Consider these strategies to help counter fear of loss so you have the potential to grow your money. Fear of loss is a powerful motivator. But fear, like greed, is a dangerous sentiment for investors. Excessive fear of loss—which behavioral economists call loss aversion—causes many investors to act counterproductively. Fortunately, you don't have to treat growth and protection as mutually exclusive. Certain strategies can help you benefit from market gains, while protecting you on the downside.
No one has ever successfully and consistently predicted stock market returns. The strategy of jumping in and out of the market is known as market timing; investors who try to time the market typically sell after their investments have lost money, and buy only after stocks have recovered—selling low and buying high. Avoiding stocks altogether has major drawbacks too. Stocks provide the potential growth nearly every long-term investor needs to stay ahead of inflation. Cautious investors with long-term saving goals—those who will not need to access a portion of their assets for 5 to 10 years—may benefit from strategies that allow them to protect principal while exposing some of their assets to the stock market's growth potential. If you fit that description, consider the following strategies: the anchor strategy or the protected accumulation strategy.
1) Anchor strategy
An anchor strategy involves dividing your portfolio into 2 parts: a conservative anchor and more growth-oriented investments. The anchor portion of your portfolio uses investments that offer a fixed return, such as certificates of deposit (CDs) or single-premium deferred annuities (SPDAs). These assets have a set lifespan, and the amount you invest is designed to grow back with interest to your original principal. This portion of your portfolio acts as your anchor, while your remaining assets are invested in more volatile, growth-oriented securities such as stock mutual funds or ETFs. The anchor strategy can remove the negative outcomes cautious investors sometimes fear because even if the markets fall, your anchor makes sure you at least have what you started out with.
*Tip: Remember, inflation can erode the purchasing power of your original investment over time and this strategy generates taxes each year in a taxable account.
2) Protected accumulation strategy
Here's how it works: the protected accumulation strategy takes advantage of principal protection features on variable annuities. A guaranteed minimum accumulation benefit (GMAB) rider on an annuity is the most basic of these. Your assets are invested in a portfolio that typically has a larger equity position than the roughly 15% stake outlined in the anchor strategy above. For a fee, the GMAB rider guarantees that at the end of the annuity's investment period—typically 10 years—you'll have at least the same asset value you started with. Another potential benefit is that most GMAB riders let you reset the level of principal protection each year if your investments have grown in value. If you do lock in a higher balance, the investment period resets and your balance is guaranteed for another 10 years. It is possible that your fee may increase if you elect this option and annuity features will vary by the issuing company.
Which loss aversion strategy is right for you? Determining which, if either, strategy may make sense for you will depend on a number of factors, including your investing goal, interest rate environment, fees on your investments, your time horizon, and your tolerance for risk. First consider if you might be better off investing in a diversified portfolio, because either of these strategies (anchor or protected accumulation) may limit your upside growth potential—and the diversified portfolio may offer a greater long-term benefit. You also need to consider when you will need access to these assets, because both strategies might penalize early withdrawals.
Consider working with your financial professional to sort how to protect your principal while keeping a watchful eye on your overall goals, diversification of your portfolio, and exposure to taxes. Questions? Contact us at Brien@TraditionsWealthAdvisors.com
Source: Fidelity Viewpoints. 22 March 2023. https://www.fidelity.com/viewpoints/retirement/fighting-loss-aversion?ccsource=email_weekly_0330_1037579_36_0_CV2