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Are annuities the real deal?

I have been seeing commercials on television about annuities, which seem safer than the stock market. Are they? And they seem to be paying good returns and so what do you think about them?

To my way of thinking they’re genuine options for a conservative investor or a retiree with a good investment nest egg and a low spending lifestyle. They’re much more stable than shares and following the disaster of the GFC, I can understand why many investors are saying when it comes to shares, “just get me out!” After all, if you can get 7.5 per cent for a five-year bank deposit that could look pretty alluring given the fact that many financial advisers work on a similar return when they calculate what the average return will be for a financial plan.

That said, they do usually err on the side of caution with that 7.5 per cent figure and actually try to make a return around 10 per cent, which is a typical long-run return for quality shares with a history of paying dividends. You have to remember that an adviser will always create a diversified plan where annuities could be used as a safe base while other portions of a client’s money is pushed towards stocks for higher returns.

Right now these safer products which are promising higher returns are worth considering but don’t give up on diversification. George Boubouras, head of investment strategy at UBS in Australia, points out that stocks have one bad year in four but that the returns in the good years certainly make up for crook ones. He says a 10 to 12 per cent return from solid stocks that pay dividends is a wise strategy for the medium- to long-term investor.

In a sense, if you listen to George, when defensive stocks are out of favour, that’s a good time to buy them, if you’re a long-term investor. And the same applies to cyclical stocks when they’re on the nose.

You always have to remember who you are and what is your investment strategy when the day-to-day market fluctuations either spook or excite you. To me annuities have a place in a diversified portfolio but I’m always wary of putting too much of your nest eggs into one basket.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, June 21, 2011

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