Are you an emotional investor?

Annuity and life insurance marketing organization

Some people make emotional financial decisions based on the messages and advertisements presented to them from the investment community.

Does this describe you?

We’ve created a test so you can find out! Let’s go through this fun little exercise together. Below you will find a series of historical performance charts. Imagine these charts display a highly diversified stock portfolio from leading publicly traded companies.

Are you an emotional investor?

Some people make emotional financial decisions based on the messages and advertisements presented to them from the investment community. Look at each graph on the left below and circle the number that best represents your feelings
about the chart. Helpful Hint: Be emotionally honest with your reaction to each chart.

Did you notice the charts not only performed differently but they also looked different?

This was done intentionally to simulate advertisments designed to trigger your emotions. Even though you were being presented with facts, the feelings were present and possibly part of your decision making.

Making investment decisions based on past performance can be a painful experience. The investment community has consistently tried to deliver this message to Americans. You have probably read the following statement hundreds if not thousands of times, “Past Performance Not Necessarily Indicative of Future Performance.” For those who advise on investments or sell investments, this statement is a required warning to the clients they work with.


Now ask yourself the following question and… be completely honest with yourself.

“Do I believe that past performance IS a good indicator of future performance of my mutual fund?”


If you answered, “YES” to this question it turns out you are not alone. If you believe past performance IS a good indicator of your investment’s future performance than you are in the same club as countless Americans who have the same belief.
In fact, many investors are influenced by ads illustrating a high past performance within mutual funds. According to Forbes, “(Mutual) Fund firms pay to run these ads for the simple reason that they work. Investors flock to funds that have performed well in the past–especially to those that are advertised as such. In fact, studies show that past returns may be the primary factor investors consider when choosing among funds.” Emphasis added. (Source:

While advertising and the average individual investor uses past performance information and data, the investment community continues to issue their standard warning.

“Past Performance Not Necessarily Indicative of Future Performance.”

Regulators like the Securities and Exchange Commission (SEC) continue to issue warnings like the one below about the advertising practices that influence people’s important financial decisions.
“This year’s top-performing mutual funds aren’t necessarily going to be next year’s best performers. It’s not uncommon for a fund to have better-than-average performance one year and mediocre or below-average performance the following
year. That’s why the SEC requires funds to tell investors that a fund’s past performance does not necessarily predict future results.” Emphasis added. (Source:


Does it sound like a conflict to you?
Does it sound like double talk?

On the one hand, mutual fund advertisements draw customers with stories of outstanding historical performance yet this very performance is likely not an indicator of future results according to the same investment community. Are mutual funds trying to deceive people or are they just promoting the value of their product?
If you were evaluating a mutual fund without looking at the past performance chart or graph, on what would you be basing your decision? If you did not look at a historical chart at all, would you send your money to that mutual fund?

Information is powerful and it can trump emotion.

Mutual funds advertisements often pick attractive periods to show just how well they can do when times are good. Rather than argue if that is an honest and balanced approach, let’s consider at how it might affect your judgment. Think back to the charts you reviewed earlier in this report. Did the charts going up make you feel better than the charts going down? That’s what advertising is all about; peaking your interest and emotions. Financial decisions, on the other hand, should be based upon information. So let’s examine some more information.
Think back to the four charts again. Here’s some more information about those charts. Each of those charts was actually tracking the very same thing! That’s right, regardless of how you felt about each chart, they all tracked the S&P 500 Index. The investment, in this case, never changed but the manner in which it was displayed to you did. Now we will zoom out and look at a longer period of time.



The chart above spans 173 months or 14 years, 4 months and a handful of days. The good news is that the index is up over all from where it began. What often surprises people is the actual return. Many people, seeing the advertising and
short-term charts find this fact surprising…

S&P 500 Index has only grown by an average compound annual return of 1.8% during this period that extends more than 14 years.

Exploring Other Options

Equipped with this knowledge, it is reasonable to consider other ways one might grow their money without exposure to volatility.

Certificates of Deposit. According to the Securities and Exchange Commission (SEC)

“When looking for a low-risk investment for their hard-earned cash, many Americans turn to certificates of deposit (CDs). In combination with recent market volatility, advertisements for CDs with attractive yields have generated considerable interest in CDs…”

“When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. If you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned…”

Fixed Indexed Annuities.

These low risk savings vehicles are issued by insurance companies.

According to the National Association of Insurance Commissioners…

“Money in a fixed indexed annuity earns interest based on changes in an index. Some indexes are measures of how the overall financial markets perform (such as the S&P 500 Index or Dow Jones Industrial Average) during a set period of time
(called an index term).”
“The insurance company uses a formula to determine how a change in the index affects the amount of interest to add to your annuity at the end of each index term. Once interest is added to your annuity for an index term, those earnings are usually locked in and changes in the index in the next index term don’t affect them.” (Source:


This chart tracks the actual performance of one Fixed Indexed Annuity that was purchased in 1998 through 2013.

*This graph is based on actual credited rates for the period shown on the Index-5 product which is no longer available for sale. Past performance is not an indication of future results. Please call your American Equity Agent for new product information. Check out product disclosure for specific information.

During this period, this specific Fixed Indexed Annuity earned greater than 4.5% (In Green Above). You can also see in the chart above that the Fixed Indexed Annuity enables the owner to sit out negative movements while participating in a
portion of the positive movements in the index (In Yellow Above). You can also clearly see the value of the minimum guaranteed rate (In Blue Above) compared to the performance of the index and the Fixed Indexed Annuity contract value.


Get all the facts!

Before selecting any financial product, be sure to meet with a fully licensed and experienced representative so that you understand the benefits and costs associated with the transaction you are considering.


Our office stands ready to help you. Just give us a call!




Figure 1: This chart tracks the S&P 500 Index from March 20, 2000 through September 30, 2002 as the index moved from 1527.46 to 800.58.
Figure 2: This chart tracks the S&P 500 Index from September 30, 2002 through October 8, 2007 as the index moved from 800.58 to 1561.80.
Figure 3: This chart tracks the S&P 500 Index from October 8, 2007 through March 2, 2009 as the index moved from to 1561.80 to 683.38.
Figure 4: This chart tracks the S&P 500 Index from March 2, 2009 August 11, 2014 as the index moved from 683.38 to 1978.34.

Call us to get this newsletter now!


Leave a Reply

Your email address will not be published. Required fields are marked *