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What is Defined Outcome Investing?

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Defined Outcome Investing Infographic

This infographic is available as a poster.

What is Defined Outcome Investing?

Equities can play a critical role in any investment portfolio thanks to their long-term growth potential. At the same time, this asset class can also present a number of challenges for investors.

Uncertainty around the short to mid-term performance of equities can be a major deterrent for some, while others may find it difficult to select the best stocks based on their unique needs. Fortunately, there is a solution that can help investors overcome these challenges. In today’s infographic from New York Life Investments, we introduce defined outcome investing, and examine how it can help individuals take more control over their equity investments.

Understanding How DOI Works

Defined outcome investing (DOI) is a family of strategies that add a layer of predictability to an investor’s results. This is achieved through two unique aspects.

The first is a customizable risk-return profile, which gives investors the option of receiving either upside enhancement or downside protection features.

Risk-Return FeatureHow it Works
Upside enhancementEnhances the returns of the specified index, up to a cap. The investor is not sheltered from negative returns.
Downside protectionProtects investors from negative returns, up to a certain amount. The investor still participates in market upside, up to a cap.

The second aspect is a predetermined time period—defined outcome strategies carry a maturity date, similar to a fixed income security. Upon reaching its maturity date, a defined outcome strategy expires and the proceeds are paid out to the investor. This feature makes it easier for an investor to time their equity exposures around personal liquidity needs.

To understand the potential of DOI, consider a woman who wishes to make a down payment on a property one year from now. She would like to invest and grow her money in the meantime, but is worried about market volatility. Rather than purchase individual securities or ETFs, she could opt for a defined outcome strategy with downside protection over a one year term.

These features would reduce the likelihood of negative returns over the year, while still giving her exposure to the growth potential of equities.

Types of Defined Outcome Strategies

Investors have three distinct types of defined outcome strategies to choose from, depending on their personal objectives.

Growth Strategies

Growth strategies are designed for investors who:

  • Have a positive outlook on markets
  • Seek high levels of capital appreciation
  • Accept the possibility of negative returns

As implied by their name, these strategies produce enhanced market returns. They do not, however, offer any downside protection. The table below demonstrates how a growth strategy with 50% upside enhancement would perform across a number of scenarios. Assume a maximum return cap of 36%.

Market ScenarioS&P 500 Return (via ETF)Growth Strategy Return Defined Outcome Result
Strongly Positive50%36%Investors reach their maximum return cap of 36%.
Positive20%30%Investors gain 10 percentage points over the index.
Modestly Positive8%12%Investors gain 4 percentage points over the index.
Negative-10%-10%Investors match the index's negative return.

Buffered Strategies

Buffered strategies are a more neutral solution designed for investors who:

  • Have a moderate outlook on markets
  • Seek capital appreciation
  • Require a safety buffer to mitigate losses

Buffered strategies allow investors to participate in equity markets while receiving a specified level of insulation from negative returns. The table below demonstrates how a buffered strategy with 20% loss insulation would perform across a number of scenarios. Assume a maximum return cap of 24%.

Market ScenarioS&P 500 Return (via ETF)Buffered Strategy ReturnDefined Outcome Result
Strongly Positive30%24%Investors reach their maximum return cap of 24%.
Positive8%8%Investors match the positive return of the index.
Negative-20%0%Investors are sheltered from losses within their buffer.
Strongly Negative-30%-10%Any losses beyond the buffer are realized by the investor.

Preservation Strategies

Preservation strategies are best suited for risk-averse investors who:

  • Have a negative outlook on markets
  • Want to manage downside risk
  • Have significant financial obligations in the near future

Preservation strategies provide a different type of downside protection where, instead of a buffer, investors define their maximum loss. The table below demonstrates how a preservation strategy with 95% capital preservation (5% maximum loss) would perform across a number of scenarios. Assume a maximum return cap of 20%.

Market Scenario S&P 500 Return (via ETF)Preservation StrategyDefined Outcome Result
Strongly Positive30%20%Investors reach their maximum return cap of 20%.
Positive8%8%Investors match the positive return of the index.
Negative-3%-3%Investors match negative returns within their maximum loss.
Strongly Negative-30%-5%Investors maintain 95% of their capital.

Accessing Defined Outcome Strategies

Defined outcome strategies are accessed through a vehicle known as a unit investment trust (UIT). UIT’s offer similar levels of transparency and accessibility when compared to ETFs or mutual funds, including daily liquidity and transparency of holdings. So how are they able to offer such compelling risk-return features?

The answer lies in their use of equity options, a type of derivative contract. Equity options give the holder, in this case the UIT, the option of buying (or selling) a stock at a predetermined price on a specific date in the future. These contracts are used to engineer the risk-return features previously described, and are the reason why defined outcome strategies carry a maturity date.

Thus, in order to realize the specified upside enhancement or downside protection features, an investor must hold the UIT for its entire term. While there is no penalty for redeeming a UIT early, the investor will not reach their defined outcome objective.

A More Predictable Approach to Investing

Equities are a powerful tool for long-term growth, but it can be difficult to build a properly-aligned portfolio according to one’s risk tolerance. This becomes especially relevant in today’s uncertain economic environment.

With customizable risk-return profiles and a defined maturity date, defined outcome investing is a powerful solution that can support a variety of financial goals through different phases of the market cycle. Whether its maximizing returns or saving for retirement, investors can now take greater control over their financial future.

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Infographics

The Top 6 Infrastructure Investment Opportunities

Based on funding from the Infrastructure Investment and Jobs Act, this graphic explores the top 6 infrastructure investment opportunities.

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Infrastructure Investment

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The Top 6 Infrastructure Investment Opportunities

The U.S. government is putting a focus on infrastructure investment. For years, the country’s infrastructure—critical structures and facilities like roads, power supplies, and internet access—has been in poor condition.

Now, the government is pledging billions of dollars in funding. In this graphic from New York Life Investments, we explore how this public commitment translates into six potential infrastructure investment opportunities.

Breaking Down the Infrastructure Investment and Jobs Act

The Infrastructure Investment and Jobs Act was signed into law in November 2021. It includes nearly $550 billion in new investments.

CategoryInvestment Amount
Transportation$283.8B
Broadband$65.0B
Energy & Power$65.0B
Water$63.3B
Climate & Cybersecurity Resiliency$47.2B
Environmental Remediation$21.0B

Based on these commitments, here are the six categories that present potential infrastructure investment opportunities.

1. Transportation

52.0% of new government funding

Because infrastructure has been underfunded for some time, transportation systems are in a state of disrepair.

  • 43% of roads are in poor or mediocre condition
  • 231,000 of the country’s 617,000 bridges are in need of repair or preservation work

New government funding will enable the expansion and repair of transportation infrastructure.

The infrastructure investment opportunity: Funding could increase revenue and provide stable long-term contracts to engineering, materials, and construction companies.

2. Broadband

11.9% of new government funding

Millions of Americans don’t have access to broadband (high speed) internet, and the number of people who don’t use it is even higher due to affordability issues.

  • People without access: 14.5 million
  • People who don’t use broadband: 120.4 million

New government funding will increase access and help reduce prices.

The infrastructure investment opportunity: Funding could boost the customer base and revenue of internet service providers.

3. Energy & Power

11.9% of new government funding

The U.S. has set a goal to have net zero emissions by 2050, yet the country gets most of its energy with fossil fuels.

SourcePercent of U.S. Energy Consumption in 2020
Petroleum34.7%
Natural Gas 34.0%
Renewables12.5%
Coal9.9%
Nuclear8.9%

New government funding will help build electric power transmission lines and facilitate clean energy technology.

The infrastructure investment opportunity: Funding could boost the revenue of utility, manufacturing, and renewable energy companies.

4. Water

11.6% of new government funding

U.S. water infrastructure is aging, with 14-18% of potable water lost through leaks. The annual costs of wasting this treated water is projected to increase from $7.6 billion in 2019 to $16.7 billion in 2039.

New government funding will modernize water infrastructure, invest in water storage and recycling, and remove lead pipes.

The infrastructure investment opportunity: Funding could boost the revenue of engineering firms and companies that build, install, and repair water pipes.

5. Climate & Cybersecurity Resiliency

8.7% of new government funding

Climate disasters and cyber attacks are leading to increased costs & destruction of infrastructure. In 2020, there were 22 U.S. climate disasters that each cost over $1 billion in damage—with a total cost of $100 billion.

Type of DisasterCost in 2020
Tropical Cyclone$57.5B
Severe Storm$35.5B
Wildfire$17.3B
Drought$4.7B

New government funding will invest in protection against cyber attacks, floods, droughts, and other climate disasters.

The infrastructure investment opportunity: Funding could boost the revenue of companies involved in cybersecurity, weatherization, environmental consultation, and construction.

6. Environmental Remediation

3.9% of new government funding

Contaminated sites are causing environmental harm or hindering land reuse, and there are more than 450,000 of them across the country. New government funding will clean up contaminated land, reclaim abandoned land mines, and plug orphaned oil and gas wells.

The infrastructure investment opportunity: Funding could boost the revenue and long-term contracts of environmental remediation companies.

Public Funding, Private Infrastructure Investment Opportunities

A boost in government funding is likely to create increased activity in private infrastructure-related areas:

  • Engineering
  • Construction
  • Materials
  • Internet Service Providers
  • Clean Energy Tech
  • Pipe Installation
  • Cybersecurity
  • Environmental Consultation

By paying attention to where the money is going, investors can consider a variety of categories that provide critical services—and capitalize on upcoming trends.

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Infographics

What Retirement Barriers do Americans Face Today?

Retirement barriers are making it difficult for people to feel good about their future. See how advisors can help in this infographic.

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What Retirement Barriers do Americans Face Today?

Today’s definition of retirement is much different than before.

It’s no longer a postscript to career, but instead a time to enjoy freedom. This could be the freedom to learn new hobbies, the freedom to travel, or the freedom to start an online business. Unfortunately, this freedom is proving to be difficult to achieve for most.

In this infographic from New York Life Investments, we discuss the retirement gap—what it is, why it exists, and how advisors can help reduce it.

What is the Retirement Gap?

New York Life Investments partnered with AARP to survey over 3,000 Americans about their retirement plans. They uncovered that across all ages, there was a gap between i) people’s perceived importance of retirement planning, and ii) their actual preparedness.

Age groupPerceived importance of preparing for retirementActual preparedness
20s77%45%
30s87%41%
40s87%40%
50s92%47%
60s93%58%
70-7484%70%

Based on a survey of 3,025 Americans aged 20-74.

These results suggest that the status quo around retirement planning isn’t working for most people. This is further supported by other survey findings. For example, 65% of respondents said they didn’t feel optimistic about retirement.

What Barriers do Americans Face?

The survey determined that Americans are struggling to overcome five retirement barriers. Let’s hear from survey respondents to learn more about them.

#1: Managing multiple priorities

Juggling between retirement savings and more immediate needs such as childcare can lead to emotional overwhelm.

”It’s difficult to put substantial money in a 401 or IRA while also paying off debt at the same time.”
– Alex B. (20s)

#2: Figuring out how much is enough

Uncertainty about how much savings is needed causes many people to avoid retirement planning altogether. The problem can simply feel too large to tackle.

”Retirement and aging are not things I look forward to, mainly because of the lack of preparation and fear of the unknown.”– Janet F. (50s)

#3: The complexity of resources

Many Americans find retirement resources are too difficult to understand. This issue is related to a lack of financial literacy, which happens to be a growing problem in the United States.

”They don’t break it down into where you can understand it.”– Amy E. (40s)

#4: Lack of representation in the marketplace

People feel that available resources are not speaking to them, or are not relevant to their life circumstances. This type of “alienation” can discourage people from seeking professional advice.

”I don’t see people who are anything like me. I see representations of upper management people…and I know that won’t be my reality.– Penni B. (60s)

#5: Don’t know who to trust

People feel that the financial industry does not have their best interests in mind. They often seek information from sources who seem more like “them.”

”I avoid professionals because I hear so many stories of financial planners who cheated people in their investments. I believe in some of the people I follow on YouTube more.”– Dino M. (50s)

Bridging the Gap

Altogether, these barriers highlight a disconnect between who the market is targeting, and who is most in need of help. Financially advisors have the power to bridge this gap by doing two things.

The first is to view investors as “customers for life”. Large firms often push advisors to work with clients who have a greater level of assets—typically those in their 40s or older. This could create a major challenge for younger generations who hope to one day retire.

For example, survey data shows that people’s expected retirement age increases as they grow older. This suggests that young adults are struggling to develop the right financial plan for their needs.

Age of respondentExpected retirement age
20s55.7
30s60.7
40s64.6
50s64.9
60s67.8

Based on a survey of 3,025 Americans aged 20-74.

By viewing investors as “customers for life”, advisors have the opportunity to steer people onto the right path at an earlier age. This can help them create positive impact in their communities, as well as grow their business through word-of-mouth marketing.

The second thing advisors can do is reach out to underserved communities. Data shows that Black and Hispanic Americans are less likely to have retirement savings, while those that do feel much less confident.

EthnicityHave retirement savingsPerceive retirement savings as being on track
White80%42%
Black63%23%
Hispanic58%22%
Asian85%47%

Source: Statista (2021)

Up to this point we’ve focused on the financial aspect of retirement, but what about health & wellness?

Redefining Retirement: Health, Wealth, and Self

The rising importance of personal health has been a major phenomenon of the COVID-19 pandemic. According to McKinsey, 48% of Americans increased their prioritization of wellness compared to 2-3 years ago.

This shift in thinking must also be reflected by retirement plans. One way to do this is to integrate health & wellness considerations alongside wealth.

For example, poor physical health can significantly drive up the costs of retirement. In fact, the average American aged 65-84 already spends nearly $17,000 per year on healthcare.

Mental health, on the other hand, can be severely affected by money-related stress. Symptoms include a loss of sleep, high blood pressure, and a negative impact on personal relationships.

Perhaps most interesting is that the relationship between health and wealth goes both ways. In other words, wealth can be a driver of better emotional and physical health. The following table shows how individuals with greater income felt better about their wellbeing.

Income levelConsider themselves to be emotionally healthyPhysically healthy
Under $40K50%47%
$40K - $75K63%56%
$75K - $100K68%63%
Over $100K73%68%

Based on a survey of 3,025 Americans aged 20-74.

To develop a more holistic retirement plan for their clients, advisors must transform from financially focused representatives to holistic life coaches.

Barriers are Meant to be Broken

With the concept of retirement, many Americans feel like they are on the outside looking in. They suffer from a lack of representation, a mistrust for the financial industry, and have few resources that are catered to them.

What’s needed is a democratization of retirement planning.

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