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number of fund choices that clients may not otherwise have access to. Inside variable annuities are subaccounts. The money invested in a variable annuity is split between whichever subaccounts the client wants, thus tying the annuity to the stock market. The main disad- vantage to holding an annuity inside an IRA is that you lose the annuity’s inherent tax-deferred capability. One of the main reasons to own an annuity is that taxes are deferred until you begin to withdraw money from the account, which also is one of the main characteris- tics of an IRA. By placing an annuity inside an IRA, you don’t gain any extra tax deferment.

There are many advantages and disadvantages to owning an annuity, whether it is a fixed or a variable annuity. It’s best to consult with your advisor to determine if an annuity is right for you.

Whether you believe in holding individual stocks and bonds, or you like the idea of mutual funds, asset allocation is a method to diversify your portfolio to help work with the ups and downs of the stock market. Being caught in a market downturn is bad enough, but if 100 percent of your holdings are tied to that market, you see that downturn reflected in your account balances. However, by following the asset allocation theory, when the stock market goes down, your portfolio won’t be hit as hard because you will have diversified across many different asset classes. (See Table 2.1.)1 Likewise, the theory of asset allocation proves its mettle when viewed over the long term. (See Figure 2.3 )

1Source for Table 2.1: Standard & Poor’s Micropal.

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