Variable Annuities

A final type of pooled investment is the variable annuity. This is similar in many ways to mutual funds, but with some equally important differences as well.

Variable annuities include either a lump-sum investment or periodic investments. An annuity, or series of payments, is guaranteed years later, but the amount varies based not only on how much is deposited, but also on how the portfolio performs.

Key Point

Variable annuities are similar to mutual funds in many ways, but they are insurance products and involve many costs and fees.

Because this is an insurance product and not like other investments, when you buy into a variable annuity, you are not an investor, but an annuitant.
The future date when payments will begin is established in advance and is usually a specific age or retirement date. Within the variable annuity you are given a range of choices about where your money will be placed. These include a range of mutual funds, including splitting your money within one mutual fund company, but among a family of funds it offers.

Advantages that variable annuities offer over mutual funds include tax-deferred growth, a death benefit that goes to your beneficiaries and is equal to account value or a guaranteed minimum, and options for how you receive payments later (including a stream of payments for a guaranteed number of years, or guaranteed lifetime income, for example).

Disadvantages include a surrender fee if you withdraw funds early; expense fees that may be greater than comparable fees in mutual funds; and the overall complexity of the variable annuity contract when compared to buying shares in a mutual fund. Because most fees are not charged up front, variable annuities look like no-load funds. But fees are charged during the ownership period in the form of back-end penalties for withdrawal.

Key Point

The best way to select any pooled investment is by ensuring that it matches your investment objectives, and that you completely understand what fees, risks, and requirements are involved.

Pooled investments -- whether organized personally through an investment club, or more formally through a mutual fund, real estate pool, or variable annuity -- are popular because they solve a familiar problem for a vast portion of the investing public. They automatically diversify investments, make reinvestment of income easy and automatic, and rely on professional management to make tough portfolio decisions.

There is an alternative to investing, through various trading techniques. The distinction is made on three levels:
  1. Holding period: Investment usually means a buy-and-hold strategy over many months or years; trading means moving in and out of positions in very short time spans, days or even hours.
  2. Risk level: As a general rule, investors tend to be more conservative and traders more speculative in their market strategies.
  3. Source of information: Investors are more likely to use fundamental analysis and to rely on financial statements and trends. Traders are more inclined to use technical analysis, study price charts, and time entry and exit based on price trends.

The many strategies used by traders are explained in Day and Swing Trading, beginning with an analysis of Trading Risks.
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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