Tired Of Stock Market Volatility?
Did you have any money invested in the stock market in 2008? Whether you invested through your 401(k), or bought mutual funds, bonds, or stocks, it is most likely you saw the value of your investment or portfolio decrease by as much as 30-50% in a matter of 6-12 months. For many people such a drop meant delaying their retirement 5-10 years. For others it just left them with a sick feeling as it would anybody who watches 40% of their money evaporate almost overnight.
If you are new to investing, let's look at what a return means. Traditionally the stock market has averaged around 7%-10% per year. That is traditionally and not true for the past eight to nine years. But lets say you invested before then between the periods of 1970 to 2000. During this time the stock market almost never went down and you would have made around 7% to 10% on your money. But that was then. The truth of the matter is that since 2000 the stock market has been one wild ride. Many people would be shocked to find out how little they have earned each year on their money since 2000, this is due to the fact that the Dow Jones Industrial Average has been down 24%.
But there is that flip side, for those who did invest between 1970 and 2000 accomplished their goals and made some money.
So what if you are somebody who doesn't want to make risky investments by playing the stock market, maybe you are wondering if there is a way for you to still earn a return. The good news is there are safe investments and they are called Fixed Annuities and Equity Indexed Annuities.
An annuity is a contract, generally issued by an insurance company, that pays an income benefit at designated periods for the life of a person, for the lives of two or more persons, or for a specified period of time. There are two basic types of annuities: Fixed Annuities, which are a type of annuity that provides payment of a specific sum of money at a fixed rate of return for a fixed period of time; and Variable Annuities- A type of annuity that allows for the investment of assets in various portfolios. The return on assets will fluctuate in value over time, reflecting the performance of the underlying investment portfolios chosen.
Then there is an Equity Index Annuity. In the United States, this is a type of tax-deferred annuity whose credited interest is linked to an equity index - typically the S-P 500 or international index. This annuity guarantees a minimum interest rate (typically between 1% and 3%) if held to the end of the surrender term and protects against a loss of principal. Equity index annuities are also contracts with an insurance or annuity company. The returns on an equity index annuity may be higher than fixed instruments such as CDs, money market accounts, and bonds but not as high as market returns.
Equity Index Annuities are insured by the State Guarantee Fund, which is similar to the insurance provided by the FDIC. The guarantees are further backed by the relative strength of the insurer.
Owning a large portion of these types of annuities within your portfolio is most suitable for a person who wants to avoid risk and is retired or nearing retirement age. Just because you are retired or preparing to retire doesn't mean you still don't want to make a little money off of your investment and of course, these types of investments can do this with even greater gains than CDs, money markets or bonds, while still protecting your principal.
While banks are returning rates, they can hardly compete with a rate of 5-8% guaranteed. And, as opposed to a bond, you could arrange to have the ability to withdrawal certain amounts from your annuity per year, generally in the amount of 10% of the contract value in any given year.
If you are still leaning toward investing in mutual funds, look at the differences between something like the Equity Indexed Annuity and a portfolio that is strong in the stock market. First of all, an Equity-Indexed Annuityis a mix between a fixed annuity and making a direct investment in the stock market. With the Equity Indexed Annuity it is like you are playing the stock market from a safe position. Certainly the potential for growth is less but again, so is the risk – it is a gamble and you have to ask yourself if you are in a position to make such a gamble.
To recap, with the Fixed Annuity you are given the most safety with a guaranteed interest rate. With an Equity Index annuity, you choose how long of a contract you want (3,5,7 or 10 years) and as long as you leave your money in the contract for that time period you will receive either 3% per year or the stock market return value, whichever is the greatest. If you invest in mutual funds or stocks, interests could go even higher or you could go to withdraw your money and find less than you even started with.
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