About two years ago, we put out an article with real historical results of a blended whole life policy. The policy was shared on the Bogleheads forum (of all places). The compound annual growth rates of that policy and the S&P 500 were close.
But, I made a mistake in my comparison…
Systematic Investing, I Violated my own Rule
People tend to confuse the results of systematic investing and lump sum investing. Lump sum investing results report a higher effective compound annual growth rate. That is why people love to use them. But, most people don’t actually save their money this way.
Two years ago, I took the lump sum investment results from the S&P 500. I compared them to the systematic saving results of the blended whole life policy. This time we’ll compare systematic to systematic.
But, there’s something else that always bothered me about this comparison.
You can’t Invest Directly in the S&P 500
You could try to buy shares in public companies that currently make up the S&P 500. But, as the index is ever-changing, you’d have a heck of a time keeping up. Keep in mind that the index can also swap bad performers for good ones. It does so without selling and buying a new security. For this reason, index funds all tend to lag the actual S&P 500 performance.
What if we used historical results of an S&P 500 index fund instead for this comparison? What index fund should we use? Well, this little gem of historical validation came from the Bogleheads…
Why not use their favorite fund company?
VFINX vs. Blended Whole Life Insurance
I calculated returns from Vanguard’s S&P 500 index fund (VFINX) using data from Yahoo Finance. Ignoring fund expenses, the effective compound annual growth rate from 1992 to 2009 is 2.78% (which is the original time frame quoted by the policyholder).
NOTE: A reader noted that backtesting the VFINX through the Portfolio Visualizer produces a different result than I originally calculated here. My own use of the Visualizer confirms there is a discrepancy. I can't find the original calculations that went into producing this chart, but the Visualizer computes the VFINX's balance at 2009 at around $280,000 not the ~$215,000 the original chart shows. That changes the compound annual return to 5.71%. Please see Jared Haines' comments below. And here is a chart showing the Visualizer's results for the VFINX:
This chart compares the VFINX’s historical performance to the blended whole life policy:
As you can see, the VFINX was doing awesome from the mid to late ‘90s. In the early '00s, it sunk to performance levels below the whole life policy.
The VFINX fought back. It managed to match the whole life policy’s performance for a while. But, the “Great Recession” did its deed on the stock market. The fund’s performance dropped way below the whole life policy.
2009 to 2014
“What about the years following 2009? Most of them were great!” I hear you say.
It's easy to calculate the VFINX results. But, I don’t have any further exact data on the blended whole life policy. Although, I can make an extrapolation based on the data that we do have.
We can estimate the growth of the blended whole life policy. It is possible using statistical regression on its past performance. This approach isn’t perfect. But, it’s the best guess we’re ever going to have at our disposal.
Here are the results:
The regression line “fits” our whole life curve well. That’s a promising sign for those of us who care about accuracy. The graph shows the VFINX still hasn’t caught up to the blended whole life policy. The effective compound annual growth rate of the VFINX by the end of 2014 is 5.66%.
Before you shake your head and think “pathetic,” there's something you should know. That 5.66% annual return is almost 13% better than the actual average annual return achieved by investors.
It’s possible to beat whole life insurance cash value performance by investing in U.S. equities. But, according to the statistics, not many have. And let's not forget that we're talking the actual performance of one of the most well-regarded index funds.
Historically speaking, the volatility is definitely higher. But, higher returns didn’t materialize.