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Real World Scenarios: Fixed Annuity Vs. Variable Annuity


Here is a real world question regarding fixed and variable annuities.

On the advice of my financial planner, I moved my fixed annuity to a variable annuity and now my value is down. What should I do?

I really don’t have enough information to give you a specific answer — I would need to see if you are qualified for the variable annuity by assessing your risk tolerance, time frame, and goals, and understand the value of the annuity, the percentage of your assets that the annuity makes up, and the investment allocation breakdown. I would suggest that you contact me at Annuity FYI directly so that we can discuss your situation in detail. But I can tell you that as a rule of thumb, if your time horizon is less than five to ten years, you should probably stick with guaranteed investments.

Many investors see in the fixed annuity a tortoise plodding along. The variable annuity is more like a hare. The first is going to be consistent and steady, and give you more comfort and peace of mind. But, you are limited in your performance to whatever your interest rate is. With the variable annuity, on the other hand, you create the possibility of a greater return, but with much greater exposure to market risk. That said, statistically the longer an investor holds the equity investment, the greater the potential for an overall positive return. (Source: Compilation of both the Bloomberg and Weisenberger, 12/00).

Investors are often known for being their own worst enemy, constantly doing the wrong thing at the wrong time — buying high, selling low, etc. Historically, stocks have significantly outperformed other investments in the long-run. That said, stocks are also subject to greater risks than other investments, in particular over shorter periods. Even though the prevailing bull market of the last decade has demonstrated higher than normal returns, equity oriented investments have historically outpaid other investments (Source: Ibbotson Investment Software, 2000 Ibbotson Associates). Be patient, and if you’re nervous, consult a professional. Don’t watch too much TV and don’t read too many newsletters.

Always remember the eight eternal truths of investing: 1) All investments go up and down; 2) Most people do the wrong thing at the wrong time; 3) Markets usually overreact; 4) No one knows what the future will bring; 5) Diversification is the best strategy; 6) Money market accounts and CDs will not make you rich; 7) Uncertainty creates opportunity; 8) Never say never.

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