Jay over at ProtectedStocks.com has an interesting series running this week about his stock of the year. Regardless of what you think of his idea it is worth reading and thinking about.
If I correctly read where he is going with his pick he is using a variation on a strategy that I have written about in the past. To be clear, neither Jay nor I takes credit for this approach but understanding it is worthwhile. The version I have talked about is buying a zero coupon bond with a face value equal to your principal and then using the difference between the cost and your principal to buy an index fund.
For example (using Jay's lump sum amount), an investor with $100,000 buys a zero coupon bond due in 15 years. Currently that strip would cost $49,560 with a yield of 4.70%. So in 15 years that strip will be worth $100,000, the original lump sum. That would leave $50,440 to buy an index fund. If the market goes to zero the investor still has $100,000. I chose 15 years off the top of my head, you could do any time period. The strategy is the thing here not the exact specifics of the trade.
In Jay's version of this an investor buys a three year CD yielding 5.57%. Using present value, Jay says that, $85,000 into the CD today will be worth $100,000 at maturity. So an investor puts $85,000 into the CD and puts the remaining $15,000 into call index options.
Both methods have pluses and minuses but this can work. There are severe limitations however. If you are 50 years old and your granpdarents made it their 90's you need a lot of inflation protection (that is you need equities).
If you don't need your assets to grow (not being sarcastic) I think this makes a little more sense. For example if your income need 1% of your assets or less this sort of game-over strategy is more appealing.
Being too conservative has plenty of its own drawbacks, I can't stress this enough. Equity markets go up more often than not. People need to let the market do its thing for them in the context of a disciplined strategy.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
10 comments:
The thing most freqently missed by cautious investors is that the longer the time frame, the lower the relative risk of equities. By the time you get to 30 years, equities are less risky than bonds. Of course, the average returns of stocks are far better than the average returns on bonds. Therefore, the person with 30 years to invest is a fool to invest in bonds.
For a person like me, who expects to make solid long-term returns, buying a zero to protect the down side at current rates would be like going swimming with a 40 pound chain around my neck.
It is amazing how many errors you have in your grammar, punctuation, and spelling.
to anonymous
i'm doing the best I can
Don't mean to harp on you there Roger, but I do agree with Anonymous re the number of errors in your narrative, if only because it makes reading a chore and much less fun.
A run through a spelling/grammer checker would help improve the quality of the blog and enhance the reading experience.
I go along with Jack about 90% on this one: If I had a 15 year time horizon I would be unlikely to hedge market risk with a zero unless my outlook for those 15 years was fairly bleak (or at least extremely uncertain) in which case I would most likely be looking at other markets. OTOH I can see that if a person had a very low tolerance for risk this could be a mechanism for getting them to increase exposure to equities - clearly critical if one wishes to avoid very low or even negative real returns over long time horizons - which I take it was the central meaning of your post.
RW
P.S. Just as informal speech normally includes mild stutters and vocal fillers such as "er" and "uh," blog entries may include minor syntax or lexical errors w/o problem; blogs are rarely formal, they are conversations. While writing errors may prove mildly distracting to some they normally detract little from content and are hardly worth comment unless they alter intended meaning or make statements ambiguous. In brief, don't sweat the small stuff, your meaning is usually quite clear.
thanks RW, but I will try to improve
"I don't give a damn for a man that can only spell a word one way."
Mark Twain
LOL!!
JFK, I use MS Word 97 and even that has a spell checker. Get with the times Roger. I for one, find the spelling and gramatical mistakes rather annoying.
Warning: My spelling and grammer are weak, but I think my ideas are solid.
Hi, I'm Jay Buster the guy who wrote the article in question at http://www.ProtectedStocks.com .
Tomorrow I'm posting the results of the trade I made today.
You'll see that I'm capturing 99% of the upside, while eliminating all of the downside risk.
The "cost" of this trade is a lack of dividends and taxable income on the CDs that I bought. I'm happy to give up the dividends to gain principal protection.
When the next market crashes (bird flu, oil at $100, etc) I'll be sleeping like a baby. How many "long-term" investors held tight during the crash of 2000 and 2001? Most "long-term" investors I know sold out at the worst possible moment because the pain was so bad.
Roger, thanks for writing about my site.
Sincerely, Jay Buster
Post a Comment