Those investing for retirement want to know how safe the stock market is because it seems to be the only investing game left in town. After all bonds, CDs, savings accounts and other fixed-rate vehicles no longer generate high enough returns to beat inflation. Unfortunately the ten year bear market that began in 2000 and continued through 2010 showed that stocks are also unreliable.
Safe for the Long Term Not the Short
The truth is that the stock market is an excellent long term investment but a lousy short or near term investment. The average return yearly from the S&P 500 from Jan. 1, 1980, to Dec. 31, 2011, was 12.61% while the annualized return or true Compound Annual Growth rate was 11.10%. That means $1 invested in the S&P 500 in 1980 would have grown to $29.02 by 2011.
The truth is that the stock market is an excellent long term investment but a lousy short or near term investment. The average return yearly from the S&P 500 from Jan. 1, 1980, to Dec. 31, 2011, was 12.61% while the annualized return or true Compound Annual Growth rate was 11.10%. That means $1 invested in the S&P 500 in 1980 would have grown to $29.02 by 2011.
The problem is that there years when the losses incurred by the S&P 500 were close to astronomical. In 2008 the index fell by an astounding 37.22% and in 2002 it fell by 22.27%. The good news was that after each of these falls the S&P recovered within two years. There was also a period between 1991 and 1999 in which the S&P didn't loose money during a single year.
The statistics prove that the stock market is too volatile for short term investment but an excellent place to put money for the long haul. This obviously puts people investing for retirement in a real dilemma the stock market is the best long term investment around but it so volatile it cannot be relied on for short-term income.
Safe Ways to Invest in Stocks
Fortunately there are some ways that investors can enjoy the potential gains from the stock market while reducing the risks. In the last two decades the investment and insurance industry have developed some vehicles designed to make the stock market safer.
Fortunately there are some ways that investors can enjoy the potential gains from the stock market while reducing the risks. In the last two decades the investment and insurance industry have developed some vehicles designed to make the stock market safer.
Indexed mutual funds or exchange traded funds invest in indexes of stocks such as the S&P 500. Long term investment in such indexes will result in a good steady return. Unfortunately as we see saw above such indexes can be subject to catastrophic short term losses.
Variable and indexed annuities contain a traditional fixed annuity that assures a regular income and a sub account that invests in the stock market usually through an index. The advantage to these mechanisms is that any gains from the stock market can be reinvested in the annuity. That way they can be insured and preserved and increase the amount of interest earning capital available. Another advantage is that such vehicles are tax-deferred.
There are also some indexed annuities that have insurance mechanisms that lock in gains. If the S&P 500 offers a 12% return one year and a 5% loss the next the mechanism or guaranteed rate of return would lock in the 12% return.
There are also some indexed annuities that have insurance mechanisms that lock in gains. If the S&P 500 offers a 12% return one year and a 5% loss the next the mechanism or guaranteed rate of return would lock in the 12% return.
Finally deferred variable annuities allow people to save for retirement using both the stock market and an interest bearing account. Both kinds of investment are tax-deferred and the annuity itself is insured and guaranteed by state governments. That gives investors an added layer of protection and a better means of investing in the stock market.
Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity Rate topics, and Financial Planners topics.
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