Setting an Anchor and Scaling the Wall of Worry
Actionable Market Insights from Tuttle Ventures
Anchoring in Investing and How It Relates to Rock Climbing
The Importance of Staying Invested
Defined Outcome ETFs
In this post, we'll explore the concept of "anchoring" in investing and how it relates to the world of rock climbing. We'll discuss the importance of investing, particularly in light of inflation and the need to preserve wealth, and we'll introduce a type of exchange-traded fund (ETF) called a Defined Outcome ETF that can help investors reshape their return profile while minimizing risk.
Alex Honnold is a world renowned professional rock climber, famed for his exceptional free solo ascents without ropes or gear.
Born in 1985 near my hometown of Sacramento, California, Alex’s free solo climbing achievements are as impressive as they are terrifying.
Alex is an exceptional, once in a generation kind of rock climber.
In traditional climbing, climbers use ropes, harnesses, and other protective gear to safeguard themselves as they ascend.
Climbers place removable protection devices, such as nuts and camming devices, into cracks and crevices in the rock to create anchor points.
These anchor points are then used to attach the rope, which serve as a safety measure in case a climber falls.
Setting an anchor is essential, regularly placing an additional protection and anchor to ensure safety.
In the event of a fall, the rope and anchors help to arrest the fall, preventing serious injury or worse.
How does an Anchor apply to investing?
Just as a climber sets anchors to safeguard against falls, investors can "anchor" their investments to protect against market downturns and preserve portfolio value.
We think it’s a good idea to anchor the recent stock market gains, because we believe we are still in a overall bear, downtrending market.
According to insurance company Allianz, 60% of households with more than $5M+ in investments want a comfortable retirement and protecting their current level of wealth as their most important financial goals.
How is it possible to make these goals happen?
Annual inflation remains well above the Fed’s 2% target.
Due to inflation, it is essential for even the most financially secure individuals to invest in order to preserve their wealth.
Not investing is simply not an option.
The standard anchor of investing in cash — at your local regional bank earning 0.01%—is not going to cut it.
The cost of retirement is only going to go up in the future.
We believe with rising interest rates, there is still bond price risk.
The historical link between bonds acting as a safe haven when equities sell off has not always held up especially if credit risk of default is an issue.
Implementation idea with Defined Outcomes
Innovator Defined Buffer ETFs are a type of exchange-traded fund (ETF) that focuses on investing in traditional index investments but recreate a defined risk/return profile using options.
The value of options can be affected by factors such as interest rates, time decay, and changes in an underlying asset's price. Options traders may also face potential losses due to the leverage involved in trading options.
Buffer ETFs enable investors to reshape their return profile, accepting a limit on growth potential, with an upside cap, while purchasing a built-in buffer against losses over a defined outcome period.
For innovator ETFs, the full outcome period is one year.
Here's how it works: When the market is going up, the performance cap is a drag, especially if the index goes above the capped ceiling.
In years like 2020 and 2021, the market moved way above the ceiling, making these products irrelevant.
However, in a down market, the buffer protects against the first -10% drop to the downside, preserving portfolio value.
We consider 2023 to be an attractive year for this type of strategy, similar to 2022.
Here is an example of the January Buffer ETF PJAN 0.00 from 12/31/2021 until Friday’s market close on 4/28/2023.
Notice the gap grows over time while still keeping upside potential.
It’s important to point out that these ETFs are perpetual products that are designed to rebalance each year on the ETF’s anniversary date.
With 12 products each rolling over every month, there are plenty of chances to buy in and anchor the latest stock market rally for the course of the next year.
The ability to buy and sell defined outcome ETFs throughout the outcome period introduces some innovative portfolio applications.
One opportunity is the ability to lock-in gains on defined outcome ETFs at any point during the outcome period.
The resetting of a buffer means a new full downside buffer can be achieved. This allows an investor to hedge against the next 9, 15, or 30% of losses without waiting for the whole year.
Stepping up into a new series allows an investor to:
expand the upside cap
obtain a fresh downside buffer
eliminate downside before buffer risk
Buffer ETFs may be a beneficial approach to locking in gains, expanding upside potential, and resetting the buffer level at the same time.
Anchoring is a concept that can be applied to both rock climbing and investing. By using defined outcome ETFs, investors can reshape their return profile while minimizing risk, and anchor gains in a down market. With inflation a major concern and retirement goals to consider, it's important to find ways to invest wisely and preserve wealth for the future.
I am grateful and humbled to be able to learn, grow and invest alongside you at Tuttle Ventures.
We believe that Vision, Courage and Patience leads to successful investing.
Darin Tuttle, CFA
This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
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