Are Secondary Market Annuities Safer? 3 Easy Ways to Assess Risk
03 23 2017
Investors are ever on the lookout for opportunities to "safely grow" income. Just as every investor's financial situation is different, every investing opportunity has its unique level of risk and reward.
Know Your Investment RiskNo investment is perfectly safe, and all financial products fit in somewhere along the risk-reward spectrum. Secondary Market Annuities - also known as structured settlements - have garnered a lot of curiosity in recent years as a complement for certain investment portfolios.
Financial advisors have been hearing a common refrain: are Secondary Market Annuities safer? Where do they land on the spectrum?
Advantages of Secondary Market AnnuitiesThe primary advantage of Secondary Market Annuities is the opportunity to reap yields nearly double that of safer investments like Treasury securities. Of course, where there are high yields, there are typically greater risks, so it's imperative that the investor do his or her due diligence regarding the specific product under consideration.
3 easy ways to assess the risk-reward calculation for Secondary Market Annuities:
1. Research the insurer of the structured settlement cashflow.Before committing to any financial instrument or plan, you'll want to understand how the investment is structured. This includes not only the payouts, but also the protections in place to safeguard your investment.
The payment streams for Secondary Market Annuities are backed by insurance companies, and they are the insurer's long-term obligation. The insurers are regulated by a combination of federal agencies and state insurance commissions, so there will be available information regarding the companies' track records, including their rating. A-rated insurance companies typically provide safer opportunities. And if you're working with a financial advisor, they should be able to point you in the right direction.
2. View Secondary Market Annuities in the context of your existing investment portfolio.No matter how much you're looking to invest, any good financial advisor will preach the same gospel: the merits of diversification. A balanced portfolio mitigates risk, because if one market sector experiences volatility, it's often buoyed by stability - or even gains - in other sectors.
There is also value in having a diverse array of financial products, some long-term and some short-term, some fixed-yield, and some that will fluctuate. Many investors' "go-to" products are simply top performers from previous years. But the truth is, past performance is not a compelling factor in financial investing; there are no guarantees.
For portfolios already laden with traditional products, or overleveraged with long-term investments, there may be an opportunity for Secondary Market Annuities to inject some above-average returns. After the initial investment, buyers of structured settlement payment streams receive regular monthly payments. It's steady income that can complement a balanced portfolio.
3. Determine your own appetite for risk, and your expectation for returns.You feel a contrary pull when your money is on the line: in one direction, toward higher reward and higher risk, and in the other, toward lower risk but lower returns. Whether you're a seasoned investor or a total novice, there are enough types of investments out there for you to tailor your portfolio to your needs.
If you simply want the absolute safest financial products available, you might load up your portfolio with Treasury bonds and CDs or invest in precious metals. But that approach can lock your money up in long-term, structured investments, diminishing your liquid capital. And depending on your needs, they might not be set up to deliver your desired returns. If you're hoping for higher yield or flexibility, you often have to tolerate a bit more risk - and occasionally product complexity.
Your position hinges on a number of factors, including your timeline (how long you intend to keep your money invested, when you need to start receiving returns, etc.) and your loss threshold (how much money you are willing to lose before you pull up stakes and walk away).
Allow Your Capital Investment to Work Hard for YouYou work hard for your money; you deserve a personalized plan that allows your money to work hard for you. But while we all want the same positive outcomes from our investments, every investor comes from a different scenario, and arrives with a unique set of priorities. Talk with your financial planner about the right mix of investments to meet your specific needs.
Return to News