There are several strategies I hear bandied about that get more attention than I believe they deserve. They are to a degree, overhyped.
Now its not that they are all universally worthless. Far from it. In the right situation, these can benefit clients greatly. However, for this piece, my definition of “overhyped” is a strategy that gets a lot of attention but probably doesn’t have as big a positive impact as is touted, is likely to have a negative impact or a strategy for which there are very few clients who can or will attempt to execute the strategy.
SPIAs And Longevity Insurance
The academic studies are clear. Adding some element of single premium immediate annuities or longevity insurance to an income plan increases portfolio sustainability and can even enhance a legacy goal but few clients will buy them. There are many factors that work against people employing them.
Big irrevocable decisions are scary. People like seeing larger numbers for the balances on their statements and buying an annuity means fewer accessible assets. Many clients lump SPIAs in with the complex and cost-ridden deferred annuities that fuel the generally bad rep of annuities. Many clients do not want to risk cutting their bequests to family, friends and charities. Many people do not envision themselves living an above average lifespan or needing as much cash flow in their final years as they do in the earlier years of retirement.
This contrast between how highly academics view annuities and how poorly clients view annuities is commonly referred to as the “annuity puzzle.”
Tax-Loss Harvesting
When volatility appears, a popular thing to tout is tax-loss harvesting, selling losing holdings in non-retirement accounts to generate capital losses. Loss harvesting is definitely something to consider but it makes the list because in many cases it doesn’t have a big positive impact on the clients’ financial health. In many cases, it can even cause larger tax bills.
To avoid the wash sale rules which disallows taking the loss, one can sell and buy the same holding back after 30 days. Alternatively, when one does not want to be out of a position for a month, they can buy more shares, wait 31 days, and then sell the old shares. Both approaches can be undermined if the price of the holding changes enough in the wrong direction.
To mitigate price change risk, a third popular method is to sell the loser and simultaneously buy a similar but not identical holding. Regardless of what method is used to avoid the wash sale rules, some losses still won’t be useable.