shiller

Robert Shiller, Sterling Professor of Economics, Professor of Finance and Fellow at the International Center for Finance at Yale University, has written on financial markets, financial innovation, and behavioral economics among other topics. Listed by Bloomberg as one of the 50 most influential people in global finance and one of the world’s 100 most influential economists, Shiller and John Campbell created the CAPE ratio, a primary benchmark for many value investors worldwide.


“Roger Ibbotson: Fixed Indexed Annuities Beat Out Bonds”


“In his research, Roger Ibbotson, the economist known for his “Stock, Bonds, Bills and Inflation” chart, argued that fixed indexed annuities have the potential to outperform bonds in the near future and smooth the return pattern of a portfolio, given their downside protection. Ibbotson’s seminal work was around the idea that as you take on more risk in a portfolio, you get a higher return. But that risk is volatility, and as one approaches retirement, they can’t afford that lack of stability.


“Ibbotson and his team at Zebra Capital Management ran hypothetical return simulations from 1927 to 2016, and found that net of fees, fixed indexed annuities had an annualized return of 5.81 percent, compared to 5.32 percent for long-term government bonds and 9.92 percent for large-cap stocks over that period. And this is a period of both rising and falling yields.”


About Ibbotson

Roger G. Ibbotson is Professor in the Practice Emeritus of Finance at Yale School of Management. He is also chairman and CIO of Zebra Capital Management, LLC, an equity investment and hedge fund manager. He is founder, advisor and former chairman of Ibbotson Associates, now a Morningstar Company. He has written numerous books and articles including Stocks Bonds Bills and Inflation with Rex Sinquefield (updated annually) which serves as a standard reference for information and capital market returns.


Current Low Interest Rates / Low Bond Returns


In today’s low interest rate environment, does it really make sense to have the majority of a retirement client’s holdings in bonds earning low returns?


When Interest Rates Rise, Bond Values Go Down


In addition to bonds having overall low earnings right now, both bonds and stocks can lose money. When interest rates rise, bonds tend to lose value.


No one has a crystal ball to know what’s going to happen in the future, but it just makes sense to hedge against interest rate risk with at least a portion of the retirement portfolio.




The Quantum Group USA, LLC and its affiliates are not affiliated with Roger Ibbotson, Zebra Capital Management, LLC., Robert Shiller, or Barclays Bank.


Guarantees and protections of fixed indexed annuities are subject to the claims-paying ability of the issuing insurance company. Fixed indexed annuities are contracts purchased from a life insurance company. They are designed for long-term retirement goals, and also intended for someone with sufficient cash and liquid assets for living expenses and unexpected financial emergencies, including, for example, medical expenses.


A fixed indexed annuity is not a registered security or stock market investment. As such, it does not directly participate in any stock, equity or bond investments, or index. Gains on indexed accounts are based on participation rates and other conditions offered by the issuing insurance company. Withdrawals may be subject to income tax, and withdrawals before age 59½ may be subject to a 10% early withdrawal federal tax penalty.


This material is for informational purposes only and is not intended to provide any recommendations or tax or legal advice. We encourage you and your clients to discuss your tax and legal needs with a qualified tax and/or legal professional.