One alternative to investing in the stock market, especially during times of exceptional volatility is in a Fixed Index Annuity (FIA), a hybrid between a fixed and variable annuity, for long-term growth. What is an annuity? It is an insurance product offered through insurance companies that grows tax-deferred over time and can provide a lifetime income during retirement. The benefit of a fixed index annuity is that they are fixed annuities, which means that the principal is guaranteed and there is a guaranteed minimum rate of return on these type of accounts. The “index” part comes in because annual returns are based in part on the price increase of a stock index (excluding dividends), such as the S&P 500. When the market goes up, a portion of the gains on an annual basis, up to a “cap”—say 6 to 12%, are locked in and credited to the account as interest. When the market goes down, no losses are posted in the account. The reason these annuities make sense for retirement planning is that the account balances can never go backward. This means that the market can go up, down or sideways and only gains are credited. Furthermore, some of these annuity contracts have riders that can create guaranteed income for life. The investing landscape has changed. This last credit crisis has proven some interesting facts: First, in order for an investor to accurately assess risk, he must know all relevant material facts regarding an investment. This is impossible when there is wide systemic misinformation or undisclosed information, resulting in a gross mispricing of risk. A good example of this is the mis-rating of mortgage-backed securities from Moody’s and Standard & Poors. Second, the economic advisors of our government and corporate institutions were surprised that this crisis occurred. If they can’t predict future economic phenomena based on mountains of data and insight at their disposal, how can an average investor have any idea what to do? The truth is that it is impossible to all of the correct data necessary to successfully navigate the world-wide investment markets over the long term, not to mention the long term effects of arbitrary government fiscal and monetary policy . Third, the costs of investing in the market through mutual funds, the most popular form of investing, are very high. When all costs are included such as portfolio management and trading costs to name a few, the costs can easily exceed 3% in actively traded funds. Forth, according to Dalbar (www.dalbar.com), the average stock market investor made an average return of 1.87% from 1988-2008, while the S&P 500 averaged 8.35%. Why? Because amateur investors love to sell when the market is down and buy more in periods of market bubbles. Empirical evidence has proven that people react irrationally under threat of loss and will actually sell out at the bottom of a market in order to “prevent further losses”. How long does it take to make up a loss? If an investment account lost 40%, then how much percentage return would it take to get back to even? 40%? Nope. 66%. The percentage returns are based on smaller numbers so it takes more return (and therefore more risk) to get back to even. Some of these innovations in the insurance industry provide compelling options for the average investor. Insurance companies do one thing very well—manage risk. Today there is more risk in the investment markets than ever before due to propaganda, authoritative opinion, and outright fraud. So, why put yourself in a position where you are affected by the roller coaster of market volatility? How important is peace of mind knowing that your account would not lose one penny when the stock market loses half of its value? Booms and busts are part of the investment game but I would imagine that the average investor has enough to worry about instead of fretting over losses in his nest egg.