1. Anchor strategy
2. Protected accumulation strategy
1. Anchor Strategy
An anchor strategy involves dividing your portfolio into 2 parts, a conservative anchor and more growth-oriented investments. The anchor portion of your portfolio uses investments that offer a fixed return, such as certificates of deposit (CDs) or single-premium deferred annuities (SPDAs). These assets have a set lifespan, and the amount you invest is designed to grow back with interest to your original principal. This portion of your portfolio acts as your anchor, while your remaining assets are invested in more volatile, growth-oriented securities such as stock mutual funds or ETFs.
A true anchor strategy protects your entire starting principal. For example, say you have $100,000 in assets and a 5-year investment period in a tax-deferred account. You could invest $88,400 in a 5-year SPDA yielding 2.50%—leaving you free to invest the remaining $11,600 for growth—because after 5 years that SPDA would be worth $100,016, just over your original principal.
The anchor strategy can remove the negative outcomes cautious investors sometimes fear because even if the markets fall, your anchor makes sure you at least have what you started out with.
Please note, inflation can erode the purchasing power of your original investment over time and this strategy generates taxes each year in a taxable account.
In next blogpost, we will discuss protected accumulation strategy.