Dennis Foster: Keeping your investments safe in a crisis
As I am writing this on April 1, the dramatic effects of the coronavirus pandemic are yet to be fully realized. Beyond the obvious tragedy of human suffering, our economy and the markets will be adversely affected for quite some time. As we are emotional, imperfect and often irrational beings, there are very real driving forces beyond just the hard and stark economic factors. These range the gamut from fear to greed and everything in between. Restoring confidence and some semblance of well-being is paramount to recovery. As the fortunate citizens of this great country, we need to band together in order to see ourselves through these troubling times.
As the country has been all but shut down for some time — and into the foreseeable future — the vitality of the economy exactly mirrors this lack of activity. The government programs that have now passed and others that are sure to follow may add some temporary relief to some sectors. Despite how much money the government throws at the problem, it will not instantly heal everything. We must also consider the inherent waste and grifting with any government programs of this magnitude. Not to mention, every dollar allocated is deficit spending and must be paid back. If you really think estate taxes will never be a concern for your family, consider where the mostly urban members of Congress are going to look for this money.
If you have had the foresight and good fortune to sock some profits away into any vehicle that is directly involved in the markets, such as but not limited to, mutual funds, common stocks, variable annuities, etc., you have no doubt lost a substantial amount of real money. I am not an economist. I am, however, a realist, and reality combined with some common sense tells us that the markets are going to take some time to completely recover. Just as it is with gravity, it takes much more time and effort to move things up versus watching them freefall.
The quandary for most folks is that safe money, fixed interest alternatives such as CD’s, money markets, fixed annuities and the like have extremely low rates right now. They amount to little to nothing and with recent Federal Reserve moves, will descend from the range of little and will be far closer to nothing.
So, is there some kind of middle ground that offers a reasonable rate of return and safety? There is, and I have eluded to it before. More than ever, it bears repeating. Equity indexed annuities offer a unique balance. They are somewhat new to the annuity scene and fill a need between guaranteed fixed rate annuity accounts and always at-risk accounts, generally comprised of mutual funds in variable annuities.
Equity indexed annuities guarantee all of your principal and earnings. You have the option of placing all or just portions of your money into a fixed interest account or into an equity indexed account. Most folks choose the indexed option, particularly in times of low interest rates. The equity indexed account bases your earnings on any number of stock indexes of which to choose from. There are several crediting methods, and the one I prefer is a participation rate. Meaning that on every anniversary of your contract, if your chosen index(s) increase, you are credited a percentage of the increase. The issuing insurance company retains the spread and in turn, guarantees your account will never lose money.
Equity indexed annuities are not flashy, flavor of the month investments. Rather, they perform like a steady plow horse chugging forward without stumbling or falling down when the markets do. They can only increase your original investment — without the stressful downturns. With all that has and is happening as of late, steady and assured is indeed reassuring. From an advisor’s standpoint, it is very comforting knowing that all my clients’ hard earned money remains safe and unaffected in these difficult times and will be poised to make considerable and fully realized gains as our nation and the markets start down the road to restored prosperity.