Investing

During periods of market volatility, investors may look to alternative vehicles. Here are some options to consider.

2022 was a difficult year for investors, with all three major market indexes dipping simultaneously and taking their biggest hit since the housing crisis of 2008^[1,2,3]. Now, even with all three up through the first five months of 2023, volatility and uncertainty are stuck in the back of investors’ minds, possibly pushing them to look elsewhere for more diverse vehicles that have the potential to provide growth and protection.

Though diversification of assets certainly doesn’t guarantee success, it can play a major role in mitigating risk and achieving sustained growth. That’s why it can be a good idea to consider alternative or unconventional methods of investing and saving. Here are a few options you may have when looking to diversify your investment portfolio and avoid the pitfalls of the market.

Real Estate

Traditionally, investing in real estate involves purchasing property with the explicit purpose of renting to tenants for extra income or in hope that the value of the investment property appreciates. This can be a great way to earn steady income or returns, but it can come with risk. For example, it can be difficult to find tenants to live or work in your rental property, potentially leaving you stuck making a mortgage payment without collecting the rental income. There’s also the risk that the housing market can temporarily go soft, as it traditionally does when mortgage interest rates are high, or crash as we saw in 2008, leaving you underwater with higher property costs than the property’s market value.

Additionally, managing your rental property can be strenuous, whether that’s because of difficult tenants, maintenance costs or other ancillary costs and challenges associated with owning and renting property. It’s important to thoroughly research your investment property and have a plan to cover traditional costs associated with real estate, as well as a plan in the event that it becomes more difficult to find a reliable tenant or liquidate if you want to sell.

There are vehicles for investing in real estate where you are not involved in day-to-day property management, but these options have other risks to consider and should be undertaken carefully working with trusted financial, tax and legal professionals.

Art and Collectibles

Art and collectibles have historically been the province of the wealthy, but they can be used by some investors looking for more fun and creative ways to achieve long-term gains in value. It is, however, extremely important to consider the market demand for art and collectibles. Oftentimes, value is built around rarity or hype, meaning that these types of items can fluctuate greatly in price. For example, a recently deceased artist may command a higher selling price for their art, however, that price may plummet if tastes and styles change after the hype has long subsided.

It’s crucial to have a strong grasp on the market for the art or collectibles you’re looking to invest in, and you may want to only purchase items that you’d feel comfortable keeping at their purchase price point. Then, were the value of the item to drop, you can still enjoy owning it without the fear of taking losses on it as an investment. Additionally, some collectibles, like collector cars, antiques, wine or high-end sports memorabilia, come at a premium price, excluding many retail investors. Modern companies like Collectable and Rally are now giving investors a chance to invest in a portion of classic cars, baseball cards, and comic books, so while you may not be able to drive a 1955 Porsche, you may be able to participate in a fraction of its market appreciation.

Bank CDs and Treasury Bonds

Often looked at as safer investments with low risk and low returns, CDs and Treasury bonds can be a great option for those looking to stay away from markets during volatile periods. The two are similar in that they essentially function as loans. The difference, however, is whom your money is being loaned to. Bank CDs, or certificates of deposit, are lump sum investments with a bank or credit union that are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation, or the FDIC ^[4]. They then earn interest for the duration of a predetermined period of time. Treasury bonds, on the other hand, are a loan to the government with specified interest rates for durations of either 20 or 30 years ^[5].

It’s crucial to know that during times of high inflation, banks usually raise interest rates paid on CDs to make their products more attractive to investors. That means that during periods of high inflation and high interest rates, CDs can be a more attractive investment. At the moment, interest rates are the highest they’ve been since 2008, potentially signaling a good time to purchase CDs ^[6]. While Treasury bonds also pay a predetermined interest rate over a set period of time, they typically lose value when interest rates rise as newer bonds with higher rates of return become more valuable. Both CDs and Treasurys are seen as traditionally safe and conservative alternatives to the market, but it can be a great idea to speak to your financial professional prior to purchasing either.

Annuities

Annuities are insurance products and contracts rather than investments, and though they are traditionally intended for those on the cusp of retirement, they can function as a vehicle for growth and future income. In the terms of those contracts, the insurance company typically guarantees features like principal protection, a rate of return or income for life, and those guarantees are based on the strength of their claims-paying ability. This is different from a market investment that doesn’t offer principal protection, potentially meaning that the funds you invest could plummet.

At the same time, some annuities like fixed indexed annuities can offer index-linked growth, potentially giving you the chance to earn market upside or growth in correlation with the predetermined index. These growth levels, however, can come with caps or participation rates, meaning you won’t always realize market gains at their peak. Additionally, many annuities tie your money down for a surrender period, meaning that you won’t have access to it unless you’re ready to incur a notable penalty. This could be devastating, especially if large amounts of money are tied up in an annuity when you find another opportunity that potentially presents greater advantages.

It can be extremely helpful to discuss your annuity options with a financial professional who understands annuities and has access to multiple products and insurance carriers in order to find a product that suits your unique situation and your goals. It can also be beneficial to work with an advisor who can weigh the opportunity costs of purchasing an annuity.

Life Insurance

Similar to annuities, life insurance policies are contracts with issuing insurance companies that offer benefits in exchange for premiums; however, there are multiple types of life insurance policies that offer different features. Term life policies, for example, typically come with low premiums for young, healthy people, but they only pay out if the policyholder dies in the predetermined term. Modern permanent life insurance policies present a few more benefits, giving policyholders the chance to secure the death benefit as well as a cash value portion that is protected and grows at rates guaranteed by the issuing insurance companies.

The downsides of permanent life insurance policies are similar to those of an annuity. For example, the cash value portion may not experience lucrative growth, and while growth is never guaranteed with any product, some policies are especially weak investment vehicles if you plan on using them specifically for the growth component. Furthermore, life insurance policies also come with surrender periods, forcing you to pay major fees if you claim the value of your policy early. While one of the positives does include the principal protection, that level of protection is only as strong as the insurance company you work with. It’s always a good idea to speak with your financial professional to see if a life insurance policy fits your needs and goals. Each policy is different, and your unique circumstances will dictate the effectiveness of that policy in relation to your objectives.

These are just a few alternative investment options, and just a few of the potential pros and cons. If you’re looking to avoid market volatility and protect yourself from downturns, we can help you explore your options. Give us a call today! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

Sources:

1. https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
2. https://www.macrotrends.net/1320/nasdaq-historical-chart
3. https://www.macrotrends.net/2324/sp-500-historical-chart-data
4. https://www.fdic.gov/resources/deposit-insurance/faq/
5. https://www.treasurydirect.gov/marketable-securities/treasury-bonds/
6. https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

This article is not to be construed as investment advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your investment portfolio. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Variable Annuity (*if IAR is also a registered rep with a Broker/Dealer, variable annuity advertising may need to be filed with FINRA through their Broker/Dealer)

Variable annuities are offered only by prospectus. Carefully consider the investment objectives, risks, charges, and expenses of variable annuities before investing. This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing. Guarantees are based upon the claims-paying ability of the issuer.

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

Indexed Annuity

An indexed annuity is for retirement or other long-term financial needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and are not guaranteed by any bank or the FDIC.

Indexed annuities do not directly participate in any stock or equity investment. Clients who purchase indexed annuities are not directly investing in the financial market. Market indices may not include dividends paid on the underlying stocks and therefore may not reflect the total return of the underlying stocks; neither a market index nor any indexed annuity is comparable to a direct investment in the financial markets.

Life Insurance: Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.