IF YOUR TIMING IS OFF
If you own each type of separate account in your variable annuity, you're positioned to benefit from a strong return on at least a portion of your portfolio, no matter which account is providing it. The same general principle applies to individual stock and bond investments, to mutual funds, and to ETFs.
THE SEESAW PRINCIPLE
For example, when investors are buying stocks, stocks provide a strong return and bond returns are likely to be weaker. And when investors get out of the stock market and buy bonds, bond returns generally strengthen and stock returns weaken. Similarly, small companies may prosper during a period in the economic cycle when large companies tend to struggle.
If you keep money invested in a variety of asset subclasses, you can benefit in two ways. First, you're in a position to profit from strong returns in a particular subclass. Second, those gains can help offset losses in a class or subclass that's slowing down.
USING VARIETY WISELY
If you have several choices within a single asset class — say several stock separate account funds — you'll want to look first at each one's investment objective. Try to avoid investment in several funds that are all making the same type of investment. To choose among those that invest in similar ways, you'll want to consider past performance, fees, and a variety of other factors.
While a separate account fund's name is often a useful clue to the kind of investment it makes, don't take it at face value. Look first at the prospectus for its official statement, and then check to see if the fund is classified by research companies, including Standard & Poor's, Lipper Inc., and Morningstar. You may find that a separate account fund that describes itself as a small-company account actually has substantial investments in medium- and large-sized companies. That could mean you're not as diversified as you'd like to be, and may need to look at other alternatives.
LOOKING FURTHER AFIELD
While international investing provides diversification simply by raising the number of potential investment choices, it also adds diversity by spreading your investments across different regions of the world. For example, putting money into a European fund or an Asian fund can position you to benefit from potential strength in those areas during periods when the US economy is sluggish or in recession or when the value of the dollar is low.
In general, variable annuities, mutual funds, and ETFs provide the simplest way to invest internationally, since they handle all of the currency and taxation issues that go along with buying and selling abroad. But you may also consider American Depositary Receipts (ADRs) issued for the US market by companies based abroad. And many US companies realize a substantial portion of their revenue from overseas markets, so they may add an element of international investment to your portfolio.