Low-risk Ways To Invest

- Alan Lavine and Gail Liberman

There are a couple of ways. The easiest: Invest half of your money in stock index mutual funds and half in bonds, CDs or fixed annuities. Historically, this type of investment mix has earned nearly 7.5 percent annually or about 75 percent of the return on stocks, according to Ibbotson Associates, Chicago. On average, with this kind of investment mix, you can expect to have one down year for every four good years. The reason: In any given year, stocks or bonds can lose money.

An easy way to play this game is to invest in a balanced fund, which typically has about 60 percent-40 percent or 50 percent-50 percent in stocks and bonds, respectively. Morningstar's best-rated balanced funds include American Funds Balanced, Dodge and Cox Balanced and Gabelli Westwood Balanced.

Another option to consider: You can invest in an equity-indexed annuity. Keep in mind that with any fixed annuity, the insurance company guarantees both the rate of return and the payout, which can be made immediately or at a future time. There is a 10 percent IRS penalty if you withdraw before age 59 . Also, there may be additional surrender charges if you cash out early.

With an equity-indexed annuity, the interest earned on your contract may be based on the performance of a published index.

Bryan Kane, vice president of Sun Life Financial, Wellesley Hills, Mass., says that with an equity-indexed annuity, your principal also is typically guaranteed. If the stock market grows at a 10 percent annual rate over the next 10 years, you might earn about 6 percent, depending upon how your contract is worded.

There are many different types of equity-indexed annuities, so you need to investigate exactly how they work. But they typically pay a minimum guaranteed interest rate in case the stock market does poorly. If the market does well, you might earn a percentage or "participation" of the gain in the named index it tracks. For example, the insurer might pay a 3 percent minimum guaranteed interest on 90 percent of the premium you've paid in. But you could earn, say, 90 percent of the gain on the S&P 500 index if the stock market does well.Instead of a participation rate, the issuer might instead opt to limit your return with a "cap," and/or subtract a specific amount from the published index's gain.

There is no free lunch with equity-indexed annuities. Critics argue that you only get a return linked to the price gain on a stock market index. However, historically about 40 percent of the total return on stocks is due to reinvestment of dividends. It's possible t

hat there may be no reinvestment of dividends with an equity-indexed annuity.In addition, the NASD warns on its website (www.nasd.com/investor/alerts/indexed_annuities.html) that not all equity-index annuities are alike. Some pay better rates than others. Whether an index is tracked from point to point or averaged, for example, can dramatically affect your earnings.

If the stock market does poorly you could earn little or no interest. Plus, if you cash out of your annuity before it matures, you could lose money.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).