Everybody wants
to find the secret to investing on Wall Street. But the
truth is, you don’t have to be a genius to be a successful
equity investor. And you don’t have to lock your money into
restrictive investments like equity indexed annuities (EIAs),
either. In this article I’ll explain several growth oriented
investments that I feel are far better than an EIA.
This article is one in a series of articles on EIAs.
Additional articles in this series are available at
www.guardingyourwealth.com.
The opportunity for growth in an EIA is based on the
performance of an index. When someone invests in an EIA,
they typically have several different indexes they can
choose from. An index is simply a means of tracking a group
of investments. Typically, EIAs will offer indexes that
track the S&P 500, the NASDAQ or the bond market.
EIAs restrict your growth opportunity. Most place a limit on
how much you can earn in any one year. If the ‘cap’ is at
10% and the underlying index goes up 25% or 50% like it did
in 2003 you will only earn the cap of 10%. And even if the
underlying index goes up 10%, that doesn’t mean you will
earn 10% because many annuities only allow you to
participate in a portion of the return of the index or they
have internal charges that would reduce your return by 1-2%.
One great alternative for the growth portion of your money
would be a No-Load Index Fund based on the S&P 500 index.
These are available from many mutual fund companies
including Vanguard. Since they are not actively managed they
have low internal fees. Since they are No-Load, there aren’t
any commissions to pay so you don’t have any automatic
surrender penalties. This gives you the flexibility to take
your money out or rearrange it whenever you want to or need
to. And you don’t have to share a portion of your return
with an insurance company.
Exchange Traded Funds (ETFs) are another alternative. They
work just like the Index Fund described above but typically
have even lower internal expenses. ETFs can be bought and
sold any time throughout the day whereas mutual funds can
only be bought or sold at the end of the day. When the
market is undergoing a significant correction, the ability
to get in or out during the day can be helpful. There are
transactions fees associated with ETFs so they should only
be used in amounts greater than $25,000.
Actively managed mutual funds that invest in stocks are
another great way to invest. For instance, I use several
No-Load mutual funds for my clients that have consistently
out-performed the S&P 500. The advantage of an actively
managed mutual fund over an unmanaged index fund is that the
money manager isn’t required to own every stock in the
underlying index. They can pick and choose the ones that
have the best opportunity. They can sell stocks that become
more risky (think Enron and Worldcom) and they can move
money to cash during periods of market decline.
Lastly, Real Estate Investment Trusts (REITs) are a good
alternative for the growth portion of your money. In
addition to their ability to provide a steady income stream
mentioned above, they also have the ability to grow over
time. If you don’t need the current income, it can be
reinvested to compound and further enhance the return.
Additionally, REITs do not fluctuate in price based on the
stock market or interest rates. Because of this, having a
portion of your money in REITs can reduce the volatility of
your portfolio while increasing its return.
So as you can see, there are many viable alternatives to
investing in an EIA. In my opinion, these alternatives are
better because they give you greater flexibility to use your
money if and when you need to, to make changes should the
investment not perform as you expect, to reduce your overall
risk by spreading your eggs among a greater number of
baskets and they allow you to earn a higher overall return
than the EIA.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or go
to www.guardingyourwealth.com. You can also reach me by
email at jeff@guardingyourwealth.com.
Mr. Voudrie is a Certified Financial Planner, a nationally
syndicated columnist and the President of Legacy Planning
Group, Inc., a Private Wealth Management firm in Johnson
City, TN |
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