Protecting Portfolios from Black Swan Events
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There is going to be a lot of Monday Morning Quarterbacking going on after the dust settles from this most recent stock market crash brought on by COVID-19 (Coronavirus). The Dow, S&P, and just about everything in the market are getting crushed.
While some tactical managers have done well to mitigate the drawdown and a few of the firms I work with had their tactical overlays kick in (to take the portfolios out of the market), most portfolios are just sinking with the market. To learn about tactical overlays to mitigate big drawdowns, go to www.tacticaloverlay.net.
What is a black swan event? It’s an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. The 2000 and the 2007 crashes were arguably black swan events and our current crash is certainly a black swan event.
It’s very difficult for a money manager to avoid losing significant money during a black swan event (the nature of such an event is that it’s not foreseeable).
Insurance agents are going to be crowing
Why are insurance agents going to be crowing? Because many insurance agents have embraced the use of Fixed Indexed Annuities.
Many securities licensed advisors have been competing with insurance agents selling FIAs. Guess what, it’s going to get a lot worse after this crash.
To remind you of the benefits of FIAs:
1) No risk of loss
2) Gains are locked in annually (never to be lost)
3) Many have guaranteed income for life riders (that are better than most VAs)
Zero is Your Hero
This used to be a great selling point insurance agents selling FIAs used to use (after the 2000 and 2007 crashes). But when the market is on a 10+ year bull run, clients don’t want to hear about zero is your hero when the FIAs have caps to limit the returns.
Stop fighting the use of FIAs in a portfolio
As a general rule, securities licensed advisors either shun or don’t like the idea of using FIAs in a portfolio. Why? Because they want to manage the money and think they can do better with it over time. And they don’t like to sell insurance products.
FIAs, when used as the conservative part of the portfolio, have a minimal effect on returns.
Let’s look at a few examples from our OnPointe Risk Analyzer Software.
Example #1—The SPY vs. the 70% SPY and 30% in an FIA with only a 5.5% annual cap over the last 10 years. You’d think with 30% of the money in an FIA with a 5.5% annual cap that the SPY would do much better. IT DOESN’T!
The risk is less when adding FIAs to a portfolio and the CAGR over the last ten years was nearly identical.
Example #2—The SPY vs. the 70% SPY and 30% in an FIA with only a 5.5% annual cap from 2000-2009 (a ten-year period with two crashes).
Now the portfolio with 30% FIAs did better than the SPY and the drawdown was 11% less.
How receptive will your clients be to using an asset that has ZERO risk of loss and doesn’t hurt their ability to grow wealth?
If you think the answer is anything other than very receptive, beta test it on the next client you run into and let me know how it turned out.
Roccy DeFrancesco, J.D.
Strategic Marketing Partners, LLC