what is indexing?

Do you want to find a safe haven that will still provide you with good returns on your savings and not expose you to any losses? Consider financial products that use a unique tactic called indexing to calculate the rate of return. Basically, indexed products offer you a chance to enjoy positive returns and an opportunity to minimize or even totally eliminate risks. In fact, many of these financial vehicles come with guarantees that you will never lose a cent.

In the past several years, you have probably seen how volatile the market can be. Stocks, bonds, and even money markets and mutual funds might be hot one year and decline the next. If you want to keep your principal and previous gains but never worry about losing money, you may want to learn more about the way that indexing works.

 

INDEXING BASICS

In short, indexed financial products link their rate of return to a major index of the market. The S&P 500 is one of the most common examples. When the index increases, so will the value of your asset. At the same time, you will have a guarantee that you can lock in past gains and not lose your principal during a year when the market declines. Some products may even offer you a fixed rate during down years, so you’ll actually make money when people who invest in securities lose money.

If you think this sounds like a retirement planner’s dream, you might want to consider these three typical indexed products:

  • Market-based CDs: Instead of offering a small, fixed interest rate, these CDs peg their rate to a market index. The FDIC protects your principal.
  • Indexed annuities and indexed universal life: Insurance companies offer these two indexed products. Government regulations and the financial strength of a major insurer protect your asset’s value

 

IS THERE A DOWNSIDE TO INDEXING?

By now, you may wonder why everybody doesn’t role their nest egg into one of these safe money products. The downside for some investors is that products that rely upon indexing are usually only really productive for long-term savings; however, they aren’t a good solution for people who might have to draw their money out early. However, if you have cash that you want to use for long-term retirement plans, future college funding, or other financial planning, you should learn more about different indexed financial tools.