Book Appointment

4 Alternatives to Annuities Your Agent Doesn't Want You To Know!

Season #2

The Roller Coaster Ride of the Market

It's a question as old as the markets themselves: Why must the financial markets roller-coaster, teasing us with their ups and downs rather than gliding smoothly upwards? Wouldn't it be a dream come true? Yet, when we take a step back, the market indeed trends upwards over time; it's the short-term fluctuations that feel like a wild ride.

The core of the market's unpredictability lies in its human element. Stocks, after all, represent companies, and their valuation is not just a matter of arithmetic but of human perceptions and reactions. Warren Buffett, for instance, invests in companies based on fundamental value, yet the day-to-day price of these investments is swayed by what others are willing to pay. It's a dance dictated by collective sentiment, where intrinsic value often takes the backseat to perception.

The Safe Haven of Bank CDs and Savings Accounts

In search of stability, some might consider parking their savings in bank CDs or high-yield accounts, away from the market's volatility. While this path shields you from daily market fluctuations, it introduces other risks, notably, the silent beast of inflation. The real question isn't about avoiding market swings but whether your savings can outpace inflation. Just as the IRS and inflation tirelessly chip away at your wealth, your investments need to not just grow, but grow faster than inflation to preserve, let alone enhance, your purchasing power.

Discovering Investments That Offer the Best of Both Worlds

In the ever-evolving landscape of personal finance, the quest for investment options that blend security with growth has led to the emergence of innovative financial products. These offerings, once exclusive to the realms of investment banks and elite financial circles, are now gradually making their way to the average investor. But what exactly are these options, and how do they work?

The Rise of Accessible Investment Options

The financial market has seen a surge in products that promise investors the chance to "have their cake and eat it too." These are investments that aim to provide both principal protection and the opportunity for upside potential. While such options were scarce and largely inaccessible to the general public five years ago, the landscape has significantly changed.

Today, a variety of these investment vehicles are available, even to retail investors. From Exchange-Traded Funds (ETFs) designed to offer more stability, to multi-year guaranteed annuities and registered index-linked annuities, the market is ripe with opportunities for those willing to look.

These products typically offer two key features:

1. Principal Protection: This could come in various forms, such as market-linked CDs with FDIC insurance, or soft protections likes buffers and principal protected notes, ensuring that some or all of your initial investment is secure and will be returned upon maturity.

2. Upside Exposure: All these products offer some form of market participation, some with caps, some with participation rates, others allow you to provide regardless of the direction of the market. The key is that they are all designed to provide greater potential returns than just your standard money market or bank CD. This makes them the perfect fit for the conservative investor.

Navigating the New Frontier

The introduction of these products to a broader audience marks a significant shift in investment strategies. No longer are safety and growth mutually exclusive; instead, investors can now explore options that provide a safeguard against loss while still participating in the potential financial gains of the market. Let's take a moment to explore these options:

Market Linked CDs:

Market Linked Certificates of Deposit (CDs) are a type of financial product that combines the security of traditional CDs with the potential for higher returns linked to the performance of a market index, such as the S&P 500. Unlike conventional CDs that offer fixed interest rates, market linked CDs provide returns based on the performance of the underlying index. While they offer principal protection, meaning the initial investment is secured if held to maturity, the returns can vary and may be higher or lower than standard fixed-rate CDs Like traditional CDs, market linked CDs are usually covered by FDIC insurance up to $250,000.

Principal Protected Notes (PPN):

Principal Protected Notes (PPNs) are a type of investment product that guarantees the return of the initial principal amount at maturity, regardless of the performance of the underlying assets. PPNs combine elements of fixed-income investments with the potential for higher returns linked to the performance of equities, indices, commodities, or other assets. Returns on PPNs can vary and may include additional earnings if the underlying assets perform well, but these returns are often subject to caps or participation rates.

However, it's important to note that PPNs carry creditor risk, meaning that the return of the principal and any potential earnings depend on the issuer's financial stability. If the issuer defaults or goes bankrupt, investors may lose part or all of their investment.

Structured Notes:

Structured notes are hybrid financial products that combine elements of debt securities and derivatives, offering customized investment opportunities linked to the performance of underlying assets such as equities, indices, or commodities. These notes can provide performance-linked returns and are tailored to meet specific investor goals and risk tolerance. They may offer various options like buffers, which provide partial protection against losses up to a certain limit, and barriers, which set specific levels at which protection or participation changes.Additionally, structured notes can include features like coupon protection, ensuring periodic interest payments regardless of market performance, and principal protection, which guarantees the return of the initial investment at maturity.

However, these products carry credit risk, as the return depends on the issuer's financial stability, and they can be complex, requiring a thorough understanding of their terms and conditions.

Buffered ETFs:

Buffered Exchange-Traded Funds (ETFs) are a type of investment product designed to provide partial protection against market losses while allowing for participation in market gains up to a certain limit. These funds use a buffer strategy to shield investors from a predetermined percentage of losses, typically over a defined period, such as one year. In exchange for this downside protection, the potential gains are capped, meaning investors can only benefit from market gains up to a specific threshold.

However, it's important to note that due to timing and price components, the actual upside and downside experienced by investors may not match the advertised rates. The performance of Buffered ETFs depends on the timing of the investment relative to the market cycle and the specific terms of the buffer and cap. As a result, investors might receive different levels of protection and gain than initially expected. Buffered ETFs are structured to appeal to conservative investors who seek some level of downside protection without sacrificing all opportunities for growth, offering a balance between risk and return while aiming to mitigate volatility.

Buffered Unit Investment Trusts (UITs)

Buffered Unit Investment Trusts (UITs) are similar to Buffered ETFs in that they provide partial protection against market losses and allow for participation in market gains up to a certain limit. However, Buffered UITs address the timing and price component issues found in Buffered ETFs by setting a fixed duration for the investment, typically about 15-months at the time of this podcast.

Buffered UITs may also use Flexible Exchange (FLEX) Options to manage both upside and downside risks. By using FLEX Options, Buffered UITs mitigate credit risk, as these options are backed by the Options Clearing Corporation (OCC), which serves as the guarantor for options trades. This structure provides an added layer of security, reducing the risk associated with the issuer's creditworthiness. Buffered UITs thus offer a reliable solution for conservative investors seeking to balance growth potential with downside protection while minimizing both timing risks and credit concerns.

As these opportunities continue to evolve and become more mainstream, it's essential for investors to stay informed and vigilant. The complexity and diversity of these financial products mean that careful consideration and, often, professional advice is necessary to navigate the choices available.

If you would like help exploring how these options can be used in your portfolio, give us a call or email us for a list of current offerings.