Changing the Investing Strategy in 2023

I feel my investing is stuck.

How do I get out?

We have to remember that traditional investing includes three distinct asset classes – stock, bonds, and cash. The personalized combination of these three investments, through diversification, has proven to build wealth over time. But, in light of additional rate hikes, earnings pressure, and a contracting economy, maybe we need to put a crowbar behind those asset classes to get them unstuck.

Now, please don’t misunderstand; I am convinced that stocks will reward long-term investors for those who can stomach the headlines and volatility. I’ll go one step further and say that the alternatives will likely come in second place to stockholder returns. However, given the current investment landscape, I’m willing to explore adding some of these investments into the mix in 2023.

1. Structured Products.

These investment alternatives are developed by banks and financial institutions and are built using stocks, bonds, or other combinations of different investments. For example, a bank may take a group of stocks or indexes like the S&P 500 and combine them with options. Once the bank completes the homework and sharpens its pencils, they package its financial structure and sell it to the end investor. The investor may get some but not all of the S&P 500 performance (i.e., a maximum of 5% annually). In return for giving up the upside, the investor receives some element of downside protection. There are thousands of varieties of these structured products, and the investor should understand the credit risk, liquidity risk, and terms before making an investment.

2. Private Credit.

As interest rates continue to rise, the bond market creates disruption and opportunity. Most of us invest in the public bond markets, but with this window of Federal Reserve interest rate hiking, the market disruptions will create windows of bond buying opportunity that we haven’t seen in a long time. It would make sense to extend this bond-buying beyond the public markets and into the private markets, where yields tend to be higher, and terms are often more favorable to the investors willing to take a risk. Private credit is found in the middle market that sits between family businesses and the big publically traded companies. There are nearly 200,000 companies in this market that have revenues between $10 million and $1 billion per year. It makes sense to find bond investments within this pool of businesses even if they don’t have a public cusip.

3. Equity Index Annuities

I’ve been a public annuity skeptic for years and have had moments of revelation. I’ve settled on the reality that annuities have their place and the annuity salespeople overhype them. Those two truths tend to be reliable guideposts. So, when adopting annuities, what is the right approach? The first is to not overinvest in them. Annuities are long-term contracts with an insurance company, and if you don’t like the terms of the agreement, too bad, you are married. It may not be a lifelong marriage, but it is often a seven to ten-year marriage. The excellent news about annuities and specifically equity index annuities is that when rates go up and risk subsides, the product benefits improve. As a result, the guarantees from the insurance companies are much more attractive long term. Equity index annuity companies are offering some interesting payouts that may be a way for retirees to get income without too much stock market risk.

According to Investment News, there is a growing appetite for financial advisors to implement alternatives for clients, but there still is much reason to pause and be careful. Alternatives require a very personal touch and are not for everyone. I know I’ve had misunderstandings in expectations that turn into uncomfortable conversations. It doesn’t take too many of those talks to walk gingerly around the alternative investment world. But, at the same time, discomfort shouldn’t stand in the way of solutions that might make sense for some people who are allergic to risk and need to get their portfolio unstuck.

**Originally published January 31, 2023.

Ideas For Changing Your Investing Strategy In 2023

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