The Visible Policy
Page 5, BBAG It!

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In the BBAG

There is a problem with modeling dissimilar things.  Permanent insurance does not act like a T+I strategy.  And there are only seven people in the whole world who know the full details about how my policy acts.  I am not one of those seven.  So how do I compare when there are so many unknowns?  One way is formalization of ignorance.  Ignore what you don't know, compare what you do.  Black Box Annual Gain is one answer:
Black Box Annual Gain, 42-99
All that needs to be known to calculate BBAG concerning virtually any sort of investment is the value at the beginning of year (value_boy), the value at the end of the year (value_eoy), any out-of-pocket cash during the year (deposits), and any in-to-pocket cash during the year (withdrawals).  Here is the formula:

value_eoy - value_boy - deposits + withdrawals
value_boy + deposits - withdrawals

I do not model any withdrawals; it is stated simply for completeness.
Taxes are not BAGG'd as a withdrawal -- they do not yield in-to-pocket cash.
(... not your pocket, anyway ;)

For monthly payments, the denominator would be:
value_boy + (deposits - withdrawals)/2

Something amazing is revealed.  Even though you may know very little about what is "inside the box", following the BBOX curve gives you an almost psychic view of certain details.

Why are there so many bumps in all the curves?  In mathematical terms, BBAG results in a "differentiated" function.  Hmmm, let's try that again.  BBAG is like a sneeze.

"AAH!"   {head tilts back}
"AAAHH!!"   {neck and shoulders thrown back}
"CHOOOOO!!!"   {head, neck, and torso plunge forward}

Or, I could just say, "1.2 liters of air was expelled strongly from your lungs."  Both are accurate ways of describing the same event; the "differentiated" description supplies a lot more drama.  What drama do the curves reveal?  Here, let's see some secrets.

BBAG is useful if you only care about annual, not total performance.  In fact, no matter how "psychic" the information provided, the above curve is useless in representing total performance.  (Differentiation:  all plot, no theme.)

Accesses since 31 May 2001
last modified 22 November 2010
2001 - 2010 by Rich Franzen
New model incorporated August 2002.

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No content within The Visible Policy has been approved, authorized, or verified by New York Life or any of its representatives.  I have attempted to fairly and accurately portray the policy, but there are likely to be mistakes.  Over time, I shall endeavor to correct any misinformation found herein.
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