Annuities: Equity-Indexed Annuities: There Are Better Growth Alternatives

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.

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.