Many investors are feeling great about recovering what they lost in the market crash of 2008 and even the crash of 2001 to 2003. But a sentiment I often hear now from investors is “I’ve recovered what I lost and I don’t want to go through that again. “ There are three steps you can take now to protect what you have and maintain growth going forward.
First, have a “floor” to protect your wealth from market losses.
A floor simply means if the market crashes you don’t lose money. The most common floor is 0%. The floor is tied to a time frame, usually one year. This means if at the end of the one year period, the market has fallen 30% you get 0% for that year.
Second, have a “Reset” feature in your strategy.
Following the above example, since the market has fallen 30%, you received no losses and now your wealth “resets” to where the market is. (30% lower than the year before.) All of your gains for the next year are calculated from the lower market position. You don’t have to wait until the market comes back up to where it was before getting gains. This allows you to capture gains even when the markets are flat for 5-10 year periods like 2000-2010.
Third, have very high caps or uncapped strategies to capture gains.
Most all strategies with floors and reset have a maximum cap on gains. This is the price of the protection. Some caps are very low in the 2%-3% range. Caps that low make the strategies almost worthless. (Slightly better than a bank CD.) Good products will have very high caps in 12% to 17% range – found mostly on indexed life insurance. You can also find uncapped strategies on very good indexed annuities which work well for 401k/IRA types funds.
Here is a chart the may help to put it all together:
Choosing the right combination of strategies can offer double digit growth potential without the downside risk. But there are a lot of bad insurance products on the market so make sure you know what to look for. Knowing what the upside potential is should certainly be on the top of the list.
