A Flexible Stabilizer

How FIAs reduce volatility and strengthen portfolios

by Dave Byrnes

Given ongoing volatility and market uncertainty, a key challenge for advisors and their clients is not just earning returns, or accumulation, it is preserving them. A single poorly timed market correction, occurring in the early years of retirement (sequence of returns risk), can permanently impair a portfolio’s ability to sustain income. Fixed indexed annuities (FIAs) are designed to address this problem and give advisors multiple options around their portfolio mix, diversification needs and asset growth potential and protection.

FIAs are insurance contracts that credit interest linked to the performance of a financial index, such as the S&P 500 or the NASDAQ 100, while providing a floor that protects principal from market losses. The result is a distinctive risk profile: participation in index growth, without the often-tumultuous downside. Far from being just a defensive tool, data finds that FIAs can reduce overall portfolio volatility, enhance diversification and improve risk-adjusted returns over time.

The Problem With Bonds Alone

For decades, the standard prescription for de-risking a retirement portfolio was a steady shift toward bonds. As investors aged, they were encouraged to replace equities with fixed income in their typical 60/40 (stock/bond) portfolio allocation, aiming to dampen volatility even if it meant sacrificing some long-term return potential.

The case for rethinking the use of bonds in a retirement portfolio can be found in Yale Professor Emeritus Roger Ibbotson’s white paper, Fixed Indexed Annuities: Consider the Alternative, which challenged the conventional fixed income wisdom.

Using hypothetical simulations spanning 1927 to 2016, the study found that a modeled uncapped FIA strategy generated annualized growth of approximately 5.8%, compared to about 5.3% for long term U.S. government bonds over the same period, based on the study’s assumptions and net of modeled fees. The analysis also suggested that FIAs exhibited volatility broadly comparable to bonds, while providing protection against loss of principal. It is important to note that these findings are based on back tested, hypothetical performance and product designs that may differ from those available in the current market; however, in scenarios where bond returns underperformed, which Ibbotson argued was a more likely forward-looking environment, the potential advantage of substituting FIAs for a portion of a bond allocation in a retirement portfolio became even more pronounced.

Portfolio Returns: The Case For Allocation Shifts

The findings were striking. A traditional 60/40 portfolio returned an average of 7.60% in below-median bond environments. A 60/20/20 split comprised of stocks, bonds and FIAs returned 8.12%. In a full bond substitution, 60% stocks, 40% FIA, returns were 8.63%, a 103-basis-point advantage over the conventional approach.

Reducing Volatility, Not Just Risk

The FIA’s ability to smooth volatility is not incidental but built into its design. Because the contract credits zero percent when the index declines rather than reflecting actual losses, the annuity effectively truncates the left tail of the return distribution. This results in eliminating the risk of loss.

Research by BlackRock Product Specialist Igor Zamkovsky confirmed this dynamic: hypothetical portfolios showcased that in weaker market environments, FIAs shielded portfolios from the most damaging effects of economic downturns through features including interest rate floors and fixed-allocation options. Under average equity market conditions, findings revealed FIAs produced greater growth than other allocation approaches.

This is particularly important in the context of sequence-of-returns risk, the danger that a major drawdown early in retirement can permanently impair a portfolio’s ability to sustain withdrawals. Recent LIMRA (Life Insurance Marketing and Research Association) data indicates that periods of elevated market volatility and economic uncertainty have coincided with increased consumer concern and stronger demand for protection-oriented products, including fixed indexed annuities. They are a good fit for this current economic environment, as LIMRA also noted that annuities have the ability to mitigate equity market downturns and allow advisors greater flexibility to hedge against risk as market conditions change. However, if conditions improve, FIAs offer some growth potential.

A Diversification Tool, Not A Replacement

It is important to note what proponents of FIAs are not saying. Ibbotson himself was clear: “I think combinations of stocks, bonds and fixed indexed annuities are good.” The argument is not to replace bonds or equities, but to recognize that FIAs occupy a distinct position on the risk return spectrum and can serve as a complementary component to both. J.P. Morgan Asset Management’s 2025 Guide to Retirement also incorporates a direct comparison of conservative allocations versus FIA-inclusive portfolios, modeling the likelihood of retirement success over a 35-year horizon. The analysis reinforces the role of FIAs as an increasingly mainstream consideration in retirement planning rather than a niche solution.

A Market At Scale

The scale of investor adoption reflects a broad shift in thinking as carriers have responded with an accelerating pace of innovation: Wink’s Sales & Market Report identified 96 new FIA products launched through the first three quarters of 2025, a 35% increase over 2024.

That growth is driven by demographics with millions of Americans turning 65 each year, and fewer of them being able to rely on traditional pensions, the structural case for downside protection has never been stronger.

Conclusion

Fixed indexed annuities offer a rare advantage in modern portfolio construction: a way to participate in index growth without accepting the full consequences of declines. When added thoughtfully to a diversified portfolio, particularly as a partial substitute for bonds in a low-yield environment, FIAs can reduce overall volatility, improve long-term outcomes and provide a more stable foundation for retirement income.

For advisors seeking to strengthen client portfolios against sequence-of-returns risk and bond underperformance, FIAs deserve a central place in the conversation.