Thursday, July 14, 2016

SIPs (Structured Investment Products)

[IMPORTANT PREFATORY NOTE: This is NOT to be taken as investment advise or relied on in any way. Nor is this a recommendation of any kind as to what to do or not do. It merely is a description of an approach that some might be find of interest, particularly those more interested in preserving rather than growing their portfolios. Past results should not be relied on as to what will happen in the future]

Sippy cups are wonderful, but SIPs might be even better for anyone looking to be out of the equity markets, but still wanting to share in the upside should the market go up. A SIP is a Structured Investment Product, and there are all kinds of them. Here is an example of one SIP: It is a 7Y FDIC-insured CD. The FDIC-insurance component guarantees you will get back your principal at the 7Y mark up to the FDIC-maximum-allowed. It does not pay interest like a typical CD. Rather its dividend is tied to an index, such as the S&P 500. If the S&P goes up, a dividend is paid proportionate to that rise in the S&P. If the S&P does not go up or goes down, no dividend is paid. So, it could be that no dividend is paid over the life of the SIP, but one gets return of principal.

The SIP route could make particular sense for someone who wants to be out of the equity markets to avoid the risk of a market crash and loss of their portfolio's value. If there were risk-free fixed income investments available, the SIP route would not be that attractive. But since cash currently earns virtually nothing (e.g., 1% on  1YCDs), putting money in such a SIP route "costs" very little in lost income even if the SIP earns no dividends.

Right now, anyone who is totally in cash or cash equivalents will be earning virtually nothing, but they will sleep at night, free of worry about the next black swan or flash crash. Staying in such an all-cash position runs the risk of running out money, but avoids the risk of loss from another huge market crash. And when there is some such event, one then might consider a relatively small bet on XIV as has been discussed in earlier posts (e.g., putting 10% of one's portfolio in XIV the day after Brexit would have raised one's total portfolio by 4% a few weeks later). 

[IMPORTANT CONCLUSORY NOTE: This is NOT to be taken as investment advise or relied on in any way. Nor is this a recommendation of any kind as to what to do or not do. It merely is a description of an approach that some might be find of interest, particularly those more interested in preserving rather than growing their portfolios. Past results should not be relied on as to what will happen in the future]

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