Chicken farmers say not to put all of your eggs in one basket. Investment analysts renamed this diversification. It amounts to the same thing – spreading out your assets in different baskets or investments is supposed to reduce the risk of loss. However, putting your eggs in different baskets doesn’t truly reduce the risk if one truck is carrying all the baskets and it gets in a wreck.
The financial pros say you should blend together stocks of different industries, non-stock assets and bonds to reduce the risk of loss. However, there’s a problem. Especially in bad times, stock returns tend to move together, or correlate. Consider the Crash of 2008. Even if you diversified between stocks of large companies, small companies and foreign companies you lost big. Going into non-stock “alternative” investments didn’t help either. Whether you owned real estate, oil or gold, you had less in December 2008 than you had in June.
That leaves bonds. Although bond yields went up at that start of the Crash – meaning the value of existing bonds went down – by the end of the year bond values had recovered and even had a small gain. However, bond yields are around half of what they were back in 2008. What that means is there is a lot less upside potential if interest rates fall and more downside risk of loss if rates go up.
Bank instruments such as money market accounts and certificates of deposit avoid market risk to principal, but the interest paid today is so low. Fixed annuities are another choice. Fixed rate annuities can lock in yields that are one to two percent higher than bank rates. Fixed index annuities provide the opportunity to earn even higher interest. Both types protect principal from market loss.
No one knows when the next crash is coming or how long it will last. Even so, it doesn’t make sense to be Chicken Little and take all of your money out of stocks. However, it does make sense to set aside some egg money so that you know it will be protected from market loss. And when you’re looking for a protected basket, fixed annuities might well produce the biggest eggs.
Copyright 2021. For educational purposes only. Does not provide investment, tax or legal advice. Information believed accurate, but is not warranted. Fixed annuities typically have penalties for early withdrawal, known as surrender penalties, which may cause a loss of principal if the annuity is cashed in prematurely. Past performance is not an indication of future results. No index sponsors, promotes, or makes any representation regarding any index product. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor. Fixed annuities are not bank instruments and are not insured by FDIC.
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