A New Way of Thinking: Interest Crediting as a Means to Mitigate Aversions
Interest Crediting is a strategy that limits risk/reward exposure to pre-set level.
An example of an interest crediting methodology is one, such as options, that delivers exposure to the S&P 500 but limits losses and may or may not limit gains. In utilizing interest crediting, the universe of potential returns has been shifted to limit extreme up and down markets. Numerous ranges and outcomes are available in interest crediting and the shifting of potential outcomes may better meet the utility and psychological needs of the investor.
· Better understand downside/upside potential and expected returns
· Mitigation or even elimination of aversions – particularly loss, but risk and ambiguity as well
· A simple path forward when the going gets tough – whether it’s an upheaval in the capital markets or individually driven, the shaped contours of such a solution may better fit utility and psychological needs
This paradigm shift in consistency and outcome transparency allows for a smoother ride through capital events. Ultimately, it allows investors to increase their equity exposure through the better matching of expected outcomes to personal needs.
All interest crediting solutions are built using options, which by their nature are uniquely able to introduce or mitigate exposures at particular market prices.