In the unpredictable world of investing, market volatility can feel like walking a tightrope—one misstep, and your portfolio could take a significant hit. But what if you could reach for the potential rewards of the market while having a safety net to cushion the falls? That’s where indexing comes into play. By combining indexing with a point-to-point strategy, investors can enjoy both downside protection and the opportunity to profit—even during market recoveries—without needing the market to fully rebound. In this blog, we’ll break down why this approach matters and how it works.

What Is Indexing and How Does It Protect Against Downside Risk?

Indexing is an investment strategy that involves tracking a market index, such as the S&P 500, to achieve returns that mirror the market’s performance. Unlike buying individual stocks, certain indexed products—like indexed annuities or structured notes—offer built-in features to limit losses during downturns. These features often include:

• A floor: This caps your potential loss. For example, even if the market drops 20%, your loss might be limited to 0% or 10%.

• A buffer: This absorbs a portion of the decline. If the market falls 15% and your buffer is 10%, you’d only feel the impact of the remaining 5%.

Think of indexing as riding a rollercoaster with a seatbelt: you get to experience the exhilarating ups, but you’re secured against the steepest drops. This balance of growth potential and protection makes indexing a powerful tool for investors wary of market crashes.

The Point-to-Point Strategy: A Simple Way to Measure Gains

The point-to-point strategy is a method commonly used in indexed products to calculate returns. It measures the index’s performance between two specific points in time—typically from the start to the end of a period, such as one year. Here’s how it works:

• Starting Point: The index level is recorded at the beginning of the period (e.g., S&P 500 at 1000).

• Ending Point: The index level is measured again at the end of the period (e.g., S&P 500 at 1100).

• Return Calculation: The percentage change between these two points determines your gain. If the index rises 10%, you might receive a portion of that gain based on a participation rate (e.g., 70% of 10%, or a 7% return).

This approach is straightforward and allows gains to be locked in periodically. It’s like timing a runner’s speed between two markers on a track—each segment stands on its own, giving you a clear snapshot of performance.

The Reset Feature: Profiting Without Waiting for a Full Recovery

Here’s where the magic happens: the reset feature in a point-to-point strategy. In many indexed products, the starting point for measuring performance is reset at regular intervals, such as annually. This means that after a market downturn, the new starting point reflects the lower index level, allowing you to profit as the market recovers—without waiting for it to climb back to its previous peak.

Let’s see this in action with an example:

• Year 1: The index starts at 1000 and rises to 1200, a 20% gain. With a 100% participation rate, your account is credited 20%.

• Year 2: The index falls from 1200 to 1000, a 16.67% loss. But if your product has a 0% floor, your account stays flat—no loss is recorded.

• Year 3: The index recovers from 1000 to 1100, a 10% gain. Because the starting point reset to 1000 at the end of Year 2, you earn a 10% return for Year 3.

Notice the key benefit: the index is at 1100, still below its high of 1200, but you’ve made a 10% gain in Year 3. Without the reset, a cumulative measurement might show you’re still underwater until the index exceeds 1200. With the reset—or as we can call it, the “bar resetting”—you profit from the recovery starting from the lower base. It’s like a video game with checkpoints: even if you stumble, you restart from the last save point, not the beginning, making progress easier.

Why This Matters for Investors

The combination of indexing and a point-to-point strategy delivers three major advantages:

• Downside Protection: Floors or buffers shield you from the worst of market declines.

• Growth Potential: You can still capture a share of market gains during upswings.

• Profits During Recovery: The reset feature lets you make money as the market rebounds, even if it hasn’t fully recovered to its prior highs.

This makes the strategy especially appealing for cautious investors or those nearing retirement, who want growth without the full risk of market volatility.

Conclusion

In today’s unpredictable markets, safeguarding your investments while still pursuing growth is a top priority. Indexing with a point-to-point strategy offers a smart solution, blending downside protection with the potential for gains. The reset feature—where the “bar resets” each period—means you don’t have to wait for the market to fully recover to profit. Instead, you can benefit from the upswing as soon as it begins. By embracing this approach, investors can face market turbulence with greater confidence and resilience.