4 ways to reduce risk in variable annuities
annuities are purchased through insurance companies, but carry the risk of the
stock market, say experts, so when you're considering buying one of these complex
animals, look for ways to cut your risk.
"Variable annuities are just like mutual
funds," says Erin Watford, senior financial consultant with A.G. Edward
& Sons Inc. "You are investing in equities. The stock market can go
down, so when you buy a variable annuity, it's important to keep in mind that
your investment can also decrease in value."
Here's four methods Watford and other experts
suggest to reduce the risk of a variable annuity.
1. Assess your attitude toward risk
Take time to understand the risks associated with
particular investments. You need to understand that by investing too conservatively,
you run the risk of not having enough retirement income or that your returns
may not keep up with inflation. On the other hand, investing too aggressively
can put you at risk of losing your retirement savings.
2. Dollar-cost averaging
By investing a set dollar amount automatically in the investment options
you choose, you take advantage of market swings. When the market is down, that
set dollar amount buys more units. When the market is up, fewer units are purchased.
This way, you pay less per unit than the average market price, and dollar-cost
averaging takes the guesswork out of investment timing. Dollar-cost averaging
does not ensure a profit or protect against loss in declining markets. You can
do this from either a fixed account or within a money market subaccount inside
the variable annuity.
3. Asset allocation
When saving for retirement, your goal is to build long-term wealth. You're
not so concerned about chasing the highest returns with an unreasonable amount
of risk. Asset allocation is a common way to help control risk by building a
balanced portfolio, diversified across asset classes, investment styles and
money managers. With asset allocation, you choose how much of your portfolio
to invest in different asset classes ranging from very conservative to very
aggressive. "Diversification is crucial," says Watford.
4. Consider your time horizon
Deciding how soon you'll need the money will help you choose the right
mix of assessments.
Prakash Gandhi is a
freelance writer based in Florida.
-- Posted: Sept. 23, 2003