Retirement investors with variable annuities beat the market and average mutual fund investors over a 20-year period by holding their investments longer, according to new findings from Dalbar, a prominent investor behavior research firm.
The average equity VA subaccount investor outperformed the average equity mutual fund investor by 148 bps in 2020, with the average equity subaccount investor earned 18.57% in 2020 versus an average return of 17.09% for the mutual fund Investor. VA investors also outperformed the S&P 500 which returned 18.40% in 2020.
Dalbar examined balances of over $1.5 trillion in variable annuity assets over two decades to arrive at the remarkable conclusion: variable annuity subaccount investors experience higher returns because they stay put in their investments longer.
As a result, the average equity VA subaccount investor continued to outperform the average equity mutual fund investor on an annualized basis for one-, three, five-, 10- and 20-year timeframes.
“Financial professionals who dismiss annuities as a viable alternative due to cost differences may not be acting in an investor’s best interest,” Dalbar Chief Marketing Officer Cory Clark said in a release.
“While costs are important, they are just one piece of the pie; and what we’re learning is that the other pieces of that pie are bigger than one may think. When we quantify the difference that behavior makes in the long-term results of investors, it’s clearly the single most important variable,” Clark added.
Dalbar examined the balances of over $1.5 trillion in variable annuity assets over two decades to arrive at the remarkable conclusion: variable annuity subaccount investors experience higher returns because they stay in their investments longer.
VAs won out on the fixed income front as well. The average fixed income subaccount investor outperformed the average fixed income mutual fund investor by a significant 291 bps in 2020, earning 6.00% in 2020 versus an average return of 3.09% for fixed income mutual fund investors.
Staying the course as an investor can make all the difference in performance. “Since 2002, there has been a distinct trend in which equity subaccount investors have remained in their respective investments for a longer period of time than equity mutual fund investors. This trend has accelerated since 2014 and held true through the COVID market crisis until the end of 2020,” the firm said.
The average mutual fund investor typically stays invested in a particular fund for three to four years. During periods of market turmoil, retention rates tend to dip to the lower end of the range, while during strong market periods retention rates will increase to exceed 4 years, Dalbar said.