The financial crisis of 2008 has resulted in many investors moving their money into pure cash and cash-like instruments such as money market accounts and funds. Many investors have become much more conservative in their asset allocation methods after the stock market crash of September - October 2008. This is understandable, since times of financial and economic uncertainty bring forth preservation instincts.

Fixed Annuities

Fixed-rate annuities are products offered by the insurance industry. The policyholder of an annuity, known as the annuitant, deposits money into an account created by the insurance company. The insurance company guarantees both the principal and the interest paid on the money. The annuitant will receive a monthly dollar amount based on the amount of money deposited multiplied by the monthly interest rate. The interest rate is fixed, which is why this product is known as a fixed-rate annuity. Conservative investors and retirees like fixed-rate annuities because the principal and interest is guaranteed, which ensures a monthly income stream.

Certificates of Deposit

A certificate of deposit or CD is a promissory note issued by a bank to a depositor. The certificate entitles the depositor to receive interest based on a rate that can go up or down depending on market conditions. The money deposited under the account named by the CD will be held in that account until the maturity date, which appears on the certificate. The key advantages are complete safety and the interest rate, which is usually higher than rates offered on savings or checking accounts. Generally speaking, the interest rate will be around the rate of inflation, give or take a point or two.

Differences Between Fixed Annuities And CDs

The biggest difference between a fixed annuity and a certificate of deposit is that the money deposited under a CD usually cannot be withdrawn at will without penalties. An annuity, which is basically a contract between the annuitant and the insurance company, can be canceled whenever the policyholder likes. Another difference between them is that the interest rate on the annuity is fixed, while the interest rate on the certificate of deposit is variable and can go up or down.

An additional difference is that there is a time limit on a certificate of deposit, whereas a fixed annuity is meant to exist for the lifetime of the policyholder. This makes fixed annuities more attractive than certificates of deposit for some investors.

Choosing Between Fixed Annuities And CDs

Individual circumstances are always the determining factor when choosing which investment to pursue. Conservative investors who want to take advantage of bull markets will probably choose fixed annuities. While they offer a fixed interest rate, in many cases this is only the minimum interest rate. If the stock market starts to rise, the interest rate on the annuity will rise also. This allows investors to take advantage of the stock market while remaining liquid.

Certificates of deposit can also prove to be viable through the laddering strategy, which structures CDs based on amount and maturity date. Conservative investors may find both CDs and fixed annuities as appropriate for their portfolios. Staying in cash is the only way for investors to be sure that their money is safe, since cash is essentially risk-free. CDs and fixed annuities are two ways for them to execute that strategy.