In our first article in the series, “Would you like to retire early,” we discussed the bond market. In my opinion, this is potentially one of the biggest hurdles investors will need to grapple with over the coming years. Debt throughout the world has risen to stunning levels. Just look at www.usdebtclock.org. The US debt is alarming! This has a potential of becoming an issue at some point in the future; in particular, for our children or grandchildren.
As inflation becomes more of a concern, along with increased government spending, interest rates tend to rise. To reiterate our previous post: As interest rates rise, the price of the bond mutual fund falls in value. Depending on the duration of the bond fund, along with the type, this could have a long-term effect on a portfolio such as a moderate allocation, where 40%-50% is invested generally in bond mutual funds.
There are few options that have been discovered that achieve historically what the bond market has been able to accomplish. Most investors view the bond market as “the safe market,” but the reality is there is no safety in any “at risk” investments. Investors buy bonds in an attempt to provide interest and stability to their portfolio. That so-called stability is hard to achieve with the potential of rising rates, or just simply stubbornly low interest rates.
What are some alternatives? An option is a certificate of deposit, which, of course, with interest rates where they are, there is relative safety, but the tradeoff is low returns. The risk of principal being lost is alleviated, but there is still truly little hope of return other than what is stated. Could there be another option that could achieve the same level of protection investors want, and at the same time, the potential for moderate returns? The fixed index annuity is an option that is discussed in my book, The Informed Retiree.
Why do we consider this an option? Again, if the desire is to protect principal and provide moderate returns, then the fixed index annuity has been a viable candidate. Yet even more benefits could be achieved. We feel this annuity type, which has been around since the mid 90’s, can do even more heavy lifting within a portfolio.
We will talk about this in our next post. Stay tuned!
If you would like to read my book, The Informed Retiree, visit my website www.TheInformedRetiree.com or send me an email to [email protected]
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Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Global Wealth Solutions and JWCA are unaffiliated entities