With the recent uncertainty around bitcoin in general and Mt.Gox (the biggest bitcoin exchange) in particular, we felt this was an apt time to reiterate a few of the points we have made in recent months regarding Fixed Index Annuities (FIAs).
For those not familiar, bitcoin is a virtual currency that can be used as payment for certain transactions and is traded on various exchanges. According to their site bitcoin “uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part”.
Whatever happens regarding bitcoin in the future, the point is that in a sea of investments and places to put your money, much thought should go into the soundness of one’s choices. Sure, the potential returns may be inducing, but there is Always a trade-off between risk and reward.
As we have pointed out so many times before, risk tolerance is very much dependent on where you are relative to retirement, and whether you have the time to recover from a potential loss. If you can afford to take a loss without this affecting your retirement lifestyle, then by all means get into investments which carry risk. But, if you are close to retirement and cannot afford a loss then you need to be in risk protected products such as a FIA. Here you can still share in any market gains (not the same as getting the full extent of the gain) but you are completely protected from downside risk and you also have the security of knowing that your money is safe in an insurance company that is heavily regulated and you have significant protection of your capital.
Weigh this up against the current scenario of people trying to liquidate their investments in bitcoin who have been waiting months and have no certainty of getting their funds at whatever price. Suddenly sharing gains, having access to your funds (even if there are surrender charges), and not sharing in any downside looks very compelling indeed. We’d bet if you offered those anxious bitcoin investors a surrender charge of 10% to get their funds immediately, you would get plenty of ‘takers’.
It’s all a question of horses for courses-just be sure you don’t bet on the horse that turns out to be a donkey!
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