If You Want Certainty, You'll Pay Dearly

Investors don’t like uncertainty. Because of that, investment/insurance providers are happy to sell you annuities and other insurance-based products that promise to make uncertainty go away. The problem is crafting certainty out of uncertainty comes with a very high price tag. Since the stock market turmoil in 2008, billions of investment dollars have flowed into annuities and similar products aimed at providing certainty. This has largely been a mistake.

The Pyramid of Temptation

The Pyramid of Temptation graph below depicts exactly why annuities are pushed ...they generate huge sales commissions for the brokers! Combine this with unwitting investors craving certainty and you have the makings of a perfect storm.

The Pyramid of Temptation

The mostly opaque costs, both initial and ongoing, of annuities and other insurance-oriented financial products are reason enough to generally avoid these “solutions.” Looming even larger, however, are the investment gains foregone by seeking certainty. Since the stock market bottom in early 2009, the S&P 500 has literally quadrupled in value.

The simple graph above shows the motivation of investment and insurance salespeople to sell products that benefit them far more than they do the investor. A few years ago (2015), the Council of Economic Advisors estimated the cost of conflicted advice at around 1% per invested dollar per year. This means that conflicted advice cost investors $17 Billion each year just on retirement plan assets alone!

Embrace Uncertainty

Everyone wants their future to be better than their past. Individuals make investments because they have a belief that the particular investment they are making will lead them in the direction of their ultimate goal.

The problem is, annuities and similar products aren’t bought... they are sold! Investors want something to “ease their pain,” even if the solution ends up causing even more pain in the long run. They end up as easy targets.

The path forward toward your most important goal is not to make the costly mistake of “buying certainty.” Instead recognize uncertainty is a force of nature and exists everywhere. Avoiding uncertainty doesn’t mean it goes away. Uncertainty is the reason for the ability to obtain above-inflation investment returns in the stock market. Most investors need these returns.

Related: How Much Are Bad Money Choices Costing You?

Quiet the Noise

Another way to transform your perception of uncertainty is to totally ignore the day-to-day market noise and the explanations that accompany these fluctuations. Noise is a widely overlooked source of mistakes.

Nobel Laureate Professor Daniel Kahneman recently announced that his next book will bear the title Noise. The release from the publisher William Collins quotes Kahneman, saying noise “takes a serious toll in terms of money and lives.” I agree.

Our natural instinct, as far as financial choices go, is to do the wrong thing. You already face an uphill battle and choosing high cost/low return options takes you off the path to a financially secure future . 70% of individuals nearing retirement feel unprepared. Your objective is to be one of the minority that is prepared. Start there. Ready for a real conversation?