When financial markets are falling fast, risk-averse investors may be tempted to cut and run. But cashing out your investments when markets are falling often means locking in investment losses. And knowing the right moment to reenter the market when things start to turn around is all but impossible.
Those inclined to avoid investing altogether may want to consider alternative approaches. The experts at Fidelity Investments suggest two options: the anchor strategy and the protected accumulation strategy. Both prioritize principal protection but also offer some growth potential. While a financial advisor can help you determine which approach is right for you, here’s a closer look at these two options.
Anchor Strategy Basics
For risk-averse investors with a time horizon of five or fewer years, the anchor strategy can provide stout principal protection with some additional upside. The approach requires you to divide your portfolio into two parts: an anchor portion and a growth-oriented segment.
The anchor portion of your portfolio will hold the majority of your assets, which will be allocated among conservative investments. “These assets have a set lifespan, and the amount you invest is designed to grow back with interest to your original principal,” Fidelity says. This gives you the security and peace of mind to invest the remainder of your portfolio in growth-oriented assets, including stock mutual funds.
The investments that will serve as your portfolio’s anchor may include:
For example, an investor with $100,000 could put approximately $82,000 in a combination of assets that will generate a 4% return within five years. This ensures the investor will have her full $100,000 at the end of the five years. It also frees her up to invest the remaining $18,000 in riskier assets that will potentially produce higher returns.
But remember, inflation reduces the purchasing power of money over time. The $100,000 principal will be worth less in five years than it is today.
Protected Accumulation Strategy Basics
If your financial goal is at least 10 years down the road, the protection accumulation strategy may be a viable approach.
The strategy involves purchasing a variable annuity with a guaranteed minimum accumulation benefit (GMAB) rider. Riders are optional protections and enhancements that can be added to standard annuities. “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,” Fidelity says.
The rider also allows you to reset your principal protection, locking in potential investment gains on a yearly basis. For example, if the underlying investments of your $100,000 annuity grow to be worth $105,000 one year after purchasing the contract, the GMAB would allow you to lock in those gains, according to Fidelity. However, this also means resetting the clock on the annuity’s accumulation period and deferring your eventual withdrawals for at least a year.
And as the name suggests, the accumulation protection strategy also protects against downside risk. If the annuity’s underlying investments flounder and drop in value in a given year, your initial principal will still be protected.
However, Fidelity advises those who are interested in the accumulation protection strategy to conduct their own research on annuities and pay close attention to the terms and fees associated with GMABs, which can vary from company to company.
Bottom Line
Investors with low-risk tolerances and/or short time horizons don’t have to stash their money under the mattress. Instead, Fidelity says two approaches known as the anchor strategy and protected accumulation strategy both combine principal protection and growth potential. Which one is right for you may depend on your timeline, willingness to purchase an annuity and other factors.
Investing Tips
- A financial advisor can help you decide how to invest your assets and integrate your portfolio into a comprehensive financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Timing the market sounds great in theory, but it’s virtually impossible to executive perfectly – especially for retail investors with limited expertise. Not only does it require you to accurately predict when’s the right time to get out of the market, you’ll also need to perfectly time your reentry into the market. If not, you’ll miss out on the eventual recovery that often follows a market downturn. Research shows that a buy-and-hold approach is the better option.
Photo credit: ©iStock.com/FatCamera, ©iStock.com/MicroStockHub, ©iStock.com/hobo_018