Planning by Lisa Financial Solutions

The Best of Both Worlds: Segregated funds in a volatile market

If you’re an investor, you know all too well that 2020 was a volatile year for investment portfolios – not to mention life in general. And while we hope that the worst is behind us, history tells us that market volatility is nothing new. Who remembers the Y2K tech bubble, the sub-prime crisis of 2007-2008 and the Chinese stock market turbulence in 2015-2016? Each of these events saw index declines as great or greater than what we experienced as a result of the Covid-19 pandemic in the first quarter of 2020. Naturally, this sort of market volatility can be extremely distressing for you as an investor, especially if you are nearing your retirement years and are counting on those dollars as a source of income replacement.

Segregated (seg) funds might be one solution to an uncertain market. A seg fund is an investment product (invested in one or more underlying assets, such as mutual funds or ETFs) combined with an insurance contract

They can be a good solution for investors who are concerned about volatility, market corrections or long-term bear markets (a market where prices are falling, that encourages selling), but don’t want to abandon the possibility of higher returns. By offering guarantees of all or a portion of the principal, seg funds protect invested capital while providing upside exposure. If, during the life of a seg fund contract, the value of the underlying assets grow, then you (or in the case of death, your beneficiary) will reap the rewards. However, if upon maturity, or the death of the contract holder, the market has fallen, losses will be capped or eliminated altogether, depending on the terms of the contract. Additionally, 100% death benefit guarantees are available to investors up to the age of 90 (without medical review requirements). It’s no surprise that seg funds have experienced increased popularity in 2020.

Another way seg funds can help you, the investor, address market volatility is the availability of “resets”. Reset options give you the ability to lock-in value gains of the underlying asset. When you implement a reset when prices peak, the guaranteed amount of your seg fund will be increased to match the elevated market value. This feature allows you to take advantage of upside gains (under the terms of the reset feature) even when asset values subsequently decline during the lifetime of the seg fund contract. It’s really a win-win situation. Let’s be honest, we could all use a few wins these days.

The current reality - and the prospect of massive government aid programs coming to their eventual end – has driven fears of a major market correction to the highest levels in many years. The protection that segregated funds offer may be more than welcome in these emotional and uncertain times. Stock markets will always have periods of uncertainty and heightened risk, but segregated funds can combine performance with security to give you the peace of mind you need and deserve.