Worried about your savings in a volatile market? In this article, we discuss the best ways to protect your savings from market risk, including understanding your risk tolerance, diversifying investments, and finding reliable income sources.
Summary
- Assess your risk tolerance and tailor your investment strategies to align with your financial goals and time horizon.
- Diversify across multiple asset classes to enhance stability and reduce the impact of market fluctuations on your portfolio.
- Consult a trusted advisor who specializes in annuities to create a personalized investment strategy that protects your savings and maximizes growth potential.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Tip: See how much an annuity could pay you using our annuity calculator.
1. Understand Your Risk Tolerance
Before making any investment decisions, understanding your risk tolerance—the degree of risk you’re comfortable taking on—is crucial. This understanding is influenced by your comfort levels with uncertainty and your personal financial situation.
Behavioral factors, such as the fear of loss, can significantly impact your perception of risk and your investment choices. Remember, investing involves risk and market risk.
The duration you intend to keep an investment, known as your time horizon, plays a crucial role in determining your risk tolerance. In general, a longer time horizon enables you to take on more risk, as it provides more time to recover from any potential losses.
On the other hand, if you’re nearing retirement, you might prefer more conservative investments to preserve your capital.
Frequent reassessment of your risk profile ensures it remains aligned with your evolving financial goals. Dividing your investments into different ‘buckets’ based on your financial objectives can help tailor your risk strategy appropriately.
This approach not only helps in managing risk but also in planning for various financial milestones.
2. Diversify Across Asset Classes
Diversification is a fundamental strategy in managing risk within your investment portfolio. Spreading investments across asset classes—such as stocks, bonds, and cash—helps reduce the impact of a poor-performing investment on your overall portfolio.
This strategy ensures that declines in one asset class are offset by gains in another, offering a more stable and growth-oriented portfolio.
Consider incorporating a mix of stocks, bonds, and other fixed income investments into your portfolio. Stocks, especially those of dividend aristocrats, can offer substantial growth potential.
On the other hand, bonds and fixed-income securities provide stability and are less susceptible to market volatility. Investing in mixed mutual funds and ETFs can also offer built-in diversification since they contain a variety of securities.
Investing in precious metals like gold and silver can further diversify your portfolio and protect against market downturns.
During inflationary periods, these assets tend to perform better than fixed-return options. Overall, a diversified strategy across different asset classes can significantly reduce investment risk and enhance the stability of your investments.
3. Utilize Multi-Year Guaranteed Annuities (MYGA)
Multi-Year Guaranteed Annuities (MYGA) are an excellent option for those looking to protect their retirement savings. These fixed annuities offer a guaranteed interest rate for a specific period, typically ranging from three to ten years.
This feature makes MYGAs particularly appealing for individuals nearing retirement who seek predictable income streams.
One of the significant advantages of MYGAs is their tax-deferred growth. Unlike traditional CDs, MYGA earnings are not taxed until withdrawal, allowing your investment to grow more efficiently over time.
Additionally, many MYGA providers allow partial withdrawals each year without penalties, offering flexibility in managing your funds.
MYGAs often offer higher interest rates and tax-deferred growth, making them more appealing than CDs. They provide guaranteed returns and protection against market fluctuations, making them a stable option for preserving principal and ensuring growth.
4. Explore Fixed Indexed Annuities (FIA)
Fixed Indexed Annuities (FIAs) provide a balance between security and growth. These annuities offer principal protection while allowing for growth linked to market indices, such as the S&P 500, without directly investing in the stock market.
This means you can benefit from market gains while avoiding the risks associated with direct stock investments.
Tax-deferred growth in FIAs enhances potential returns over time. This tax advantage, combined with the security of principal protection, makes FIAs an attractive option for those looking to safeguard their savings while still achieving some level of growth.
5. Consider Certificates of Deposit (CDs) and High-Yield Savings Accounts
Certificates of Deposit (CDs) and high-yield savings accounts are excellent options for conservative investors seeking predictable growth.
They are also insured by the FDIC, providing an additional layer of security for your funds up to a certain limit.
The variety of durations and types in CDs allows you to select options aligned with your financial goals and timelines. If you have specific timelines for needing your funds, investing in CDs can provide the predictability you need.
High-yield savings accounts, however, provide greater liquidity while offering higher interest rates compared to traditional savings accounts.
CDs and high-yield savings accounts contribute to a well-rounded investment portfolio by offering stability and predictable returns.
These fixed-income investments are especially beneficial during periods of market volatility, ensuring your savings continue to grow steadily without exposing you to significant risks.
6. Manage Inflation Risk
Inflation gradually erodes the purchasing power of your savings. Managing inflation risk is essential to preserving your investment portfolio’s value. To protect your savings, hold assets like stocks and real estate that outpace inflation and sell investments when necessary.
Including assets that perform well during inflationary periods in your portfolio can mitigate inflation risk. For instance, stocks and precious metals often fare better than fixed-return options when inflation rises.
Additionally, certain bonds, depending on the interest rate environment, can be a good investment to hedge against inflation.
Incorporating fixed income investments like FIAs, which may include a guaranteed lifetime withdrawal benefit for an additional fee, can ensure a steady income stream during retirement, further protecting against inflation.
This strategy helps maintain the purchasing power of your savings, ensuring your money works as hard as you do.
7. Focus on Reliable Income Sources
Reliable income generation is crucial, particularly as you approach retirement. Maintaining a balanced portfolio is key to generating income while protecting capital. Dividend stocks, particularly those of companies known as dividend aristocrats, can provide steady income streams.
Investment properties offer steady income and potential profit as real estate values rise. Bonds and other fixed-income securities are equally important in a well-diversified portfolio. Certain bonds can be excellent for generating reliable income, depending on the interest rate environment.
Regular portfolio rebalancing helps manage sequence-of-returns risk, crucial for retirees relying on investment income. Focusing on reliable income sources ensures steady cash flow, enabling continued investment and achievement of financial goals.
8. Consult a Financial Fiduciary
Consulting a financial advisor who specializes in annuities, is highly recommended to navigate the complexities of investing and managing risk. Advisors offer personalized advice to align your risk strategies with your financial goals.
They play a crucial role in managing your retirement savings to protect against market volatility.
Ensure your financial plan is up to date before making portfolio adjustments. Combining time-tested factors with personalized advice can mitigate investment risks and reduce portfolio volatility.
Conclusion
Understanding your risk tolerance, diversifying across asset classes, utilizing MYGAs and FIAs, considering CDs and high-yield savings accounts, managing inflation risk, rebalancing your portfolio regularly, focusing on reliable income sources, and consulting a financial fiduciary are all critical strategies.
These methods not only help reduce risk but also ensure your savings grow steadily and securely.
Need help with finding the best annuity?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have
