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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

The 7 Criteria To Evaluate and Compare Capital Investments

Updated: Jan 18, 2023

For any given "bucket of money", there are many ways to work with it to generate a given result. How can we get the clarity we need in order to make a clear decision? We need the criteria to evaluate in order to make a better and more informed decision.

I have determined that there are 6 and an optional 7th criteria to evaluate to determine how you want to manage your money. We'll take a tour of them and define them so you can make a clearer decision that feels right to you.

1. Risk: When we think of risk, we are usually thinking in terms of the risk of loss through no fault of our own. After all, if you're comparing a true investment, the word "investment" could be code for "can lose all your money". (It may not really be likely - even in 2008, the most people lost was about 50%.) How is risk determined? Only by looking through the past and evaluating MPT or Modern Portfolio Theory statistics and the current make-up of the portfolio. If you've watched my YouTube video on "Risk Tolerance and Recapturing Investment Losses", you'd learn about my experience recommending certain 'moderate' mutual funds. And when the market dropped -50%... these funds dropped about -30% and -40%.

Do not confuse risk with volatility. Volatility is in comparing your particular investment to its relative benchmark. If the benchmark is too risky for you, then so will the investment that is tied to the benchmark, which might be more volatile than the benchmark.

How much risk does your current strategy have?

Do you have to take that risk to get the desired returns you want?

Note: To be clear: I do not and will not give advice about specific securities or investment portfolios - such as buying, selling, holding, or any analysis of securities or strategies. Yes, I know how securities work and I know where to find such evaluation information online that is available to the public, but I give this information for educational purposes only. I do offer alternatives to securities portfolios, but because of the features and benefits of what these contracts offer, rather than as a result of any evaluation or judgment of anyone's current portfolio. If you desire an analysis of your securities portfolio, please seek out a properly licensed investment adviser or registered rep in your state.

2. Return: For a given level of risk, we expect to be compensated with a given level of return. That return may not happen every year... but we expect a decent return over time. Generally speaking, the more risk we take on, we want a commensurate rate of return. That seems simple enough.

3. Costs: This is about the costs of investing. There are many ways that costs may be incurred: up-front charges, higher ongoing charges, or deferred charges for quitting a plan too soon. There are costs in everything, so it's important to understand what your costs are. While securities allow you to have the highest returns (along with the lows), fixed indexed annuities have principal protection with limited gains, but no potential losses OR hard dollar charges on your contract! (There may be an optional lifetime income benefit program you can choose to add for usually up to an additional 1% charge per year; see your contract for details.)

4. Terms: Everything has different terms available. Annuities function very differently from wealth management platforms. The key is to understand what the terms are, and if they fit your current plans for the capital being considered. For example: If you are choosing an investment portfolio management program for 2.5% per year, you'll pay adviser fees and management fees for the life of the portfolio. However, if you choose a fixed indexed annuity, you may not pay any fees out of your portfolio, but may have to pay larger surrender penalties if you have to take out money beyond the 10% allowed in a given year during the surrender period. See your contract for details. For more information about how indexed insurance contracts work, please see my blog post here:

You will notice that I keep the considerations of surrender charges not as a "cost" but as some of the terms to be considered.

5. Agent or Adviser Compensation: Should compensation be a factor? Yes... and no. There is a lot of scrutiny of those who sell annuities because they earn up to 10% one time (or sometimes more) on their annuity sales. Is that a problem? One might think it would be because it would seem to favor that product over anything else. However, if you aren't paying that compensation directly out of your pocket (and with annuities - you aren't)... does it really matter? As long as the annuity is fully and properly disclosed as to how it works, the terms, conditions, costs, etc. AND how it fits into your overall financial and retirement income planning, I don't see a problem with it. It must still fit, feel right, and be understandable to the annuity purchaser.

Some fiduciary securities advisers will tell you that they are "the superior adviser" because they only charge you for as long as you keep your account with them. (There's a famous guy on television who says they'd rather 'Go to Hell' than sell an annuity; but they'll invest in annuity companies!) However, take a look at their ADV Part 2 disclosure brochures and determine what your real long-term costs are. Most will disclose that their costs can be up to 2.5% per year (depending on total investment balances) between your adviser's compensation and the 3rd party asset manager costs. That can be up to 25% over 10 years! And that compensation comes directly out of your returns (or losses).

6. Intangible Considerations: Benefits & Drawbacks:

Everything has various benefits and drawbacks. For example: The do-it-yourself investor has the advantage of control and lower costs on their portfolio. However, that comes at a cost of time, research, and executing your own decisions.

Why would a do-it-yourself investor possibly choose to purchase an annuity? An annuity would seem to "lock up" their money for the returns (or other income benefits) and rob them of managing their portfolio themselves. However, to provide for one's spouse (who may not be as financially astute or inclined), or to simply enjoy their retirement instead of being behind a computer screen... those are intangible considerations that really should be considered. Note: One idea could be to keep a smaller portfolio to do your trading with and "invest the difference" in an advisor-advised strategy (not available through me at this time) or through various annuity contracts.

7. Tax Considerations: This factor really comes into play when you're in the contributory phase of building your financial reserves and not necessarily once you've already built up your sizeable portfolio. While there are "rescue" strategies for large taxable retirement portfolios, it would probably be better to contribute to a plan by "beginning with the end in mind" rather than taking the bait of having a tax-deduction today. Every capital contract or investment has tax considerations to be evaluated. That evaluation must be factored in to the total recommendation and plan.

I hope this has been helpful and you have some criteria on how to evaluate various strategies for your financial and retirement planning.

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