Portfolio insurance? Sounds a bit fishy

If you're ever presented with a can't-lose scenario for your investments, a little skepticism will go a long way.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By George Mannes, Money Magazine senior writer

george_mannes.03.jpg
Send us your investing questions to: answer_guy@moneymail.com
millionaire_write_insert.gif
CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.40%
1 yr CD 0.72%
5 yr CD 1.45%

Find personalized rates:
 

Rates provided by Bankrate.com.

(Money Magazine) -- Question: Is portfolio insurance legitimate? At a seminar I attended, an adviser said it would cost me 0.5% of what I invest with him. Supposedly it will lock in my gains and I can't lose money no matter what the market does. - Paula Krensavage, Weirton, W.Va.

Answer: That ringing sound is the alarm bell going off in Answer Guy's brain. "Seminar" is often a euphemism for "sales pitch with free food." And if you're left with the impression that you "can't lose" - well, skepticism is a good idea.

A.G. called the adviser running that seminar. Turns out that what he calls portfolio insurance isn't a way to protect investments so you won't lose money if you cash out. Rather, he was talking about a popular add-on feature of variable annuities, a hybrid mutual fund/insurance product in which you invest a lump sum now and take out regular payments later, usually at retirement.

The "portfolio insurance" is an option known as a guaranteed minimum withdrawal benefit (GMWB), which lets you withdraw annually for life a certain percentage of the money you put in - and maybe more, if your VA's investments grow in value.

Legitimate? Yes. Worth it? That's debatable. You could pay north of 2% in annual fees on your VA before you add on the 0.5% GMWB cost. If you pull out too much money in a down market, your guaranteed benefit could shrink. And if you want all your money back at once, you could, in fact, lose principal.

Bottom line: The income feature offers peace of mind. But it'll cost you.

Question: I know you're supposed to invest your 401(k) for the long run. But since people change jobs so frequently - and you usually have to sell your investments when you roll over your 401(k) to an IRA - why bother? Why not focus on what looks good in the short term? - René Rosendahl, Irvine, Calif.

Answer: Try not to let investment mechanics distract you from investment goals. Remember what the ultimate purpose of the 401(k) is: to provide a tidy sum that will help finance your retirement decades from now.

Experience indicates that if you set up a diversified portfolio heavy in stocks, you'll have a good chance of reaching that goal. Success is far less likely if, every time you switch jobs, you try to guess which market sectors will perform best over the next two or three years. If only it were that easy.

It's true that when you're rolling a 401(k) over into your IRA, you often have to sell investments, take the cash and buy new funds. But that doesn't mean you have to give up on a long-term strategy. All you have to do is find equivalent funds for your new IRA.

For example, if you're selling $4,000 worth of Brand X large-cap value fund in your old company's 401(k), buy $4,000 worth of Brand Y large-cap value fund in your rollover IRA. The same thing goes for all the other asset classes in your portfolio.

The similarities will likely outweigh the differences between the before and after funds, and you'll be able to stick with the long-term view.

Are you prepared for a financial emergency?

With a recession and rising inflation, it's more crucial than ever to have a six to 12-month living-expense cushion in cash for an emergency. Don't have it? Drop us a line at makeover@moneymail.com. Include your name, age, city, state, marital status, occupation, how much you have in cash savings and retirement savings. Please send a photo of you (and your spouse, where applicable) too. To top of page

Send feedback to Money Magazine
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
Meet the kids dressed as Oscars red carpet stars By now, you've seen the red carpet looks from the 2015 Oscars. But you haven't seen 5 year-olds dressed up like A-listers at the awards, until now. Photographer Tricia Messeroux and designer Andrea Pitter recreated the pint-sized looks in just 36 hours. More
Flying economy doesn't have to be miserable For those willing to shell out just a little extra, several à la carte services offer experiences usually reserved for First Class passengers. More
Consumer Reports' Top Picks - American cars are back The magazine's favorite cars include three American models for the first time in years, thanks to a big boost from Tesla. More