A guarantee, without high fees

For investing peace of mind, you don't need to buy a costly and complicated annuity.

January 14, 2009: 12:15 PM ET

NEW YORK (Money) -- On a recent frosty morning, as I was reading the mail and cradling a mug of hot coffee, I noticed a beautiful envelope on my desk. It was an invitation to an all-expenses-paid course at an exclusive warm-weather resort. While there, I could learn how to earn a 9% commission by selling clients an investment that offers stock market returns without any risk of losing money.

I like making money and winning free trips as much as the next guy, but I couldn't help feeling that this didn't smell right. How can the insurance company, the planner and the consumer all make out like bandits?

Sure enough, with an equity-indexed annuity (EIA) like this one, the consumer is the loser. You'll pay 2% to 3% a year in fees and face high surrender charges if you want to get out within 10 years. And if you can decipher the fine print, you'll learn that you get only a fraction of the market's gain.

I'd need 40 pages to elaborate on all the "gotchas," but I'd rather tell you how to create your own EIA-like product.

Let's say you have $10,000 to invest for 10 years. You don't want to lose it under any circumstances, yet you want to profit if stocks go up.

First find a high-yielding 10-year CD that's insured by the FDIC or the NCUA. Recently you could buy a 10-year CD from Capital One Bank through Costco that paid 5.55%. Buy the CD in your IRA, if you can, and you'll re-create an EIA's much-hyped tax break. At 5.55% you need to invest about $5,850 now to have $10,000 in 10 years. (To do this math, use a present-value calculator like the one at moneychimp.com.) Take what's left and buy the low-cost Vanguard Total Stock Index exchange-traded fund (VTI).

You get $10,000 back, guaranteed. Even if the market goes nowhere, you end up with about $14,150. And if stocks earn 8% annually, you'll have nearly $19,000.

Knowing that you will get your initial investment back may give you the psychological wherewithal to stay in the market when the going gets tough. We planners, though, end up with no commission and no free trips. But that's our problem. It's your money, not ours.