There are many ways to invest your money in the stock market and no shortage of convincing salespeople preaching the best way to do it.
The "can't-beat'e m- s o - j o i n - 'e m " crowd thinks index funds are the way to go. Some think actively managed mutual funds are best, while others go for individual stocks.
All the above ways have merit, pluses and minuses, and different levels of involvement from you, the investor.
There is one way of investing in stocks, however, that has no merit whatsoever: through a variable annuity. A VA is the absolute worst way to invest in the market. Although some insurance folks are rankled by that statement, I'm not alone in this opinion. The titles of articles on variable annuities I keep in my files will attest to that. Worth magazine, August 1996: "Annuities, Just Say No."
Forbes, February 1998: "The Great Annuity Rip-off."
Newsweek, August 2004: "One Faulty Investment."
The Illinois Securities Department in its December 2004 newsletter listed the "Top Ten Scams, Schemes & Scandals." No. 10 was variable annuities.
In the Newsweek article by Jane Bryant Quinn, the former chairman of TIAACREF said, "I cannot imagine a personal financial situation where I'd recommend a VA as a good idea."
Despite all this bad press, 2004 was the best year ever for VA sales. Investors poured more than $128 billion into them. Banks were the fastest-growing sales channel for VAs the last two years.
You may have been through the routine when your CD came due. The kindly teller told you the bank's new CD rates and then added, "But if you would like a higher rate, our investment counselor can show you ways to increase your yield."
Thirty minutes, one cup of coffee, and one signature later, you're the owner of a variable annuity.
Like the sweet song of the Sirens in Greek mythology, the features and benefits of the VA sound so alluring. There is tax deferral, guaranteed death benefits and minimum returns, no commission and, maybe, a 5-percent sign-up bonus. What's not to like?
For one, the tax deferral comes at a huge price.
Assume you bought a regular index fund and its value doubled in 10 years. If you sold it, the vast majority of that gain would be taxed at the capital gains rate of 15 percent. If you died, your heirs would get a stepped-up basis and pay no tax.
In a VA, that same doubling would be taxed at the higher ordinary income rates, whether you're dead or alive. Next, the "guarantees" are oversold and expensive.
Guarantees are usually good only if you keep the policy until you die or annuitize the policy. Less than 1 percent of all policies are ever annuitized, which leaves death as the other alternative. That's not appealing to me.
You'll never hold it until you die, anyway, because when the five- or eight-year penalty period expires, a slick salesman will swap you into a "better" VA.
No commission? How gullible are you? Sign-up bonus? Since when did any financial service company give you something for nothing?
If someone tries to sell you a VA, put your hands over your ears, start humming, and run.
Dave Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or firstname.lastname@example.org.