Making it temporarily easier on investors’ psyches appears to be the goal of the rash of products offered by the investment industry. Promised are lower downside risk, upside guarantees, even tax benefits, Innovative Portfolios Managing Director Dave Gilreath observes. To appeal to Baby Boomers, whose “fear factor” has been kicked into high gear by recent stock market losses, the promotional materials for these “buffered investments,” Gilreath notes, include tempting descriptors such as:

• “guaranteed”
• “defined outcome”
• “tactical”
• “hedged”
• “structured”
• “buffered”

Investor fear is most definitely at a high. “Intellectually, we all know that, over time, the stock market goes up,” says Gilreath (as well he might, looking back over no less than four decades in wealth management). He points to the chart (shown below) of S&P 500 returns over the past 40 years, with good years far outweighing the bad-news times.

Even going back close to a century, stock market results represent nothing but a success story.

But, when it comes to the average investor’s emotions, not only is it “the economy, stupid!” (as Bill Clinton’s advisor James Carville once observed), it’s the short-term stock market losses. What with headlines highlighting threats of war, high inflation, rising interest rates, and viral illnesses old and new, investors might well be led to view short-term market results through “emotional eyeglasses.”

Much of the media coverage surrounding markets relates to emotions, Andrew Kichings of Commonwealth writes. “When the market rises, we read about the excitement. When the market declines, we hear how investors are worried. This commentary can be very evocative, but it is not very useful.” What can be useful, Gilreath tells investment advisors, is helping investors view market developments through their “intellectual” lenses. As opposed to becoming “victims” of their own fear factor, he says, harnessing volatility can prove the more productive approach.

“Structured notes” and so-called “buffered investments” are invariably complex, involving higher internal costs, Gilreath cautions, with the biggest and most punishing cost being limited upside return.” At Innovative Portfolios, he explains, “we think it’s better to keep it simple, sticking with direct securities such as U.S.-based stocks, preferreds, and Real Estate Investment Trusts, meanwhile selling options to add income to the portfolio.”