The year 2022 was a bit of a doozy for both stock and bond investors, with both stocks and bonds experiencing double-digit losses for the year, something that is incredibly rare. While maintaining a diversified portfolio and staying the course is critical for a long-term investor’s success, the following five investing alternatives could help those who are approaching retirement or are in retirement and looking to safeguard their assets in the current market environment:
1. Cash
Cash is an often-overlooked asset in a portfolio. Financial advisers commonly suggest low allocations to cash because it tends to be outperformed by bonds over the long term. Given the unique shape of the yield curve today, however, which is relatively flat and slightly inverted (which means shorter-maturity bonds are actually paying more than longer-maturity bonds), allocating to cash-like investments such as money market funds could be a smart move.
A benefit to allocating to cash is that it is relatively unaffected by changes in interest rates. So, if interest rates go up (again), it wouldn’t negatively impact performance.
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2. High-Yield Checking or Savings Accounts
Interest rates on checking and savings accounts offered by more traditional banks today are often well below the yields available from some banks, especially online banks. For example, I have two checking accounts: The one at a more traditional brick-and-mortar bank has a yield that is effectively zero, while the other, which is an online bank, pays 2.5%. They are offering relatively identical services, yet notably different yields.
3. Stable Value Funds
Stable value funds are a specific type of investment available only in defined-contribution plans such as 401(k)s where the portfolio is protected against a decline in value. It is important to note, though, that stable value funds aren’t available in IRAs, so if you plan on rolling money out of your 401(k) plan, you will no longer have access to the stable value fund.
4. Multiyear Guaranteed Annuities (MYGAs)
MYGAs, often called fixed-rate annuities, provide a stated fixed return over a given period and currently offer relatively competitive yields. These products are structurally similar to CDs, but are offered by insurance companies.
I started writing about MYGAs back in 2020 and think they are especially attractive now. One notable benefit of these products is that the interest grows tax-deferred, unlike a bond, where gains are taxed annually at the investor’s marginal tax rate.
5. Delay Claiming Social Security Benefits
While obviously not an investment, Social Security retirement benefits are the only form of guaranteed income available today that is explicitly linked to inflation. Social Security benefits are also tax-advantaged, and there are special spousal benefits that may increase the value.
While I think stocks and bonds definitely belong in investor portfolios long term, recent changes in the market environment, especially the rise in bond yields, have created some opportunities that either weren’t available or just weren’t that attractive at the beginning of the 2022.
In my opinion, conservative investors, especially retirees, who haven’t considered some (or all) of the strategies above should at least look into them.
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