Rich Not Famous

11/3/1999

Stocks vs Annuities & VUL

So you are wondering to yourself, should I invest in stocks or play it safe and put my money in an annuity (or a Variable Universal Life) which will be invested in a mutual fund. As much as some mutual funds holler about their past returns, let us remember they are just that, PAST returns.

What is a good mutual fund to invest in? What is the norm on the returns which you can expect from a mutual fund? If you were to talk to future planners, they would hesitate to calculate anything over a 15% annual return and some even insist on 12%. Although with a little bit of work, you could probably find a mutual fund which will return about 20% annually. Now you are thinking that this is pretty good money for very minimal work. Well it is. But for some work, this could get better, much better.

Let us take a look at investing in the stock market. As you will be able to see from the Stock Picks page of http://www.richnotfamous.com we can easily return 10% on an investment within a few weeks to a few of months. This could be done several times a year and the profit will also be compounded. Let us forget about the compounding effect for the moment. It is very likely to make 3 or 4 trades a year where a 10% profit is realized per trade. This gives us a 35% return on our money. Now we must pay taxes. Assuming that you are in the 30% federal tax range and the 10% state tax range, AFTER taxes you will be left with a 21% return on investment.

I have liberally given the mutual fund a possible 20% return and have given a pessimistic 35% return for stock investments. And even then, we can see that it is better to invest short term and pay the taxes, then it is to invest for the long term and try not to pay taxes.