Old strategy with a new twist: Dollar cost averaging and annuities – InvestmentNews (blog)

Today’s investors fall on a spectrum when it comes to their tolerance for risk. Most, roughly two-thirds, are moderate risk takers, while about 1 in 10 are high risk takers and the remaining quarter are very risk averse. While market volatility did not seem to negatively impact consumer sentiment as evidenced by the University of Michigan’s February reading on consumer confidence, recent trends in the volatility index, or VIX, and the dramatic point drops we’ve seen as of late have reignited the conversation as to where consumers can turn in the face of market volatility. In fact, the Spectrem Group’s household outlook — a monthly measure of long-term investor confidence — dropped 10 points in February after reaching a 13-year high in January.

Improved market confidence levels don’t happen overnight, and it can be challenging for advisers to help clients stay the course when they’re seeing significant daily account balance fluctuation.

When the market is volatile or experiencing dips, clients may feel spooked, agonizing over whether to participate in market risk in exchange for potential growth or go to cash but miss the upside potential they may need to reach their long-term goals. When the market is high, clients may have a hard time knowing whether they’ve reached the ceiling of their risk tolerance — especially when their retirement horizon is closer than in years past.

Advisers can help clients feel more comfortable about their investment decisions by guiding them through the emotional highs and lows of the market and providing tax-efficient options that involve a simple, disciplined approach to investing.


One way to help clients see the upside of market movement is to explain the value of dollar cost averaging. Dollar cost averaging is a simple, disciplined and proven approach in which investors follow a regular investment schedule over time, regardless of market conditions. Clients will buy more assets when the market is low and prices decline, and buy fewer assets when the market is yielding higher prices — generally resulting in a lower average cost per share. This steady investment pace requires discipline by clients during periods of market volatility, which may involve an adviser’s guidance to lead them through it.

With a systematic dollar cost averaging strategy, clients will be able to make the most of their investment dollars by smoothing out fluctuating share prices over time. Because dollar cost averaging involves continuous investment regardless of changing price levels, you should advise clients to consider their ability to continue purchasing through periods at all price levels.


For advisers looking to increase their clients’ guaranteed lifetime income, dollar cost averaging can be an especially effective strategy within annuity allocations — and one that is offered by many companies in the industry. Using a dollar cost average approach within an annuity contract that features an optional living benefit rider allows clients to take advantage of guaranteed interest payments while their money is invested over time, in addition to managing fluctuating market prices.

Here’s an example that illustrates how this concept allows for growth of annuity investment dollars when coupled with a dollar cost averaging program.

Using a dollar cost averaging strategy within clients’ annuity allocations gives them the opportunity to invest in underlying investment options on a regular basis, locking in guaranteed interest payments via a living benefit rider as they invest over a set period of time. Doing so may result in an annual yield that outpaces market interest rates and help accelerate savings for future income. This simple, methodical approach can provide clients with a boost to their retirement savings to help them reach their retirement income goals. While dollar cost averaging is an effective way to initially get clients into the market, it’s important to keep an eye on your client’s overall portfolio and rebalance as necessary. An annuity allows this activity to occur in a tax-deferred environment.


Dollar cost averaging can help clients navigate their concerns regarding unstable market conditions by easing them into the markets steadily over time. When describing this strategy to clients, advisers can help them feel more comfortable investing in the market by employing an annuity with a dollar cost averaging program. Dollar cost averaging cannot guarantee a profit or protect again a loss in a declining market.

(More: Are annuities finally getting some respect?)

Tim Seifert is head of annuity sales for Lincoln Financial Distributors.

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