The performance of the CREF Stock Account provides an example of the type of performance one might expect from a broadly based stock fund as proposed in this paper. Its performance over several selected periods is used in this paper to illustrate how an Investment/Insurance Social Security system might operate under various market conditions. The CREF Stock Account, a cornerstone of the traditional retirement program for educational institutions, is a broadly diversified stock fund. It invests 60% of its assets in stocks representative of the US equity market as a whole and most of the remaining 40% in stocks traded in foreign markets and selected US stocks, so its performance should be similar to a fund invested in the entire US stock market.

The performance of the CREF Stock Account from its inception in 1953 until 1999 is shown in Table 15 and Figure 1A. The top graph in Figure 1A shows the actual growth pattern of the unit values of the fund since 1953 (the irregular red line). The green line shows how an investment paying a constant yearly return of 10.86% (the annual return for the stock account during this forty eight year period) would have grown to equal the cumulative value of the stock account in 2001. The lower graph shows the actual yearly returns which produced the growth. Note that the yearly returns vary widely from year to year ranging from -23% to +43%. (As shown in Table 15 the rates of return shown are derived from Annuity Unit Values in Ref 4a and do not correspond to calendar year returns of the CREF Stock Account. These derived returns serve the purpose of illustrating how similar stock funds are likely to perform.)

Shown in Figure 2A are the forty-year annual returns for the last three forty-year periods. The annual return is the annual rate of return which would yield the same result as the actual investment if the yearly return had been constant over the forty-year period. The green line shows that, if one had invested an amount equal to the unit value at the beginning of 1959 ($29) in an investment paying 11.2% each year, the value of the investment would be equal to the unit value of the Stock Account in 1999, $1646 after all its yearly fluctuations. The blue and red lines show the same thing for the indicated periods. The point is that even though the returns during the last three years varied greatly, +11.2% in 1999, +24.7% in 2000, and -23.9 in 2001, the forty-year annual return varied very little, less than 1.3%. In the ten forty-periods covered by this fund since its inception, the average forty-year return was 10.4%, the maximum was 11.1%, and the minimum was 9.8%. This performance is what one would expect based on the Ibbotson and Bogle analyses.

To show how variations in the twenty-year returns can affect variable annuity income and income insurance payments in illustrations used in this paper, the actual returns from several twenty-year periods of the CREF stock account will be used. Figures 3A and 4A depict the performance of the CREF Stock account during two twenty-year period in which the annual returns were 10.15% and 4.90%.

Figure 5A shows unit values for two periods with differing yearly returns but approximately the same twenty-one-year annual return. The actual returns for period A will generate retirement income which is quite different from the returns during period B, even though the annual twenty-year return is the same for both periods. These actual twenty year returns will be used to illustrate how income insurance functions in some illustrations in this paper.

Links: Home     Appendix A     Appendix B     Appendix C     Appendix D     Appendix E     Appendix F    

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