Bear Market Retirement Strategies


Individual investors approaching or already in retirement may be wondering how to survive the various challenges associated with the US bear market conditions. A bear market refers to the state in which the prices of securities fall 20% from recent highs, where market conditions remain characterized by widespread pessimism as well as negative investor sentiment.

Planning & Executing a Retirement Investment Strategy

In the midst of volatile or bearish markets, investors should transition their energy from worrying about asset devaluation to making portfolio shifts that mitigate losses and execute investment strategies that actually generate positive returns or cash flows.  There are various retirement strategies that, with the help of a qualified retirement financial advisor, help protect your assets from large losses in a bear market. As a retiree or investor looking to secure the income that supports your lifestyle, one may want to consider implementing a tactical investment strategy capable of potentially shielding assets from market volatility.

Retirement Strategies

The process of implementing relevant or appropriate strategies begins with identifying, understanding, and acknowledging causes of a bear market. The determinants of bear markets cut across various macro-economic conditions that often result in a sluggish economy. For example, low employment, reduced business productivity and profits, low disposable income, and market volatility as some initial indicators. 

From a technical perspective, a market with the majority of traded stocks on a downward trend is for that reason named a bear-market. A more “technical” definition would be a drop of 20% or more in the Dow Jones Industrial Average or S&P 500 throughout two (2) or more months.  Below are strategies that could help weather volatile bear market conditions.

Interventions by the government can also play a role in triggering bear markets. For instance, significant changes (increases) made to lending rates could lead to bear market conditions.

Retiring and change-oriented investors must remain focused on different indicators, including high market valuations, geopolitical events, low earnings growth, as well as rising interest rates.  Below are investment options worth discussing with a qualified financial advisor.

Indexed Annuities

iven the need for many retirees to have income generating assets during volatile stock market conditions, fixed indexed annuities allow investors to potentially generate higher yields linked to the performance of the stock market, while at the same time, offering downside protection from losses in principal.Here is an example of how a fixed indexed annuity could work: Let’s say the contract stipulate that the annuity provides a return of 50% of the SP500 on a yearly basis:

InvestmentPeriodsMarket PerformanceS&P 500 PerformanceAnnuity Performance
Year 1S&P 500 is Up12 %Annuity generates a return of 6 %
Year 2S&P 500 is Down-10 %Annuity generates a return of 0 %
Year 3S&P 500 is Up8 %Annuity generates a return of 4 %

Despite their huge potential in enhancing the survivability of investor portfolios during bear markets, critics argue that fixed indexed annuities remain characterized by limits on returns. On the contrary, recent and previous studies have so far established that investors, who invest in fixed indexed annuities, are comfortable with giving up some upside to hedge downside risk. According to the Wheaton Financial Institution Center:

Indexed Annuity returns have been competitive with alternative portfolios of stocks and bonds and have limited downside risk associated with declining markets. And they also have achieved respectable returns in more robust equity markets.

Partial Investment in Cash

Apart from fixed indexed annuities, another reasonable strategy involves selling overvalued securities in your portfolio. Although this requires comprehensive analysis, its key benefit is having the cash to buy higher yielding, lower risk investment or value equities as they become cheaper, while at the same time, potentially protecting the investor’s portfolio when faced with the declining market conditions.

However, the main danger associated with going partially into cash is that a bear market may last many months (or in some parts of the world for years).  This creates uncertainty for investors with cash in terms of when to get back into the market.  If not done at the right time (too soon), this could expose the investor to the forthcoming bear market pressures.

Investing Using Stop Loss Orders

Stop loss orders can play a pivotal role in protecting portfolios in markets with increased downside risk.  A stop loss order is often placed just below the prevailing or current price. If the stock falls to the stated or established price, the sale of the investment is done automatically. In this way, as a retiree or investor, you enjoy the freedom of keeping your portfolio until the stop loss is triggered.  If the market picks up without hitting the stop, your portfolio manager, at your behest, can raise the stops so that additional profits are captured. 

While they can be protection strategies, stop loss orders are not 100% guaranteed that your stock will be sold at your stop price. That is because the stop loss is a market order and will be executed at the first available bid in the market. If the stock drops below the stop price, your order may be executed at a lower price depending on market conditions and liquidity in the stock or Exchange Traded Fund (ETF) position at the time.

Fixed Income Portfolio

Retirees and investors should look into conservative investment strategies, given increased volatility and risks in the equity market. They should consider tactical fixed-income strategies that support a broader overall strategy.  The reason for investing in fixed-income investments would be to support withdrawal distribution income and achieving tactical portfolio diversification.

Tactical Asset Allocation

Tactical asset allocation (TAA) serves as one of the best possible investment tools to navigate the complicated and multifaceted full market cycles. Sovereign Wealth Management’s, Gary Korolev, CFA, concurs that TAA offers a broad range of opportunities, including potentially lower Maximum Drawdowns, as well as higher likelihood of increased Compound yearly growth rates across a bull-bear market cycle. 

Additionally, another advantage associated with TAA involves its rule-based, change-driven, and mechanical approach, which allows investors to maintain market-oriented portfolios. TAA cuts risks as opposed to spreading them across asset classes, which, in turn, minimizes the anxiety involved in the whole process of portfolio management.

Tactical Asset Allocation combines an active management strategy with the use of low-cost passive funds to potentially improve retiree and investor income while reducing risk of large losses.  There is significant amount of compelling academic research supporting the use of TAA to manage part or all of an investment portfolio.  This approach can also blend a diversified bond portfolio with a tactical stock ETF strategy to provide a combination of steady income and stock market exposure with potential for reduce downside risk.

Active Trading Strategy

Active trading is another strategic method that could allow your retirement and investment portfolio to survive a bear market. According to Gary Korolev, CFA, Principal Wealth Manager at Sovereign Wealth Management, “the investment approach is not for every investor since there is a higher risk of losing capital. What’s being recommended here is certainly not day trading.”  Rather, Active Trading refers to:

Watching a particular security and trading it from point A to point B and not caring if it goes further up. Most importantly, a trader has to be willing to take losses if it doesn’t work out right.

The benefits to this approach are higher rates of return on your portfolio but that would have to be weighed against the risk of losing your capital quite easily. 

Trades can become long-term holds if they decline and you do not have the discipline to take the loss. Also, investors can get greedy and start to get in over their heads by trading too much too often. That is when problems can happen and losses pile up quickly.

Quote Source: John Riley – Cornerstone Investment Services

Conclusion

Volatile and/or Bear markets require retiree investors to develop and implement the right strategies to prevent asset loss or devaluation. Of the solution-oriented frameworks identified and briefly discussed in this article, it is apparent that using TAA and fixed-income portfolio offers the most sustainable solution to retirees during a bear market. The two strategies place great emphasis on diversification, income growth and asset protection.


The content provided is for informational purposes only and should not be considered a recommendation of any particular strategy or investment product or investing advice of any kind. Information contained herein has been obtained from sources deemed reliable but Spire Wealth Management, LLC and its affiliates do not guarantee its accuracy.  The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the possible loss of principal.

Potential Retirement Portfolio Protection Strategies for Bear Markets

Many of us look forward to retirement as the time to reap the fruits of many years of hard work, financial discipline, and wise investment strategies. A comfortable retirement involves leisure time spent relaxing at home, taking up new hobbies, traveling to more exotic and unique destinations of the world, volunteering, socializing with friends, starting a new and exciting side venture (business), and taking care of your health.  Having the income to sustain your retirement lifestyle is directly related to how well you’re able to build a retirement investment portfolio that can survive bear markets.

Before you hand over your hard earned retirement savings to a Wealth Management firm for investing, you must ensure you have the basics of what a well thought out investment plan looks like. With the understanding of investment strategies of a company like Sovereign Wealth Management, you can build a substantial retirement investment portfolio that has potential to outperform in both bull and bear market conditions.

What is a Bear Market?

A bear market is a period where stock prices are falling week after week, month after month due to weak or low investor confidence.  Many times they are rooted in fear of losing money in stocks in the future, creating a downward cycle in price and increase in fear-selling and market volatility.                                         

The term “bear-market” gets its name from the way a bear attacks by drawing its paws down on its prey. A market with the majority of traded stocks on a downward trend is for that reason named a bear-market. A more “technical” definition would be a drop of 20% or more in the Dow Jones Industrial Average or S&P 500 throughout two(2) or more months.For your investment strategy to be profitable, you, or more importantly your Investment Advisor, Wealth Manager or Retirement / Financial Planner, must know how to effectively navigate a bear market.

Bear Market Technical Signs from the financial markets

A falling or a slow-growing economy fuels bear markets. Indicators of a slow market include a convergence of the following:

  • Slowing Housing Momentum/Starts
  • A Flattening Yield Curve
  • Falling Purchasing Managers Index 
  • Increasing Unemployment
  • Slowing Earnings Growth Forecasts

These are are just a few to keep a pulse on.

This blog post outlines a few investment principles and strategies that have the potential to weather bear market cycles better than a buy and hold strategy. We also cover several more conservative product classes which do not involve risk of stock market losses.

Current State of the Market & Investor Mindset

  • Equity markets are pulling back significantly over the past few weeks.
  • Market volatility is high with large upswings and down swings happening with a week and sometimes within a day.
  • As an investor, retiree, or soon to be a retiree, we should understand that predicting the future is ineffective and fruitless at best.  Time would be better spent working with a capable financial planner to develop a plan that seeks to protect capital during various macroeconomic scenarios.
  • Wise retirement-minded investors understand that while all capital protection plans are well intended and are not perfect, they may be more effective at protecting a portfolio of investments from significant drawdowns over time.
  • Wise investors should look to data-driven financial models that are consistently performing, offering capital growth and maximum capital protection, versus trying to invest via a particular macroeconomic cycle.

Tactical Retirement & Portfolio Investment Strategies

Retirement & Investment Strategies
  • Embrace the concept of “the trend is your friend.”   There is a huge amount of supporting research where investors can avoid significant drawdown in their portfolios leverage the main trends and asset prices, thereby optimizing risk and returns for their portfolios.
  • Leverage Earnings Expectations for Return Drivers in Your Portfolio.  Leverage the 5-Day moving average’s relationship to the 20 moving average to buy and sell an ETF that tracks the S&P 500.  Simply put:

If the 5-Day moving average is more than the 20 moving average, you’re fully invested in the S&P 500. If the 5 day moving average less than the 20-day moving average, you should be invested in cashImplement a Relative Strength of Rotation Strategy.  This investment methodology centers around comparing different asset classes to each other to evaluate which ones have superior relative strength and buying the few strongest while selling the weakest every month. When even the stronger of the asset classes in the strategy fall below a market moving average, like the 10 month or the 200 day moving average, the portfolio can shift partially or fully into cash or a Treasuries to weather the storm.

Combining trend following and relative strength means investing only in assets that are rising in price over the long term, and also picking only the strongest names among the ones that are rising in price.

Quote Source: Seeking Alpha – How I’m planning to Protect My Portfolio in a Bear Market 

FDIC Insured Investment Options in a Bear Market

Certificate of Deposits (CDs)

The Certificate of Deposits (CDs) is a common, if boring way, of saving money that we are all familiar with.  CDs are offered by every bank here in the US to its customers and based on a fixed duration with a fluctuating interest rate.  This strategy is best for funds needed in the short term or for investors who cannot bear losses in their portfolio. The amount of interest paid on CDs is unlikely to outpace inflation, especially after accounting for taxes.

Market-linked CDs

A market-linked CD is also known as equity-linked CD. It is an investment vehicle that is linked to one or more securities or market indexes or a combination of both. The moment the market fluctuates so does your CD.  If the Index the CD is linked too grows in value so does the return on your CD, depending on the terms of the specific CD issue.

The potential for partial stock market linked returns without the downside risk is what makes this strategy attractive. However an investor should expect only partial exposure to the upside of the stock market, as they are investing in something which is protected from downside risk.

How Do Market Linked CDs Work?

Let’s say an index sees a gain of 10% and your CD has a participation rate of 60%. Your CD won’t reflect the 10% market gain. Instead, your CD will see a gain of 6%, or 60% of 10%.

If the market takes a downward trend, there is a chance that your Market-linked CD will not pay any interest. Some market-linked CD issuers protect against this by offering a guaranteed base return.

CDs have to run their full duration, or fixed term agreed to at acquisition. These durations range from 6 months to 10 years depending on the rate of return (interest rate) you’d like to earn. If a need arises and you need to withdraw cash or close out the CD, you could face steep discounts that eat into your interest and principal depending on the terms.

The results may be a minimum payout which would have been different at the maturity of the investment. The issuing bank can “call” the CDs. The bank calls in the investment before the due date. The payout may either be big or small. The bank can decide to call in the investment when it seems to be doing well. In that case, your investment earns you money.

The reverse happens when the investment is not doing so well. The early calls can be an issue as the investment can improve after some time to make better returns at maturity.

Are Market-linked CDs Worthwhile?

Market-linked CDs can certainly be worth the time and risk involved from an investment perspective. They can make you much higher returns than a typical CD if the market is trending or stays positive. However, they can result in no returns over many months and years if the market/economy is trending downward or not doing well.

Market-Linked CDs can also be a sound strategy for an investor waiting out the bear market but still wants to participate on at least some of the gains if the bear market ends before the CD matures.

Fixed Indexed Annuities for A Bear Market

What are Fixed Indexed Annuities?

A fixed indexed annuity allows an investor to receive a rate of interest linked to a stock market index, a bond market index or a combination of both, for a given period of time.

Fixed indexed annuities are meant to compete, in the same wheelhouse, with bonds and CDs,” said Mark J. Orr, a certified financial planner and author of “Retirement Income Planning: The Baby-Boomer’s 2017 Guide to Maximize Your Income and Make it Last. 

Fixed indexed annuities can provide potential higher returns that cannot be lost to bear markets, and they can offer an optional guaranteed lifetime income,” Orr said. “Neither bonds nor can CDs do that – however they are more liquid than fixed indexed annuities.

Quote Source: Bradenton Herald Investor’s column: Pros, cons for fixed indexed annuities

Typically fixed indexed annuities don’t have management fees, and they come with the safety of your premium and credited growth guaranteed by an insurance company.  This means that during years of negative stock market returns (bear markets) there is no downside risk, just a period of zero credited growth. 

Investments of any kind must be weighed in light of risks the investor is willing to take.  Many investors looking to retire should consider a percentage of their portfolio in fixed indexed annuities and market-linked CDs as a source of stability when stocks and bonds are in a falling market.  

Private Placement Annuities

This class of investments does not trade on the stock or bond markets and involves documentation to purchase as well as high minimums such as $50,000, $100,000, $250,000 or more, and lockup periods of 3 years or longer. It also often requires the investor to meet high liquidity and net worth thresholds in order to qualify.  Despite all these hurdles, Private Placements are often more attractive than public investments due to lower volatility in the share price as well as potentially higher interest payments they often pay their shareholders. 

These investments can be private loans to real estate developers, and businesses, as well as Hedge Funds investing in sophisticated market based strategies.

Sovereign Wealth Management customizes retirement income portfolios for clients which often include a combination of tactical and long term stock investment strategies, bond strategies, market linked CDs as well as fixed indexed annuities and private placements to provide a robust and solid foundation for a Retirement Income Strategy.

Bear Market Investment Strategies Summary

Smart strategies lead to wise investments.  Better investments lead to a better retirement lifestyle.  These strategies must incorporate asset protection plans that allow for minimized losses and higher returns in bear markets.

For your retirement and investment portfolio to have the highest earnings potential, understanding various investment principles and the difference in investment opportunities is critical in weathering bear markets.

Sovereign Wealth Management’s Team of Research Analysts and Advisors can help you with your investment strategies as we move into a highly unstable time for US and global equity markets.

Original Blog Post


The content provided is for informational purposes only and should not be considered a recommendation of any particular strategy or investment product or investment advice of any kind.  The information contained herein has been obtained from sources deemed reliable but Spire Wealth Management, LLC and its affiliates do not guarantee its accuracy.  The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the possible loss of principal.

Retirement Strategies in a Rising Interest Rate Environment

Given the current regulatory and economic climate, it is clear that we are headed for a period where interest rates will be consistently rising, most likely at a gradual pace.  It’s also clear through review of the Consumer Price Index (CPI) that the cost of living across many consumer and commercial goods and services are seeing an increase in price because of inflationary pressures.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.

Source – US Bureau of Labor Statistics

As interest rates continue to rise, investors find themselves not only with stocks becoming more volatile but also with bonds which are starting to lose value like they have not done for several decades. 

So what is an investor looking for a sound, stable source of retirement income, to do? Below we will describe some of the options we use in combination to produce a sound retirement income strategy. But first, for perspective, a bit of economics.

12 Month Percentage Change in CPI | Food, Energy & Everything Else

Source – US Bureau of Labor Statistics

For many retirees, the impact of inflation and rising rates are certainly felt when you spend nest-egg resources for buying groceries, filling up your tank with gas, and planning your vacations.

With the Federal Reserve continuing to tighten monetary policy and the US Administration pursuing aggressive trade policies, retirement income planning is necessary to extend your existing asset base throughout your retirement.  The objective would be to define a strategic approach to Retirement Income so that you can not only insulate yourself, but even profit from a rising interest rate environment.

What Causes Interest Rates to Move Up?

We’ll cover a bit of economics before we get to retirement investment strategies.  You might be asking, “what causes rates to go higher?”  According to macroeconomic principals, there is an inverse relationship between inflation and interest rates. A simplified example of the relationship between interest rates, inflation and savings is:

The interest rate acts as a price for holding or loaning money. Banks pay an interest rate on savings in order to attract depositors. Banks also receive an interest rate for money that is loaned from their deposits. When interest rates are low, individuals and businesses tend to demand more loans. Each bank loan increases the money supply in a fractional reserve banking system. According to the quantity theory of money, a growing money supply increases inflation. Thus, a low interest rate tends to result in more inflation. High interest rates tend to lower inflation.

Source – Investopedia

Short Answer – The rise in inflation has trigger the Fed to start increasing interest rates. This will continue over the next few foreseeable quarters and will have a strong impact on your portfolio.

As interest rates rise, Central Banks start raising interest rates to get inflation under control. Higher interest rates mean higher cost of capital for businesses and consumers which reduces the velocity, or movement of money throughout the economy, thereby reducing inflation. 

Whether you’re now starting to invest for your retirement, already have a retirement plan in place but looking for better asset appreciation / returns, or if you’re in or near retirement age and want to ensue you’ve have enough income to carry you through, employing a  mix of the below investment options  could be beneficial to your overall portfolio.  

13 Investment Strategies in a Rising Interest Rate Economy

Bond Liquidation & Raising Capital (Cash)

The longer term the bond, the more it goes down in value as rate rise, this feature of bonds is called Interest Rate Sensitivity.

To take advantage of rising rates, the simplest thing would be to review your bond portfolio where yields are low, and duration is high, liquidate these bonds and keep the proceeds in a higher interest bearing money-market / cash account, which could see better returns as interest rates rise. 

This would be considered a defensive retirement / investment strategy but one that could yield better returns than a low interest, long term bond in a rising rate environment.

Short Term Bond Play

Another strategy would be to invest in short-term bonds since they are likely to pay a higher rate of interest than money market accounts.  One thing to keep in mind would be that there is risk of a decline in the value of a short-term bonds, whereas in a money market account your investment will not decrease as interest rates fluctuate – your compounded rate of return would only fluctuate with no loss in your capital. 

Floating Rate Bonds

These bonds adjust the rate of interest they pay as interest rates rise. Due to this feature, the interest rate sensitivity, or the risk of floating rate bonds losing value as rates rise, is much lower.  There are a number of different types of bonds, from government bonds to lower rated corporates.

Bond Ladders

Bond ladders provide investors with the ability to select from different types of bonds. Some popular bonds include treasury bonds, municipal bonds, and even CDs. These bonds should have different maturity dates that can be spread across several years. When the bond matures a person can put the money into a new bond with higher yields and have a later maturity date.  

No market timing is needed. An investor will then be able to enjoy the income when the bonds mature after they retire. A sizable investment is going to be needed. It is recommended to start these investments early so the money will have years to grow.

Municipal “Kicker” Type Bonds

These bonds are also known as kicker bonds. They will allow the investors to increase the yield on the bond without having to worry about credit quality. These bonds have a higher interest return percentage that other type of bonds.

Because kicker bonds have higher-than-current-market coupons – 5 percent versus 2.50 percent, for example – they usually offer stronger yields and higher cash flow than typical bonds, with one important difference. A kicker bond can be redeemed or “called” by the issuer well ahead of its maturity date, which means an investor would have to invest the funds elsewhere if the bond is called. But if it’s not called early, the investor’s yield rises or “kicks up” as the effective maturity of the issue extends. It’s important for investors to understand the built-in uncertainty of the potential call, says Mark, but also to recognize that the risk is offset by a higher yield.

Source – RBC Wealth Management: Six fixed income strategies for a changing interest rate environment

This retirement income strategy would be best for the investor that is willing to take on a little more risk or potential volatility given the “callable” nature of the bond.  Our Financial Planners at Sovereign will be able to advise you on the best approach to incorporate these higher return asset categories into your retirement portfolio. 

Interest Rate ETFs & Hedge Funds

These investments involve holding treasury, investment grade corporate, and high yield corporate investments that provides investors a more attractive dividend yield. In order for this strategy to work best, the hedge fund or ETS would sell short treasury bond and/or treasury note futures in order to offset the risk of potentially lower bond prices to offset any risk.

The objective with these investments would be obtain higher yields while reducing risk if there is an increase in the interest rates.  Long-term research is still being conducted so it is important to watch the rate.  Investors like these bonds because they can have a higher rate of return than other investments and they can take measures to reduce the risk of losing their investment.  

Some of the Pros and Cons for interest rate hedge fund and ETFs are as follows:                                   

Pros: Can allow an investor to continue to earn higher yields while potentially offsetting some or all risk associated with higher interest rates.

Cons: Limited track record, so hard to gauge effectiveness of hedging feature. Also, many interest rate hedged funds are not heavily traded.

Pros & Cons as Noted by Schwab: 6 Strategies for Dealing with Rising Interest Rates

Although interest rate hedge funds and ETF can offer attractive returns to investors, it is strongly recommended that you do some research and speak with a qualified and experienced Financial Planner or Wealth Manager as this strategy is relatively new.

Real Estate Retirement Income Investment Strategies

With the interest rates on the increase, many retirees are encouraged to invest in real estate.  There are two types of real estate investments to consider and implement. Retirees and younger investors can choose to between Public or Private real estate vehicles to determine which, in not both, strategies would work best.

Public Real Estate Investments

This investment strategy allows a person to invest in real estate investment trusts also known as REITs. When interest rates rise, there is typically a higher cost of serving the debt, which in turn decreases dividend payout and investment returns.   If invested properly the impact of the rising rates can be small. As an example, if the duration of a lease on that multi-family property is short, then the investor could have time needed to pivot / adjust or reallocate capital.  One thing to keep in mind with REITs in a rising interest rate environment is that the population of renters in the market is likely to increase since getting approved for a mortgage will be more difficult and buying a home would technically be more expensive. This higher renter base will have a positive impact on investors looking to (multifamily) REITs .

Private Real Estate Investments

Private real estate investment will likely have a higher return on investment (often 6% to 12% per year)  than public real estate when we’re in a rising interest rate environment. This investment strategy includes Mortgage Investment Corporations (MICs), Private Equity Real Estate Funds, and Limited Partnerships.

A major advantage of these funds is that the price does not fluctuate daily, like it does for publicly trades securities, allowing the investor to concentrate on the fundamentals of the investment instead of being distracted by day to day market movements. This advantage is balanced by the illiquidity of these investments, or the relatively difficulty of selling them, which involves paperwork and redeeming the shares directly with the fund.  

Most Private Placements have a lockup period where the investor cannot get out of the investment for several years. Most Private Placements are available only to High Net Worth Investors (Accredited Investors, Qualified Investors, or Qualified Purchasers as defined by the SEC.)Rate increases should be accompanied by a strong economy, translating to Net Operating Income (NOI) growth and thus better property prices.

  MICs see increased demand as more people turn to private mortgages in light of tougher mortgage regulations and higher interest rates that prevent them from qualifying at a regular bank. Unless these assets are severely leveraged, the long-term private real estate investor should not be utterly concerned with their position, especially if cash flow is strong.

Quote Source – Hawkeye Wealth: Real Estate in a Rising Interest Rate Environment.

Private Placement Credit Funds

These funds, which are also often restricted to Accredited Investors, Qualified Investors, or Qualified Purchasers as defined by the SEC, offer yields often ranging from 6% to 14% per year with little or no fluctuation due to interest rate risk due to the way they are valued, which is based on independent audits looking at the fundamentals of the investments and not the daily whims of the market.

These investments have higher minimums ($50,000 to $500,000 or more) and lockups of several years, where interest is paid but the principal cannot be accessed until the lockup is complete.

Hedge Funds

Also a type of Private Placement restricted to Accredited Investors, Qualified Investors, or Qualified Purchasers as defined by the SEC, offer a variety of strategies to produce income with relative stability. These investments have higher minimums ($50,000 to $500,000 or more) and lockups of several years, where interest is paid but the principal cannot be accessed until the lockup is complete.

Investing in Annuities

Annuities were originally used only as vehicles for guaranteed income for a specific period of years, or for the entirety of a person’s or couple’s life. Annuity offerings have increased in number and type so much that investors now use some types of annuities purely as investment vehicles with no downside risk, while other types of annuities are still used to provide guaranteed income.

Annuities can serve as an excellent low risk income strategy in a rising interest rate environment, since certain types of annuities allow the investor to receive a fixed rate of interest, or part of the upside of the stock market, while protective the investor from all of the downside of the stock or bond market.

  • One tax advantage of annuities when compared to a standard taxable investment account is the deferral of any capital gains or income taxes in the annuity until the funds are withdrawn for spend down.

When a person invests in an annuity for income they can elect to receive payments immediately, or at a future date. The income from the annuities can be received monthly, quarterly, or annually. The payout will vary based on the underlying investment that is made, and the frequency of the payment as well as the age of he investor. Some types of annuities do not have fees, while others, which provide a guaranteed income stream have substantial maintenance costs. The basic types of annuities are listed below.

Fixed Annuity

This form of annuity will allow an investor to get the same payout or a fixed sum irrespective of what is occurring with interest rates in the market, which provides a more stable investment experience. Investors will receive this payment on a regular schedule and it will not change even if the market does; so from an income generation perspective they are similar to CDs.

Fixed Index Annuity

These annuities offer complete protection form downside risk while offering the investor returns linked to a market index. This feature makes a Fixed Indexed Annuity an ideal part of a retirement income strategy for many long term investors who are not comfortable with bonds due to rising interest rates, but still want to have a return on their money with no risk of market losses.

Variable Annuity

The value of a variable annuity can fluctuate with the investment held in this type of annuity. The payout amount, in general, does not decrease. If the annuity investments perform well, a person will get a higher payout by waiting to take their distributions at a later date.

While investors in variable annuities can enjoy a larger payout, many financial experts recommended investing in the fixed annuity instead. Retirees like the security and comfort of having a reliable income stream every month and being able to plan their finances around it.

Conclusion

At the end of the day, investors should see the advice of qualified Financial Planners, and Wealth Managers as well as take a concerted effort to put in place retirement income and/or investment portfolios that are customized to their individual preferences and needs. This means having a clear roadmap of the strategy from both a micro and macroeconomic perspective, understand each of the investment instruments bring implemented, how their asset allocation is deployed and optimized, actively monitoring and making adjustments when and where needed.

Given our interest rate environment, neglecting to do the above is irresponsible and will have undesirable outcomes for your retirement readiness and investment portfolio.

Although interest rates are on the rise, we feel they will remain relatively low while the rate increase will be measured”, says Sovereign Wealth Manager, Gary Korolev, “if early retirement investors and existing retirees don’t know what strategies to implement or mix of securities to invest in when choosing bonds, real estate investment, annuities, hedge and interest funds, their portfolio performance could suffer.”

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Author | Gary Korolev, CFA®

Gary Korolev has used his 15 years of experience as a Wealth Manager with firms such as Morgan Stanley, Merrill Lynch and Charles Schwab to build a comprehensive Wealth Advisory practice centered around meeting clients’ Investment Management, Risk Management, Estate Planning and Retirement Planning needs. His practice focuses on High Net Worth individuals, families and business owners with financial needs far beyond investment management. He has a Bachelor’s Degree in Finance from the University of Florida, is a Chartered Financial Analyst and holds the General Securities (Series 7), Securities Licensing (Series 66), as well the Life, Health and Variable Annuity licenses.

Disclaimer

The content provided is for informational purposes only and should not be considered a recommendation of any particular strategy or investment product or investing advice of any kind.  Information contained herein has been obtained from sources deemed reliable but Spire Wealth Management, LLC and its affiliates do not guarantee its accuracy.  The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the possible loss of principal.

Is Estate Planning Just About Wills and Trusts?

A lot of friends have asked me if Estate Planning is all about Wills and Trusts. Actually, this is just a part of the planning process. However there are other very important aspects involved. Here are some crucial Wills and Trusts matters you should take into account.

Diversifying Your Assets

Building your immovable assets

Singaporeans are generally asset-rich but cash poor. That is because they invest in properties, commodities, etc. These assets are usually subject to the market volatility. When the market is bullish, the values of the assets will appreciate. However, if the market is bearish, the values of the assets will reduce. Depending on the severity of the market, the assets can also become a liability when the values of the assets fall below the debts owed to the bank. Therefore, it is important to determine if these assets should be diversified to avoid the assets becoming a liability. Life insurance is a form of assets, and it is important to consider it as part of your diversification of assets.

Determining the Ownership of your Assets

Keys to your assets

Some friends told me that they don’t have many assets, so they don’t need to have any Estate Planning. I believe that most people should be proud owners of at least a HDB flat. These are assets that we can leave behind for our loved ones. Another friend told me that his HDB flat would be owned by his wife, who is the joint tenant (most HDB ownership are joint-tenancy). However, they didn’t take into consideration if both husband and wife died at the same time, and what would happen to the HDB property or even the condominium. How about the bank accounts of the breadwinner of the house? When upon death, the bank will need to freeze the account before the court issues the Letter of Probate or Letter of Administration for the Executor or Administrator to distribute the assets. Ownership of the Immovable and Movable Properties need to be established now, or it will cause more delay when the properties are being distributed to loved ones.

Declaring Where the Assets are

Jig Saw to your Assets

While we are still around, we know where our assets are. But do our loved ones know where are they? Which bank is holding our deposits? Where are the movable and immovable properties? Though these may seem trivial, when the crunch comes, it can cause great hindrance in identifying the assets. Well, my wife knows where are my assets. But what if both my wife and I died in a car crash? Certainly, we will not be resurrected from the dead to instruct our loved ones on where to find our assets? Therefore, take stock of your assets and inform your loved ones of where are they located. A good estate planner will have a checklist and worksheet to help you plan all these, so nothing will be left unattended.

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Most people will be unsure of where and how to start the process. What they need is someone who can guide them and assist them. There are qualified Estate Planners who can assist and advise you on the process. It will be a consultative approach, where two parties will need to discuss on how to get things going. So why wait? Talk to a qualified Estate Planner now!

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