How can an investor mitigate the risks associated with variable annuities?

To mitigate the risks associated with variable annuities, an investor should focus on diversifying investments within the annuity and regularly monitoring performance. Variable annuities are designed to allow investors to allocate their premium payments among a variety of investment options, such as mutual funds or other pooled investments. By spreading investments across different asset classes—such as equities, fixed income, or balanced funds—an investor can reduce the impact of poor performance in any one area.

In addition, monitoring performance is crucial because the allocation might need adjustments based on market conditions or personal financial goals. Regularly assessing how investments are performing helps an investor make informed decisions to reallocate assets when necessary, thereby managing risk more effectively.

While focusing solely on one type of asset, guaranteed income options, or avoiding riders might seem appealing, these strategies can limit potential growth or benefits provided by the annuity, making them less effective at risk management. Diversification, in contrast, is a proven approach in investment management for balancing risk and reward.