It is very common to hear about investment products and the benefits they tout. Stocks boast growth potential, annuities attract with guarantees, while the lure with CDs is preservation and income. All of these can make a great impact to a broad financial plan, but there’s always a cost or tradeoff to be weighed.
We’re going to take a look at the pros and cons of three different investment models – the banking world, the insurance world, and the Wall Street world. A majority of investments can be lumped into one of these categories. In fact, many investors may have products in all three.
The World of Banking
Let’s begin by reviewing the very relationship-driven environment of banking. Like many other industries, it’s changed over time. Small-town banks were far more common in past decades. Now, the landscape is mostly made up of national banks and the recent emergence of online-only banks. As a result, it’s less common to be on a first name basis with your local branch.
One constant through all of this change is that banks become very important for short-term money management. That is, checking, savings, money markets and CD’s allow us to properly budget for bills and rainy day emergency money. The more money we have with a bank, the more perks arise – higher interest rates on savings, lower or no fees, and a whole host of other benefits. In addition to our savings, banks are also looked to for a variety of different loan vehicles – another aspect of budgeting and short-term money management.
While banks offer investment and retirement products, they began their companies as banks, not retirement planners. The Insurance and Wall Street worlds are able to provide retirement options, as well as guarantees.
The World of Insurance
There’s a wide range of insurance products available, allowing individuals to transfer their own personal risk to an insurance company. These companies take on significant risk with cars and homes, and can do the same for retirement. How? By providing the option of a guarantee. A common fear heading into retirement is wondering where income will come from after the last paycheck. One benefit of these guarantees, usually attached to annuities, is their guaranteed stream of income for any amount of time. However, these guarantees aren’t free, usually coming in the form of a product with higher fees and/or little to no liquidity.*
The World of Wall Street
When looking for money with the most long-term growth potential, we look to the world of Wall Street. The ever-evolving marketplace has provided even more complex investment vehicles for those seeking more risk. But therein lies the catch – the lack of certainty. With a large array of options, the decision to find the appropriate one given our time to invest and our level of risk can be a very difficult one. Unfortunately, a down market like 2008 can ruin the best laid plans.
The bottom line? There’ll always be a risk vs. reward relationship. The more risk taken, the higher the potential for loss or growth.
The likelihood is that a majority of people are leveraging all three of these worlds, yet not to their fullest potential. Meeting with our clients on an annual basis gives us an opportunity to look over their broad financial picture and check for any missing pieces. If you’re unsure of what pieces you may be missing, or if you’re using the best strategy for your financial future, feel free to reach out to our office.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
*CDs are FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities do have risk and may fluctuate with changes in market conditions. The guarantees are based on the claims-paying ability of the issuer and do not protect against market fluctuation. The guarantee only applies to the death benefit and does not cover the sub-account investments. Investment in stocks will fluctuate with changes in market conditions. Past performance is not a guarantee of future results.