The collapse of the housing market in 2008 caused a financial crisis so devastating that it lead to a period known as the Great Recession. But was this disaster preventable? The 2015 movie The Big Short answers how some people were able to see it coming with two simple words, “They looked.” If there’s any lesson to be learned from this it’s that: The best predictor of the future is past performance. So the questions we must ask ourselves is where should we be looking.

One market that possesses key indicators of carrying a false sense of security is fixed annuities. These structured settlements are backed by the State Insurance Fund which suggests that the Life Insurance Company Guaranty Corporation of New York would back a portion of the annuity if a company were to go bankrupt. While this has all the signs of a guarantee, in reality, it is anything but that.

In 2008 Fannie Mae and Freddie Mac were unable to bail anyone out as the entire industry collapsed around them. If a similar meltdown were to occur to the annuity market, the Life Insurance Company Guaranty Corporation of New York would have no chance of guaranteeing anyone’s annuity. In other words, if you are not getting paid your annuity because of a market downturn then the State Insurance Fund becomes useless. During a major failure, the insurance industry would not have any money, and the guarantee would be worthless. Simply put they can’t bail everyone out.

At Fogel Capital Management we are doing something simple that most others aren’t, we look. We invest in United States Treasuries and municipal bonds which are guaranteed by the federal and state government respectively. The municipal bonds carry credit support, third party insurance policy. If New York State were to go bankrupt, this municipal bond insurance will pay the bondholder when the issuer fails to do so. Annuities, on the other hand, are backed only by privately owned insurance companies none of which are AAA rated.

It is wrong to assume that your annuity is secure just because the Life Insurance Company Guaranty Corporation of New York has the word “Guaranty” in their name. In fact, it is so wrong to make the assumption that New York State law[1] actually prohibits the use of this “guarantee” for marketing purposes and advertising of any kind.

Investing should be treated with the same care and diligence that we apply to the rest of our lives. The dangers of annuities can be summarized perfectly by a quote from the opening scene of The Big Short, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.

[1] New York State Insurance Law Article 77 Section 7718