Avoiding New Complex Investment Opportunities

In the past few years, I have been offered the opportunity to invest in Fixed Index Annuities and Private Credit.  Fixed Index Annuities were advertised as never going negative but participating in the gains of the stock market.  Private Credit was advertised at higher returns for little or no additional risk due to superior vetting by the company.  Both of these options are now being offered to main street retail investors, which is the reason I can now participate.

I'm usually skeptical about investment options that previously were only offered to institutions and now being offered to main street investors.  First, the options are presented as get great investment opportunities just like big institutions.  Second, they often are introduced as low risk opportunities.

• Fixed Index Annuities -  This was the first one I learned about.   It is an annuity that is pegged to a stock index, typically the S&P 500, but has downside protection.   The annuity has a downside floor, which is typically 0%, meaning the investment cannot have a loss.   However, the gains are capped, meaning that the gains won't necessarily match the index for large gains.  In addition, this is an annuity, which has restrictions on when and how much can be withdrawn in the future. The benefit is there is never a loss.
  
  I have typically avoided annuities as an investment.  Funds are usually tied up for many years and there is a high up front fee. Typically, it is costly to access more than the allowed withdrawal amount. Finally, it depends on the worthiness of the insurance company, who earns a high fee for offering the product.
  
  
• Private Credit - This provides non bank loans at higher rates to borrowers who may have difficulty qualifying for loans from traditional banks.  Investors provide funds and usually commit to investing these fund for 5 to 10 years or longer without withdrawing.  Returns are in the 8-12% range.
  
  I asked for a prospectus.  It was about 800 pages and a significant portion was devoted to detailing possible risks.   Also, there are possible capital calls (request for additional funds), there was a lockup period of several years, and limited withdraws above a certain amount.
  
  

Overall, the complexity, potential high risk and lack of flexible access to invested funds were enough negatives for me to decline participating.   At this time, I am glad I made this decision since the stock market has delivered above average returns higher than the cap of Fixed Index Annuities and more than expected defaults are occurring for Private Credit.

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This is not financial nor investment advice. Please consult a professional advisor.

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