A Chance To Invest Without Risk
Is it possible to participate in the stock market without risk?
The short answer is yes: with equity-indexed annuities, it is possible to avoid the downside of the market. Many investors have never heard of equity-indexed annuities, even though they were first introduced in 1995. If you’re an investor, you can relax knowing that you can eliminate risk!
In the late 1990s, most investors were arguably not concerned with downside risk. But the days of 25–40 percent returns are over now. Today’s investors have a different outlook. Many are flocking to safer alternatives to avoid losing more of their retirement nest egg. The problem is… safer alternatives typically offer lower rates of return. So where can you find a happy medium?
Guaranteed principle protection
Equity-indexed annuities (EIAs) were designed for the cautious investor—someone who likes the idea of receiving market-like returns, but also wants the guarantee of principle protection. EIAs are linked to a stock market index such as the Dow Jones industrial average, Standard & Poor’s 500, and NASDAQ—or all three.
Consumers see the value in EIAs because they understand that in the past, the stock market has been a great place to grow their money. However, they don’t want to expose all of their assets to the risk associated with the stock market. They use EIAs for the “safe portion” of their assets in order to achieve higher returns without the risk. Additionally, they take advantage of the tax-deferral that EIAs offer versus investing in taxable CDs.
Why zero-percent returns can be thrilling
There are many companies offering EIAs, and the products vary greatly in the way they work. Our role as Advisors is to continually monitor the market place and determine which companies offer greater features and benefits, and are fair with the way they credit earnings.
It’s interesting to hear investors talk about how happy they were when their EIA investments returned zero percent in the years 2009 and 2010. As backwards as that sounds, most people were thrilled that their principle was protected during those years. People agree that giving up some of the upside is worth it when all of the downside is eliminated.
Locking in annual gains
Another big attraction to EIAs is that most products lock in gains annually. Each year, the gains that are earned cannot be lost. The slate is wiped clean and everything starts over, or resets every year. Whatever was earned last year is locked in and cannot be affected by what happened this year.
Fair returns without risk
What kind of returns can you expect? This question is tricky, because there are so many products out there that differ. Since 1995, there have actually been EIA products that have posted returns of 30 percent or more in certain years.
These products are not designed to outpace the stock market, they are designed for safety. EIAs are designed to give the consumer an opportunity for a fair return without any risk.
Some people are attracted to the stock market because of the upside potential it offers. At the same time, they’re turned off because of the volatility and risk that accompanies it—like what is happening since the beginning of this year. Safer alternatives offer security, typically with lower returns.
An investor should consider an EIA as a vehicle that will offer the opportunity of a good return. The return may or may not be as high as the stock market each year, but an EIA offers the protection that many of the safer money alternatives offer.
A safe place to diversify
The EIA investor should not expect to beat the stock market. Your EIA should be where “safe money” is placed. Most of us understand the concept of diversification, which is why many investors see these products as a great place to avoid risk. Others will use EIAs as a place to reallocate investment dollars that have been underperforming, or one that may replenish taxable earnings washed away by market losses like this year.
Keep in mind the EIA was designed for the cautious investor. The AARP advises guaranteeing your income with an annuity as a way to avoid outliving your money.
What do you think? Your comments and questions are welcome.