A Case for Annuities

Last year, it was the Russia-Ukraine war, the highest inflation rate in 40 years and the policy shift at the Federal Reserve to raise interest rates that caused both stocks and bonds to lose value at the same time. Bonds ended the year down about 13 percent and stocks ended the year down about 19 percent. By April of 2023, the market was up about 7 percent for the year, but many are worried that there is more volatility to come. Some believe that we could very well be headed towards a recession this year. So, what is an investor to do in this environment?

Safe Money

With so much turmoil in the world, many investors have been fearful and want to retreat to a place of safety. The problem is that we still have significant inflation, so we need to be able to make as much return as possible just to keep up. You could chase promotional CD rates at the bank, but tying the money up for long terms could work against you by not having available cash to take advantage of good buying opportunities in the market. If you want to be prepared to take advantage of the next market boom, but are worried about current market volatility, one option is to simply use a money market mutual fund within your investment account. By having the funds still in your investment account, they will be available for rapid deployment to take advantage of the next growth opportunity in the market.

Fixed Rate Annuities

Another choice you have for safety is fixed-rate annuities. These are not new products — they were first introduced to the public in this country in 1812. Funds placed into fixed-rate annuities are not FDIC insured, but each state has a guaranty association whose purpose is to protect policyholders and claimants in the event of an insurance company’s impairment or insolvency. In other words, these state guaranty associations serve the insurance industry in a similar fashion that the FDIC serves the banking industry. Fixed-rate annuities have stood the test of time as a reliable source of fixed return, and today, rates as high as 5.5 percent for a 3-year term are available.

Indexed Annuities

Another useful type of annuity for volatile times is the fixed indexed annuity (FIA). These innovative annuity products were first introduced in 1995, but have gained much popularity in recent times. Essentially, an FIA allows you to earn interest based on the movement of a market index, such as the S&P 500, but protects your principal from any market losses. You don’t lose any money due to market downturns, but the upside is limited, or capped, at about 8 to 10 percent depending on the insurance company and product features. This can be a good option when there is so much uncertainty about the future direction of the market. If the market goes down from here, the annuity protects the money from any market losses. If the market goes up, then the annuity will capture a reasonable portion of the market’s upside potential. This makes it possible to benefit no matter which direction the market goes from here.

Bottom Line

It is important to note that there is no perfect place to invest money. There are pros and cons of investing money in bank products, insurance products and securities products. A well-diversified portfolio will usually include all three of these investment strategies. Seek the advice of a professional investment advisor that you can trust to help guide you through these turbulent times. Don’t settle for the same old advice that your advisor has handed out for the past several decades. Today’s financial world demands professional investment advice that is innovative, forward-thinking and product agnostic.

Randy Yeisley is a local, independent investment advisor and is the founder and president of Yeisley Financial Group, Inc., located in northeast Wichita. He can be reached by emailing advisor@yeisleyfinancial.com or by calling 316.719.2900.