The idea of taking hard-earned money and placing it into an investment, which you do not fully understand or realize the risk associated with, can be a cause for uneasiness.

Many people who bring their investments to me for review often do not know what they have, cannot read their statement, and typically have no contact with the company or advisor that sold the investment to them.

It is something they have, but they do not know what to do with it.

Well, it is time for you to take control of your investments!

I want to help you differentiate one investment from another and help you to understand the difference between a tax code and a product.

Let’s get started by breaking down your options, and defining what you may be looking at in your own portfolio.

When you hear terms like stock or equity market, they are referring to the exchange of stock shares from one person or institution to another.

You may hear terms like S&P 500, DOW, NASDAQ, Russell 2000, and others, all of which are created to track different segments of the stock market.

They are indexes or barometers for measuring its performance.


stock is a representation of ownership in a company. Companies issue stock to raise money for their operations.

They give away a portion of ownership in exchange for capital.

This is where the term equity comes from; if you purchase a share of stock you have equity in the company.


bond, on the other hand, is exactly the opposite. It is a debt that a company issues to raise money for their operations.

You do not have any ownership in the company but by purchasing a bond you essentially have an IOU with interest from the company.

In other words, they are borrowing money from you.

The bond market is similar to the stock market in that bonds are traded in an open exchange.


mutual fund is made up of a number of stocks and bonds, for the purpose of diversification and simplicity.

For a fee, a fund manager buys and sells stocks and bonds on your behalf and operates within the boundaries of a given objective.

For instance, if you want to invest in China, you can purchase a mutual fund that only buys stocks and bonds in that country.

The idea behind a mutual fund is that you have the ability to invest while having a portfolio manager make the buying and selling decisions.

In addition, you have the ability to hold multiple stocks and bonds with a single investment.

A mutual fund is not traded on any exchange and is purchased directly through an issuing company.

A transaction to purchase or sell a mutual fund is settled at the end of each trading day. The return and principal value of mutual fund shares fluctuate with changes in market conditions.

When redeemed, shares may be worth more or less than their original cost.

Investments seeking to achieve higher rates of return generally involve a higher degree of risk of principal.

Investments in aggressive growth funds tend to be more volatile than the market in general.


An ETF or Exchange Traded Fund is similar to a mutual fund in its makeup and philosophy but it is traded like a stock on an exchange.

The advantage of an ETF over a mutual fund is that it is traded in real time rather than settling at the end of a day.


REIT or Real Estate Investment Trust takes everything that we know about a mutual fund but is specific to real estate.

The difference is that a mutual fund can be purchased or sold at any time where a REIT is only available when there is an offering available to purchase and only allows you to receive your money back when the portfolio making up the REIT as a whole is sold.

You may have the ability to retrieve your money before an actual sale for a fee.


BDC or Business Development Company is structured similar to a REIT except for the underlying investments are different.

In a BDC, the underlying investments are primarily tied to various forms of debt.


An annuity is a financial product issued by an insurance company. It allows for tax-deferred growth of money and can provide income at retirement, in specified amounts, for a specified period of time.

They are long-term contracts with many benefits, but they do have their limitations.

There are three basic types of annuities: fixed, indexed, and variable. Let’s go through these one at a time.


fixed annuity is a contract that provides a set interest rate for a specific term.

For example, you may have a contract that has a 3% rate for five years. Once the five years is complete, the rate can adjust up or down based on the rate the company declares for the next year.

Often, the contract will have a guaranteed minimum rate, which means that after the initial contract term, your rate will not go below a certain rate.

A fixed annuity contract could have ongoing fees and a possible annual contract fee. The insurance company builds their profit margin into the rate they offer you. This is similar to how a bank makes money.


variable annuity is a long-term investment vehicle designed for retirement purposes. It provides investment options called subaccounts.

These subaccounts determine the gain on or loss of your investment, depending on the performance of the chosen investment.

There are no guarantees against loss and no promise of future returns.

You have the upside potential of the markets, with the downside risk associated with owning an investment.

A variable annuity has common fees that many insurance companies charge for their base contract.

There are mortality and expense charges, along with an administrative charge.

These fees are generally a percentage of assets in the contract, often ranging from 1.25% to 4%.


An indexed annuity is a complex contract with many moving parts.

However, it is similar to a fixed-rate annuity in that there could be ongoing fees for the base contract, as well as the profit the insurance company builds into the structure of their crediting method.

It provides a fixed rate option, which guarantees a rate typical for a one-year period, while also providing an option for an indexed rate.

The indexed rate is calculated using a proprietary method, which may include a common index such as the S&P 500 Composite Index.

The indexed rate is often limited to its upside potential while limiting the downside risk.

For example, you may have a contract that has a six percent annual cap (which allows a return of up to six percent), and a zero percent minimum (which limits your risk to zero). In an indexed annuity, you are not directly invested in an index.

Other Characteristics of Annuities:

Early withdrawals from an annuity generally incur penalties, which may result in a loss in principle invested.

In addition, some contracts add a fixed annual contract fee, typically around thirty-five to fifty dollars.

An annuity will typically carry provisions for how long the owner must hold the contract.

This period of time is referred to as the surrender period.

This can range from no required surrender period to a period of ten years or more.

During this period, there is limited access to the funds in the contract without a penalty.

These penalties and withdrawal restrictions are based on each separate investment made in the annuity.

One of the most common arrangements is having access to 10% of the initial deposit each contract year.

For example, if you deposit $100,000, you may have access to as much as $10,000 per year.

Furthermore, withdrawals from annuities prior to age fifty-nine and a half will incur a ten percent penalty in addition to the payment of any income taxes due.


Annuities offer riders that can be added to an annuity contract to enhance certain features.

To clarify, riders are optional.

They come at an additional cost and are often subject to specific restrictions and limitations.

A few of the most common riders are:

  • nursing home waiver is a common rider added to many contracts. This rider could allow for account access if the annuity owner is confined to a nursing home and requires access to the funds in the contract even if within a surrender period.
  • long-term care rider is a feature some contracts offer that allows for an enhanced payout benefit based on the number of assets in the contract if the annuity owner is in need of long-term care. There is generally an additional fee added to the contract if this rider is elected.
  • An income benefit rider is a feature some contracts offer that allows a contract owner to receive income from the contract for a specified period of time without initially annuitizing the contract. There is generally an additional fee added to the contract if this rider is elected. (Annuitizing is an arrangement between an insurance company and the annuity owner, where you essentially hand your principal over to the company in exchange for a guaranteed income for a specified term, which can range from a few years to the lifetime of the owner or surviving spouse).

This is not an exhaustive list of what annuities are but it is a good start to understanding common arrangements offered by insurance companies.


CD or Certificate of Deposit is offered through a bank or credit union. It is an arrangement that provides a set interest rate for a specific term. For example, you may have a CD that has a three-percent rate for five years.

Once the five years are complete, the bank or credit union will notify you what the declared rate will be for a new term and provide a short window for you to either pull your money out or allow it to renew.

A CD is FDIC insured and has guarantees for your principal.

There are many other products available and while there are other viable options, an attempt to cover them all would be a book in and of itself.

Rest assured that we have covered the most popular products. I will now move on to explain tax codes.

PRODUCTS VS. TAX CODE – Know the Difference

What I have found to be true is that many people have trouble differentiating between a product and a tax code.

They believe that an IRA is what your money is physically in.

This is not exactly how this works.

A product such as the ones we described earlier in this chapter is what physically holds your money.

Once the money is in the product, it is necessary to inform the IRS how we plan to handle our tax liabilities.

This is where the tax codes come into play.

An IRA (Individual Retirement Account) allows you to contribute to the product and take a deduction on your tax return up to certain limits.

Money grows tax-deferred, and when you withdraw money from such an account, a hundred percent of the distribution is subject to tax.

There are a few different varieties for employer-sponsored retirement plans.

For-profit companies typically use a 401k; nonprofits use a 403b, and government entities use a 457 to allow their employees to save through payroll deduction.

Although the limits for how much can be contributed to these plans are higher than the limits on an IRA, all accounts have a similar tax treatment. A Roth IRA is different than a traditional IRA since the contributions are not tax-deductible, growth is tax-free, and withdrawals are tax-free.

This is not an exhaustive list of codes, but it does cover the most common and can help you to understand the difference between a product and a tax code.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Indices are an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in an index. Past performance does not guarantee future results.

Investment in stocks will fluctuate with changes in market conditions. Guarantees are based on the claims-paying ability of the Issuer and do not protect against market fluctuation. The guarantee only applies to the death benefit and does not cover the sub-account investments.

Mutual funds are sold by prospectus. Investors should read the prospectus carefully and consider the investment objectives, risks, charges, and expenses of each fund carefully before investing. The prospectus contains this and other information about the investment company. Pleases contact your representative or the investment company to obtain the prospectuses.

This type of investment is not suitable for all investors. ETFs will fluctuate with changes in market conditions. In many cases, ETFs have lower expense ratios than comparable index funds. However, since ETFs trade like stocks, they are subject to brokerage fees and trading spreads. Therefore, ETFs are not effective for dollar cost averaging small amounts over time, and likewise, any strategy using ETFs must account for these additional costs. ETFs do not necessarily trade at the net asset values of their underlying holdings, meaning an ETF could potentially trade above or below the value of the underlying portfolio.

Traditional CD’s are insured by the FDIC and offer a fixed rate of return, whereas both the principal and yield of investment securities will fluctuate with changes in market conditions.