Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 15

VARIABLE ANNUITIES ARE ALL UPSIDE, NO DOWNSIDE

I’ve been accused of being hard on variable annuities. So I apologize. I apologize to every high net worth investor for being hard on variable annuities in my public writings instead of über-hard. Instead, it would be better if I had done more to keep people—like you—from buying one. (Hopefully, you haven’t bought one.) There’s little worse for high net worth investors (and plenty of other investors) than these, particularly equity-indexed annuities. That these are a “safe way” to get market-like growth with less risk is first-order slam-dunk bunk.

First and foremost—annuities are insurance contracts, and only as good as the firm behind them. Investors in 2010 and beyond will remember well: Insurance firms can and do go kaput. If the firm issuing your annuity goes bankrupt, your contract may be null and void and the premiums simply lost.

This is radically different from investing in stocks and bonds. The brokerage firm can go kaput (and they do) but with no impact on your ownership of publicly traded stocks. (Unless you happen to own stock in the bankrupt brokerage, which likely went to $0. But then, that’s an issue of never holding more than 5 percent in any one stock so one blow-up doesn’t take your entire portfolio down—basic rule covered in Bunk 33.) You own the stocks and bonds—the brokerage (or bank) is just a transparent piggy bank. You can easily journal those securities to another firm for safekeeping—easy to do in ...