The Investment U E-Letter: Issue # 220
Monday, March 10, 2003 Guaranteed Return Investments… With Unlimited Upside
By Dr. Steve Sjuggerud, Chairman, Investment U
How about an investment where your worst case is a positive 12.2% return, and your upside is unlimited? That's what we're talking about today: guaranteed return investments… and here's why… Two market pros spoke to our group of 100+ investors on Saturday at our 5th Annual Investment U… Both of them spoke equally well, and both of them are new to the Investment U crowd. Yet one attracted 50 participants to his workshop while the other attracted five. What happened? It must have been the subject matter. You see… one was speaking about guaranteed return investments (promising you the upside potential of the stock market with no risk to your initial investment), while the other was talking about international bonds. Either the attendees were not interested in international bonds, or they were really interested in guaranteed investments. Jeff Winn of International Assets attracted the big crowd to his guaranteed investment workshop, so let's take a look at what he was talking about… Jeff covered everything from low-return, guaranteed investments to high-return ones, and the various risks and costs associated with each. To keep things simple today, let's just stick with one guaranteed return investment idea: the Equity-Indexed Annuity (EIA)… The basic idea here is to give yourself the upside potential of the stock market without the downside risk. By buying into a "contract" for a specific period of time, it's possible to realize guaranteed returns on your money - with unlimited upside - all in exchange for sacrificing some potential return. Sounds appealing, doesn't it? Before you sign any bottom lines on an EIA though, make sure you're crystal clear on its basic elements… The Four Core Elements Of A Guaranteed Return Investment Program 1. Minimum Guarantee: This is your worst-case scenario. Some of these just guarantee your principal, nothing more. The one Jeff spoke about guarantees you a minimum return of 12.2% in five years (so a $100,000 investment is worst case but still guaranteed to pay you $112,200 in five years). Not only do you have no downside risk, you are guaranteed to make money (though you won't get rich on the guarantee alone, the stock market will have to move for you). 2. Participation Rate: Are you entitled to all of the market's return? Or just a fraction of it? The answer depends on the specific investment, so make sure you find out exactly. The one Jeff showed us gives you 75% of the market's return. So if the market went up 10%, you'd get 7.5%. In exchange for getting rid of the downside risk in the market, you're giving up some of your upside potential. 3. Maximum Return (or Cap): Some have a maximum yearly return, of say 12%. The one Jeff spoke of has no cap. If the stock market happens to take off, your reward is not limited (other than by the participation rate explained above). 4. Term: The length of time (in number of years) you're locked into the contract. These come in all lengths, but the specific EIA Jeff spoke about had a five-year life. Sounds Good… But There Has To Be Some Downside Risk, Doesn't There? Now you know exactly how much money you can make (worst case: 12.2% in five year's time, best case: the sky's the limit). So now let's look at some of the downside risks. Surrender Charge: This is your main issue, and it is where an annuity can hammer you. Most annuity products will hit you with an early surrender charge if you need your cash before the end of your term. And these Equity-Indexed Annuities are no different. This "lockup," and the costs associated with it, is the major strike against products like this. Equity-Indexed Annuities are just one of the ways that you can meet your financial needs. And even if these may not be your (or Jeff's) favorite way to accomplish your goals, the 50 people at Jeff's workshops were very interested in these types of guaranteed return investments. And even if you're one of the many people who may ask, "Why give up some of the potential return in what basically amounts to fees?" I think you'd agree that after the performance of the market over the last few years, a guaranteed-minimum return investment with significant upside sounds very appealing. Today's IU Crib Sheet - If you're interested in these and other investments like it, you can contact Jeff Winn by calling 800.432.4402 or 407.254.1522 or by e-mailing him at jwinn@iaac.com. Or you contact one of The Oxford Club's other recommended financial planners. In addition to people like Jeff who we trust to give you personal investment advice, there are other avenues if you have a good idea about what you're looking for: Charles Schwab (www.schwab.com) and Vanguard (www.vanguard.com) come to mind.
- I'm definitely no expert in the world of insurance-based products. Far from it. And I always recommend that you understand the ins and outs of any investment you make. As a further safeguard, if you stick with our recommended planners (like Jeff) and solid names like Schwab or Vanguard (names that are synonymous with excellent investment products and reasonable prices), you'll likely be able to find a limited-downside, unlimited-upside investment product with a reasonable trade-off in fees that may meet part of your investment needs.
Good investing, Steve Related Articles Back to Archive | 
