How soon would you want to know if your investment advisor wasn’t telling you about the three major investment types? If you’ve only heard of two – Variable and Fixed, then you may have a problem.
Unfortunately, many investment advisors routinely fail to present all three types: Variable, Fixed, and Indexed as valid investment choices to their clients. This is normally because they are unable to offer all three options or they have a personal dislike for one or more of these investment types.
So what is the difference in these investment types and what do the terms mean? The simplest answer is that these terms define how interest is earned on your investment. More specifically, it tells you how your money is invested and if your money is protected from market fluctuations. Let’s take a look at these various investment options.
Variable
A Variable investment is one where your money is typically invested in stocks or GT INVEST mutual funds. The performance of these stocks or funds varies and is not guaranteed – hence the term “variable investment.” Variable investments have many key benefits. They allow you to earn interest by investing in a single company (individual stock), multiple companies, or a specific segment of the market (mutual funds). You can even invest in an entire Index like the Dow Jones or S&P 500. Also, variable investments allow for the greatest return and historically have outpaced all other investment options.
Sounds pretty good, right? It is, as long as you have the tolerance to lose money as well. The volatility of variable investments is a major concern for many investors. The “upside” or growth potential is nearly unlimited, unfortunately so is the “downside” or risk of losing money.
One other adverse factor that Variable investments face is the cost. Most have either fees or loads associated with the underlying investments. These fees or loads can reduce the performance by as much as 3.5%, although 1-2% is more common. These fees or loads are applied even in down years so it is definitely something to consider.
Fixed
A Fixed investment offers a pre-determined or fixed interest rate for a specified period. This is most commonly seen with bonds, CD’s, annuities and universal life insurance products.
Fixed investments have three major advantages over the other options. First, they provide a guaranteed or known interest rate that is disclosed prior to making your investment. Second, fixed investments are generally designed to protect your initial or principal investment.
A Fixed investment also has two major pitfalls. First, because they provide a known or guaranteed interest rate, they generally provide a lower rate than what may be available when you’re willing to risk your principal. Second, they normally have restrictions or penalties associated with any withdrawals made during the fixed interest rates term period. This is especially true with CD’s and annuities.
Overall, Fixed investments can be a great option for those not willing to risk some or all of their money, older clients using the investment interest to provide or supplement their income, and clients looking to provide a hedge against other, more aggressive investments.
Indexed
Unlike Fixed and Variable investments, Indexed investments are somewhat unique to the insurance and annuity marketplaces. An Indexed investment shares traits of both Fixed and Variable investments, but with one major difference – how interest is earned.