Annuities or Stocks

by FindYourAnnuity.com20. February 2012 21:03

Can you afford to bet on the stock market?

When discussing annuities, many investors are still asking the question, "why not stocks or mutual funds?". The stock market indices saw relative stability and a steady incline from the late 1930s to early 2000. In the last 10 years though, the stock market trend line makes us wonder if we will ever see the stable market growth that was seen before 2000.
US Stock Market Graph

Many investors have made millions in the stock market and many have lost millions, including their retirement nesteggs. Many have watched their hard earned retirement account take a knuckle biting roller coaster ride with no guarantee that the ride will end on the up-turn at the most crucial time of retirement. There are reasons for this new found market volatility.

The Global Economy

One reason is, like never before, we are in a global economy and the US indices are directly impacted by what happens beyond our shores. In 2011 we saw the Greece economy collapse, Italy troubles and speculation of EU bailouts which all had a direct impact on the US stock markets. As overseas markets stabilize, we naturally see a stabilization of the US markets but the lessons are learned and hopefully remembered by those that wish to have a safe and secure investment medium. We now know, that even using the term "US markets" is something of a misnomer when considering all the large multinational companies trading on US stock indices.

Automated Trading

Another possible reason for stock market volatility, is that technology has brought stock trading to the masses, and I don't just mean human masses. Masses of huge computer systems running software using predictive analysis algorithms to make automatic trades on stock up-turns and down-turns. The numbers on automated program trades is staggering and in some cases darn right scary. The whole point of these new automated trading systems are to buy and sell massive amounts of stocks in an attempt to exploit subtle market patterns that would otherwise be undetectable by human traders. Up to 60% of daily trading is performed by automated systems using algorithms to make decisions on stock trades. This new trading paradigm has and will continue to affect stock market stability.

Some say, due to these two factors and others, that the stock market is broken... Others might argue just the opposite, the stock market is functioning as it is designed to function and works well for many investors. For many others though, that do not like the risk and uncertainty associated with the stock market, the writing has been on the wall for some time and they have moved to safer havens for their savings and retirement nestegg.

The Safety and Security of Annuities

Fixed and Indexed Annuities are not susceptiable to market down-turns so the volatility of the stock market would not affect the performance or investment returns of the annuity. The below graph illustrates a hypothetical comparison between an indexed annuity and an S&P 500 investment between the years 1998 and 2008.
Index Annuity Performance

The index annuity in this example has typical contract terms: 80% participation rate, 20% cap, and a 1.5% annual administration fee. Comparing hard numbers, a $100,000 investment directly into the S&P 500 in 1998 would have resulted in an approximate balance of $90,000 by 2008. You would have lost nearly $10,000 not to mention inflation. On the other hand, your index annuity would be worth nearly $170,000. The difference is a stark, near-two-fold improvement: $76,855. Notice that because an index annuity never loses capital, it's always inching forward and locking in pervious years' returns. During recessions the index annuity simply plateaus.

2008 was an exceptional year for stock market declines and the stock market did see a rebound in the last few years. That being said the lessons are still there to show that in a matter of weeks or even days, your retirement account can lose significant value and put your financial seucrity at serious risk.

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