A Vaccine For Market Volatility?
Remember when the pandemic was in its early stages and the stock market plummeted? What did you do? Panic and sell your stocks at a loss? Reinvest the proceeds in a money market fund, bank CDs or US Treasury Securities that offered miniscule returns? Stay the course and watch your savings shrink with the hope that it would someday grow to its previous height?
As it turned out, investors who chose the last alternative were rewarded for their tenacity. By mid-August, many of them had recouped all or most of their losses.
But now what? With the pandemic still with us, an economy that is still very much infected by it and a hotly contested presidential election in November, what should you do to position your portfolio?
One Possible Solution Might Be An Index Annuity
Adding Greater Certainty to Your Portfolio
What if you could maintain your equity exposure with the knowledge that if your stocks declined in value, you would be protected to a specific degree? What if you could share in any growth they experienced up to a specific maximum?
That is the principle behind Index Annuities.
Like any annuity, Index Annuities are contracts issued by insurance companies. Unlike any annuity, they are not necessarily designed to provide you with a guaranteed level of income at retirement (although they can, if you wish).
Index Annuities, as their name implies, offer the ability to place assets in a vehicle that tracks a specific market index – the S&P500, for example. If the index goes up, you participate up to a maximum cap. If the index goes down, you are shielded from all or part of your loss.
- You place $100,000 in an Index Annuity that tracks the S&P 500
- The Index Annuity has a six year term
- Your maximum upside cap is 80%
- Your downside protection limit is 25%.
It’s now six years later and here is how you would fare under various scenarios:
These are only examples, and Index Annuities typically come with a choice of terms, downside protection rates, maximum caps and even indexes. In fact, some investors purchase more than one Index Annuity to protect major components of their portfolios – small cap and large cap stocks, for example. By incorporating Index Annuities into your investment strategy, you can conceivably replace low yielding fixed income securities with a vehicle that offers greater return potential, as well as a degree of downside protection. The protection feature may not eliminate the anxiety you’ll feel if the market plunges hundreds of points on successive days, but it may very well help you keep your emotions in check and avoid selling potentially promising positions in favor of safer but unproductive assets.
Finally, there’s the issue of tax consequences. By selling stocks in periods of market decline, you may incur capital gains tax which essentially adds insult to the injury you’ve already been dealt by falling prices. With an Index Annuity, you not only avoid this scenario, you gain the advantage of tax deferral. Any growth you achieve inside your annuity is tax-free until you eventually withdraw assets.
Other Points to Consider
- Annuities require a longer-term perspective. With Index Annuities, liquidity is limited during the term of your contract (six years, in our example). You are generally allowed to withdraw only a specific percentage of your assets each year without surrender charges. In addition, the IRS penalizes any withdrawals made under age 59 ½. Over that age, withdrawals are penalty-free but subject to income tax.
- Fees are commensurate with the features you choose, but most index annuities charge no fee upon purchase.
- By purchasing an index annuity, you may be tracking an index, but you don’t actually own the underlying stocks. As a result, you participate in any growth the index achieves, but you receive no dividends.
A variable or indexed annuity is a long-term investment product, designed for retirement, where all interest, dividends and capital gains accumulate tax deferred. Liquidated earnings are subject to ordinary income tax and if made prior to age 59 ½ may be subject to a 10% federal income tax penalty. Early surrender charges may also apply. Variable annuities have additional fees and charges such as separate account charges, mortality and expense risk charge and annual maintenance fees. These charges vary by product and will have a significant impact on contract values. Please refer to the prospectus for specific charges ap-plicable to your contract. Before purchasing a variable annuity product, investors should carefully consider the investment objectives, risks charges and expenses of these products and its underlying investment choices. For this and other information, obtain a product prospectus and underlying fund prospectus, from your financial services representative. Please read it carefully before you invest or send money.
Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC and NFP Corp. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.6000. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS). CRN202209-271768