Why put your self in a position where you?re affected by the roller coaster of market volatility? By Christopher Music
With all the volatility from the stock market, have you ever wondered what alternatives are there towards the stock market?
One alternative to investing within the stock market, particularly during times of exceptional volatility is in a Fixed Index Annuity (FIA), a hybrid between a fixed and variable annuity, for long-term growth.
What is an annuity?
An annuity is an insurance item offered via insurance companies that grows tax-deferred over time and can provide a lifetime income throughout retirement.
The benefit of a fixed index annuity is that they are fixed annuities, which indicates that the principal is guaranteed and there is a guaranteed minimal rate of return on these types of accounts.
The -index- component comes in because annual returns are based in part on the cost increase of a stock index (excluding dividends), such as the S&P 500. When the market goes up, a portion of the gains on an annual basis, up to a -cap?say 5 to 10%, are locked in and credited towards the account as interest. When the marketplace falls, no losses are posted within the account.
The reason these annuities make sense for retirement planning is that the account balances can never go backward. This indicates that the market can go up, down or sideways and only gains are credited. In addition, some of these annuity contracts have riders that can create guaranteed revenue for life.
The investing landscape has changed.
This last credit crisis has confirmed some interesting facts: ?1st In order for an investor to accurately assess risk, he must know all relevant material facts regarding an investment. This is impossible when there is wide systemic misinformation or undisclosed information, resulting in a gross mispricing of risk. A good example of this is the mis-rating of mortgage-backed securities from Moody?s and Standard & Poors.
?2nd The economic experts of our government and corporate institutions were surprised this crisis occurred. If they can?t predict future economic phenomena according to mountains of data and insight at their disposal, how can an average investor have any idea what to do? The truth is the fact that it is impossible to know all from the correct data essential to successfully navigate the world-wide investment markets over the lengthy term, not to mention the long term effects of arbitrary government fiscal and monetary policy.
?3rd The costs of investing within the market through mutual funds, typically the most popular form of investing, are very high. When all costs are included like portfolio management and trading costs for starters, the costs can easily exceed 3% in actively traded funds.
?4th According to Dalbar (www.dalbar.com), the average stock market investor made the average return of 1.87% from 1988-2008, while the S&P 500 averaged 8.35%. Why? Simply because amateur investors love to sell when the marketplace is down and buy more in periods of market bubbles. Empirical evidence has proven that people react irrationally under threat of loss and can actually become unattainable at the bottom of a market in order to -prevent further losses-.
How long will it take to make up a loss?
If an investment account lost 40%, then just how much percentage return would it take to get back to even? 40%? Nope. 66%.
The percentage returns derive from smaller numbers therefore it takes more return (and for that reason more risk) to get back to even.
Some of these innovations within the insurance industry provide compelling options for the average investor. Insurance companies do one thing very well-manage risk.
Today there is more risk within the investment markets than previously due to propaganda, authoritative opinion, and downright fraud.
Why put yourself at risk?
Why put yourself in a position exactly where you?re affected by the roller coaster of marketplace volatility? How important is peace of mind knowing that your account would not lose one penny when the stock market loses half of its value? Booms and busts are part from the investment game but I would imagine that the average investor has enough to worry about rather of fretting over losses in his nest egg.
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