3 Things 4-12
04/12/2021 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One A Real-Life Annuity Example In the last post, we talked about annuities from the perspective of a financial writer who characterized them as generally bad for everybody. We’d like to offer for your further consideration a few statistics on returns from an actual client who purchased an annuity a few years ago. Note there is no identifying information on either the client or the annuity company here as we don’t think that would ever be appropriate. Also note that with regard to actual client information, we’ll only reference investment values and returns in the form of percentages and not dollar values. The annuity was purchased in 2017. For comparison purposes, we have done a performance side-by-side with the S&P 500 index from that point through the end of March of 2021. We have also added some projections. See below:
For reasons related to the annuity type, its features and its fees, this client’s annuity greatly underperformed the market, as represented by the S&P 500. If $100,000 had been invested in this annuity a little over three years ago, it would be worth $121,000 today while that same amount would be worth almost $150,000 if it had just been invested in the S&P 500 index. Similarly, if the growth estimates hold through the rest of the five-year period that represents the annuity’s first exit opportunity, the initial investment in the annuity will have grown from $100,000 to $130,000 while the same investment in the S&P would have grown from $100,000 to $175,000. The more time the money is invested at the slower annualized return rate associated with this annuity, the wider the potential loss gap relative to the alternative will get. That’s because the laws of compounding are immutable. Still, not all annuities are created equal and not all people’s retirement income needs are the same, so the choice in your particular situation might not be the same as someone else’s. That said, guess what this client has decided he will do as soon as he can without penalty?
Thing Two One Size Fits All Is Hardly Ever The Way To Go In fact, most things that are one size fits all (OSFA) are horrible. Why? Because the things that make us who we are - our physical characteristics, our beliefs, our needs, and our desires - come in different “sizes”. In other words, we are individuals. We don’t all wear the same sized shoes, vote for the same political candidates, take the same medications, or drive the same color cars. And that’s OK. In fact, it’s wonderful for those of us who truly want and appreciate freedom, for us as well as our neighbors, no matter how incongruent their words and behaviors are with our own. Education isn’t an OSFA proposition either. From whom we best learn, from where we best learn, what we best learn, how we best learn, and how we are best motivated to learn are highly individual considerations. But sadly, and to the detriment of our society, from top to bottom, we have allowed the OSFA approach to exist in almost a state of pure monopoly for many decades in the area of K-12 education. The results are as you would expect, generally speaking. The state of public education in the city of New Orleans, pre-Hurricane Katrina, is pretty indicative of what has gone on nationally in the same regard. But what they have done since then offers a way out (actually ways out) if we have the guts to finally call what’s going on in education a crisis and confront it in a non-insane way. Prior to Katrina, 62% of the students in New Orleans attended public schools that received a failing grade (F). In 2018 only 8% did. Granted, 8% should be 0% but we should still pause and give credit as well as examine the results. So what happened? Well in New Orleans specifically, K-12 education changed to 100% charter schools. They also switched from a seat-time-based learning model to a competency-based one. In other words, they threw out the traditional, OSFA approach. In Louisiana more broadly, the state made the following changes:
Students were freed from attendance zone rules.
Charter schools were allowed to proliferate.
Thousands of teachers had to reapply for their jobs.
Money followed the students.
Tenure laws were reformed.
Teacher pay was tied to student outcomes.
All of the above are sensible ideas that have been resisted by the educational establishment for decades. If you ever get into a conversation with someone who thinks differently, tell them to ask the parents of New Orleans if they’d prefer the current system to what existed before it. And if they reply with the, ‘it’s about the kids’ trope, tell them that doesn’t mean we should be playing around.
Thing Three Just A Thought "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." - Thomas Sowell