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Investing for Growth, Now and in Retirement

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A somewhat scary truth is that today’s retirees could easily face up to 30 years in retirement. This means that their assets have to last for a substantial period, and keep pace with inflation. To avoid depleting their principal, retirees may need to focus on investing for growth, even during the retirement years.

“It’s important for people on the sidelines to move back into higher-risk asset classes for growth, so they don’t outlive their wealth,” notes Elizabeth Forget, senior vice president at MetLife. “But after the market downturn in 2008, we can understand why our research shows that people don’t have the appetite for risk that they had pre-2008.”

It’s not surprising that many investors have preferred to sit out of the market after the turmoil of recent years. However, the tides may be turning somewhat, with flows coming back into money market funds in 2008; fixed income in 2009; and equity markets most recently. But even with movement happening, investors are still wary.

Missed opportunities

Wasif Latif, vice president of equity investments at USAA, based in San Antonio, understands why clients may be gun shy about the markets. “Even though the stock market has run up, given all the macro challenges we continue to face, there is still some fragility in the economy and so investors are rightfully concerned.” But, as Latif is quick to point out, by being too defensive and acting only on those concerns, investors can lose out on growth opportunities. Moreover, there is every sign that the economy is improving, as reflected in corporate profitability.

Latif suggests that investors proceed with investments in a measured way and pay particular attention to value. This doesn’t necessarily mean becoming a “value” investor and narrowly searching for out-of-favor and underpriced stocks. Instead, this means looking for stocks from high-quality companies. Latif characterizes these as companies that show consistent and predictable earnings, as opposed to having a strong quarter followed by a weak quarter. In addition, these companies exhibit strong balance sheets in terms of not being overly leveraged. And finally, they tend to be market leaders in their respective industry or sector, commanding a brand premium.

“If you invest in the stocks of companies with these characteris-tics, which also pay a divided, you will have a steady income stream and lower volatility than the overall markets,” says Latif.

There are other means of accessing growth beyond careful stock selection. Investing in broad markets generally positions investors to be able to exploit economic growth from around the world. “But this broader approach comes with more volatility,” cautions Latif.

The power of participation

The main investment driver of portfolio growth has been identified in the FAJ study “Asset Allocation and Investment Strategy Are Equally Important.” The study found that asset allocation and security selection were indeed important factors in determining portfolio growth, which isn’t news to most financial professionals. However, the conclusion of the study was much simpler. The key factor for growth is the decision to be in the market or not. Approximately 70 percent of portfolio returns come from just being in the market and experiencing market movements, as opposed to being in cash.

Therefore, the route to growth is to be in the market, as easy as that sounds. But this is not such an easy choice for many investors, who are still frightened and remain on the sidelines. By staying in cash, they may protect their downside, but they miss out on upside or even lose principal when inflation is accounted for. Says Forget, “Preservation of capital is more important to investors now than just a few years ago.”

The solution to this seeming conundrum is to invest in growth products that offer downside protection. Products such as variable annuities with living benefits allow investors to have equity exposure, but with a floor. Annual step-ups can lock in gains, further protecting investors and offering greater potential for generating retirement income. Forget notes, “Combining equities with insurance guarantees can give investors the confidence to get back in the market.”

Cathy Weatherford is the CEO and president of the Insured Retirement Institute. She can be reached at [email protected] or 202-469-3010.

For more exclusive annuity coverage, visit ASJ’s Annuity Resource Center.

Past annuity stories from ASJ:

Downhill from Here: The 151A Legacy, and New Challenges for Indexed Annuities

Annuity Facts: What You Need to Know to Sell Annuities in 2011

Variable Annuities and the Power of Storytelling

Dealing with a Low-Interest Rate Environment: Annuity Laddering

Annuity Facts: Seminar Dos and Don’t