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I do own a structured investment that has a 6 year shelf life. At the end of 6 years I get 105% on the s&p500 upside if there is any, 1 for 1 on the downside up to 35% meaning if the s&p is down 10% I'm up 10%, if the s&p is down more than 35% I just get the market return.
I'm confused. The buyer of such an investment vehicle appears to get a win/win/break-even deal (gain more if the market rises, lose less if the market falls modestly, lose together with the market if it falls greatly), and that's wonderful. But ought not the underwriter of this investment vehicle profit? Where is his profit? Hidden fees?
I'm confused. The buyer of such an investment vehicle appears to get a win/win/break-even deal (gain more if the market rises, lose less if the market falls modestly, lose together with the market if it falls greatly), and that's wonderful. But ought not the underwriter of this investment vehicle profit? Where is his profit? Hidden fees?
Don't forget the upside beyond 5%. If I understood Lowexpectation's terms right, if the market, in 6 years:
goes up 50% - he gets 5%
goes up 6% - he gets 5%
goes up 1% - he gets 1%
goes down 10% - he gets 10%
goes down 34% - he gets 34%
goes down 50% - he loses 50%.
The counterparty is basically betting that the stock market goes up by at least 5% or falls by more than 35%. The seller (underwriter) is long the market in several ways, sort of a combination of a future and a protective put with a 5% premium. For six years. Not a bad racket.
I'm confused. The buyer of such an investment vehicle appears to get a win/win/break-even deal (gain more if the market rises, lose less if the market falls modestly, lose together with the market if it falls greatly), and that's wonderful. But ought not the underwriter of this investment vehicle profit? Where is his profit? Hidden fees?
Well I bear liquidity risk and credit risk. There is a 3% selling concession and the only way I can get out is to sell back to the brokerage firm. I've loaned them money for six years to make other investments
Don't forget the upside beyond 5%. If I understood Lowexpectation's terms right, if the market, in 6 years:
goes up 50% - he gets 5%
goes up 6% - he gets 5%
goes up 1% - he gets 1%
goes down 10% - he gets 10%
goes down 34% - he gets 34%
goes down 50% - he loses 50%.
The counterparty is basically betting that the stock market goes up by at least 5% or falls by more than 35%. The seller (underwriter) is long the market in several ways, sort of a combination of a future and a protective put with a 5% premium. For six years. Not a bad racket.
I get 105% of any upside then inverse of -1%- -35% and 1to1 anything below a 35% loss
For '08 I was prepared and had a very substantial portion of my portfolio in cash. I am not preparing at all for any major stock market crash. For at least the next few years I view that possibility as extremely small. We have plenty of fickle, or if you prefer cautious investors who sell with every minor negative news item. Even so the corrections we see are small and the market continues to grow at a fairly consistent rate of about 10% per year. The economy continues to rebound and many businesses are making strong profits. The Fed will keep interest rates low for a long time which means bond yields will remain very low.
I agree...My thoughts exactly. If I may add, as long as the national debt is what it is, then interest rates will remain where they are and track the rate of inflation.
It depends. Once I reach my retirement investment goals I will scale back on stocks and stay with safer investments. I have reached my current income investment goals (20% of job income) so will not change anything there.
What I am preparing for are negative interest rates. It's starting in Europe and may come to the US too. I think it is a more realistic risk than a stock market crash right now. We could soon see negative IR on any short-term deposits, bank and savings accounts and money market funds. Look, in Germany you have to pay the government for holding its debt up to 5 years out.
I have heard the gloom and doom for 5 years. Plenty of folks are still waiting for another big recession or a 10-30% "correction". Neither is at all likely. In '08 I was already out of the market. That was no accident. I was out of the market more than a year in advance. I certainly cannot "time" the market, but it is pretty easy to see the big trends and to see when we are heading towards a recession or major correction. I will be pulled back on my market investments well in advance for the next big one.
This forum can be a place for complaining and worry or you can use it and other information to help understand and plan for the future.
i have never prepared for anything of the sort in my investing life. i have my goals , my plan and i stick to it no matter what.
at this stage i am retiring , brought my equity level down to a comfortable 35%-38% and will increase holdings through retirement over the next 15 years up to 50/50 or so.
that way any bad sequencing or extended downturns do not hit me to hard early on when portfolios are the most vulnerable.
i have never prepared for anything of the sort in my investing life. i have my goals , my plan and i stick to it no matter what.
........
Well you admit to goals and plans but not to preparing. I think your distinction is pretty thin.
It seems to me that we all need to look at our own financial positions and invest for the future. It is wise to look at the big economic picture and adjust our plans and goals accordingly. I would call that also being prepared for future changes. You are investing to avoid any short term risk would might seriously set back your portfolio as you begin retirement. Seems to me you are being prepared. I am in a similar situation but I consider the short term risk to be minimal and hence have a higher equity allocation.
I do think it is foolish to stick to an allocation and investment strategy "no matter what" happens. I remain conservative and do not increase my stock allocation beyond about 60%. But if there are serious signs of weakness in the economy I would not hesitate to drop my allocation to 30-40%.
To me the big issues is how we go about assessing the big picture of the economy. Panic and emotional responses typically have the worst outcomes.
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