“Nothing is constant…except change.” That statement is as true today as it was in ancient Greece. As CEO of a wealth management firm, I understand the hand-wringing that happens when investors experience a volatile economy. But with the right strategy, we can learn to protect our wealth even during seasons of uncertainty.
Today I’d like to share with you three core tactics that you can use to protect your wealth no matter what the economy brings. At Ty J. Young Wealth Management we call this strategy the three-legged stool; and just like a real stool, a portfolio missing any one of these legs cannot stand on its own.
First, every portfolio of course should pursue growth. Successful investing means buying low and selling high. One of the ways to do that is buying dips in the market. The strategy is simple: take advantage of a price drop, then reap the rewards once the stock price rebounds. But not every dip means an immediate rebound, which is why you also need the other elements we’ll discuss below: income and protection.
During the 2020 pandemic, industry giants like Coca-Cola and Disney took a hit. Savvy investors had the opportunity to grab shares in these companies at historically low prices. Now that pandemic restrictions are loosening, stock prices have risen sharply relative to their prices 12 and 24 months ago, with many stock portfolios reaping the rewards.
This is why a volatile market can actually be an advantage. You can invest in assets that are discounted. As volatility continues this year, we’ll likely see buying opportunities again as prices correct.
The second element every portfolio needs is income. While growth is what every investor likes to chase, conservative income-producing investments protect your returns in times of uncertainty.
There are many income-producing assets to consider based on your objectives and risk profile. For instance, you might consider bonds or stocks that pay high dividends as a strategy for securing additional income. Some exchange-traded funds (ETFs) also produce income for owners who use them as an alternative to mutual funds. Others might consider revenue from real estate properties or other investments.
The income category isn’t where you’re trying to hit homeruns. It’s great when it happens, but the key is consistent generation of revenue. Long-term investors typically see greater benefits with time. The point is that even during a volatile economy, high net worth individuals can experience the consistency of the income these assets produce.
Finally, we have the third leg of the stool: protection. Far too many investors neglect this leg in pursuit of growth and income. But when markets hit turbulence, you can quickly see your account balance go down. Hedging your portfolio with investments that are protected from market down-turns will help you sleep at night during those times. For example, fixed index annuities (FIAs) can provide your portfolio some much-needed financial protection — it’s like wearing a seat belt for your portfolio!
How does an FIA work? It’s essentially an insurance policy. Your gains are driven by stock market indexes.
But unlike traditional stocks, FIAs provide protection against the loss of principal. This is key. This structure means that investors can use these vehicles to avoid losing money when the market takes a downturn. There are certain limitations to consider such as when your money can be withdrawn. But that should not intimidate investors who have a long-term view of their portfolio.
FIAs are more popular than you may realize. After the 2008 banking crisis, it seemed as if everyone who survived had some sort of FIA in their portfolio. The same will hold true today and in the future, providing even high-income investors some much-needed protection from an unpredictable market.
Pursuing Financial Resilience
Like the legs of a stool, these three tactics of growth, income, and protection overlap and reinforce one another. The more money you have, the more you’ll find these strategies to hold true.
As Will Rogers once observed, “I’m more interested in the return OF my investment than the return ON my investment.” No one likes to lose money. But no one really has to. We can’t always count on smooth waters, but with the right strategies, we can learn to navigate even the most volatile waters and emerge resilient.
Written by Ty J. Young, CEO of Ty J. Young Wealth Management.
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