• Ryan Vogel, CFP®

Beware of Sales Pitches That Prey on Fear and Volatility

Key Takeaways

  • Annuities sound attractive in theory, but they can be loaded with hidden and confusing fees.

  • Annuities can be punishing if you need to access your money in an emergency.

  • If something sounds too good to be true, it usually is.

When the stock market is as volatile as it is today, you see lots of advertisements for annuities. Insurance companies prey on people’s fear of losing money during uncertain times. The pitch usually promises consistent growth when markets go up and no risk of loss of principal when markets go down. As with so many things in life, if it sounds too good to be true, it usually is.  But after a quarter like we just had to start the year, it’s easy to see why annuity peddlers are flooding the airwaves.

The first three months of 2022 registered the third worst quarter for the bond market since 1980 – down 5.9% (Barclays Aggregate Bond Index). It wasn’t a banner quarter for stocks either as they lost almost 5%. But the bond market retreat got more attention since bonds are supposed to be less risky than stocks. As I’ve mentioned in earlier posts, there’s typically a 15% “intra-year” swing for stocks even in a normal year. Even though stocks were down about 13% at some point in Q1, what we saw earlier this year was not all that remarkable.

Bonds are different. They offer investors two sources of return: (a) the income return, and (b) the return on principal. The bulk of a bond’s return comes on the income side, so it accrues throughout the year. Evaluating bond returns in the early part of the year is different from evaluating returns at the end of the year. So, an early year slump can seem more dramatic.

Siren Song of Annuities

The big selling point of annuities is getting a “guaranteed” predictable, regular stream of income every month no matter how volatile the financial markets are. Annuity purveyors look for people who are nervous about loss of principal, who are terrified about what’s going on in the world, or who have received a windfall inheritance or legal settlement.

You turn over a lump sum of money for the insurance company to invest for you and you get a steady stream of income you can count on every month, so you “never have to worry about money again.” Of course, you’re earning less than you would by investing in a diversified portfolio of stocks and bonds. And here’s the big gotcha: When you pass away, the insurance company gets to keep whatever money is leftover.

Another type of annuity commonly sold during times of stock market turmoil is the “Indexed annuity.” Instead of opting for a fixed stream of income for the rest of your life, an indexed annuity allows you to participate in the market’s upside in a bull market, while theoretically protecting your downside in a bear market. What most annuity contracts don’t want you to see is that your upside returns are “capped” at say 8% to 10% in a bull market. That can be tough to swallow after a year like 2021 when stocks returned over 25%. Sure, your downside is protected in a bear market, but if you do the math, you’ll see your long-term returns are greatly eroded with this strategy. And again, with most annuities, you’re also capping your ability to withdraw your money without significant “surrender” fees or penalties.

Fees, Expenses, and Legalese

When evaluating an annuity product, you’ll have to sift through pages and pages of fine print to see that you’re paying lots of money in the form of sales commissions, mortality and expense fees, and high underlying investment fees. And most troublesome of all, the insurance company gets to keep all the money left in your account when you pass on.

Annuities can potentially make sense for people who are super risk averse and who don’t want to leave their money to any family members or charity. But that doesn’t fit the profile of most of our clients.

Volatility is Part of a Healthy Portfolio

Whether you are highly aggressive or risk-averse, you can’t eliminate volatility from your portfolio completely if you want to stay ahead of inflation and reach your goals. When it comes to fixed income, most of the bonds we invest in are of high quality. They’re generally quite safe and secure, but that doesn’t mean their price never fluctuates on the way to maturity. It doesn’t mean your bonds will make money each and every month. As with all investments, bond investing requires patience and the ability to withstand some level of volatility as market conditions change. Their price swings are generally less dramatic than that of stocks, commodities, and real estate, but there are going to be times when your financial plane hits some turbulence. That’s to be expected – not feared.

It all comes down to disciplined investing. Working with a professional helps you keep your money liquid, stay ahead of inflation and stick to your plan when so many of your peers are making poor decisions out of fear.


Again, if an opportunity sounds too good to be true, it usually is. If you or someone close to you is being pitched an investment product you don’t understand during these uncertain times, please don’t hesitate to reach out. We are happy to review it for you.