Starting a long-term savings and investment plan early in your professional life can pay long-term dividends. Young couples trying to decide which financial products to select will find a wide range of choices. Unbiased information about those choices makes the selection easier. Two major categories of financial products are equities, which involves stock market investing; and annuities, a type of tax-advantaged savings contracts.
Equity investments are stocks. A share of stock represents ownership in a company, and a shareholder participates in the growth and profits of the company. Investing in equities can be accomplished through several kinds of accounts. With a brokerage account, you can buy shares of individual companies and you select which companies you would like to own. Managed products include stock mutual funds and exchange traded funds, or ETFs. With these products, you buy shares which represent ownership of a portion of a portfolio of stocks selected to meet certain criteria.
Risks and Rewards of Equities
For younger investors, stock market investments provide the best opportunity for long-term growth of their portfolios. Financial advisers often use the formula of 100 minus your age to determine the percentage of investment savings which should be in equities. However, an investor in the stock market should understand there can be periods of time -- called bear markets -- when the value of equity investments will decline significantly. Investment values might recover after a bear market, but many individuals with investments in equities have trouble accepting the paper losses showing up on account statements. They might sell their shares, producing real losses. To reap the rewards of long-term equities investing, you must understand and be able to handle the periods of negative returns.
Annuities are income products sold by life insurance companies. A deferred annuity accumulates value over time with the goal of providing a retirement income to the owner. In retirement, the value in an annuity can be converted to a stream of income -- either for a fixed period of time or for life. The earnings in a deferred annuity grow tax-deferred until withdrawal. There are tax penalties if money is withdrawn before age 59 1/2. An annuity can either be a fixed -- earning and accumulating interest on top of the principal value -- or variable -- with an account value separated into sub-accounts invested in stocks and bonds.
The typical annuity buyer is an older individual with a large amount of money to invest. A fixed annuity provides a safe investment alternative with guaranteed rates of interest and tax deferral on the interest earnings. For younger individuals, there are usually better alternatives than locking money up for the long-term required by both the insurance company and tax rules. An employer-sponsored 401(k) plan or IRA accounts provide the same tax-deferral advantages as annuities with a wider range of investment choices. Insurance agents or investment advisers with insurance licenses often charge larger commissions for managing your annuity accounts compared with many other investment or savings products.
An equity-indexed annuity is a specific type of annuity with some properties of the equities market. The annuity contract pays a portion of the gains of a specified stock market index with the guarantee the annuity will not lose money. The product appears to offer the best of both equity investing and annuity. Equity-indexed annuities contain a high level of complexity and very high surrender fees if you want to withdraw money early. The Financial Industry Regulatory Authority -- FINRA -- website states, "EIAs are anything but easy to understand." FINRA recommends getting expert advice before putting any money in an equity indexed annuity.
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