Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Barrier investments?
Old 09-03-2008, 10:31 PM   #1
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 3,419
Barrier investments?

Just was talking to a rep. at a brokerage where I recently exercised stock options.

They're offering me access to what they claim are investments only available to corporate customers, such as CDs in the secondary market (not that unique but on their web site for "retail" customers, they don't show up).

But she was talking about "barrier" investments offered by banks like JP Morgan, UBS, HSBC. One she talked about was something tied to the Russell 2000 index.

You invest a minimum of $10k, no transaction fees because any costs are priced into the terms.

Your principal is protected. The term is 18-months. In the case of this one barrier investment, which closes in 2 weeks, if the Russell 2000 is within 27% higher or 27% lower than at the time of the investment, you would get your principal back plus the difference.

If the Russell 2000 is down 20%, then you get a 20% gain. Similarly, if the Russell 2000 is up 25% in 18 months, you get a 25% gain.

If the Russell 2000 falls outside the plus or minus 27% range, then you just get your principal back. In other words, your money has had zero return but your principal is intact, other than losing some purchasing power in real terms.

Has anyone ever heard of these barrier investments? This is new for me.
__________________

__________________
explanade is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-03-2008, 11:55 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Pretty easy. You're going to get your principal back plus any gains or losses, minus a bunch of trading costs that are "priced into the terms".

You'll make less or lose more than if you invested directly into the russell 2000.

Santa Claus wont by by for another ~3 months...
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 09-04-2008, 05:59 AM   #3
Recycles dryer sheets
 
Join Date: Mar 2008
Posts: 75
This reminds me of "structured products" that were retailed in the UK several years ago. I remember one product in particular which was quite legally advertised as having tiny management fees. What regulation didn't require them to explain was that all of the invested money (after deducting the fee) would be invested in a derivatives contract with a single counterparty, who had devised and priced the complex derivative. The profit they built into the price was unkown and unknowable to consumer and financial advisors, and not reflected at all in the advertised management charge they were legally required to publish.
__________________
cjking is offline   Reply With Quote
Old 09-04-2008, 08:09 AM   #4
Recycles dryer sheets
 
Join Date: Jul 2005
Posts: 113
Its a structured note. Basically you are buying a bond that pays a lump sum based on an underlying index's performance. The issuer hedges the liability with derivatives and profits from a spread of what it costs to hedge vs sales price. I work for an RIA and we use these for commodity exposure (so does PCRIX) but nothing else. The real cost is about .8%/yr for the products we buy. For a retail investor it might be significantly higher.
__________________
boutros is offline   Reply With Quote
Old 09-04-2008, 10:16 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
So in 18 months you get a return of principal plus the absolute value of the price change over that 18 month period (as long as the absolute value of price change is under 27%). Otherwise you get a return of principal?

The small cap index (Russell 2000) is typically more volatile than the S&P 500 (for example). This would make it more likely to see returns more than 27% (or less than -27%). I took a quick look at the quarterly returns for the Vanguard Small Cap Index (not Russell 2000 but MSCI US Small Cap 1750 Index now - ie similar to Russell 2000; this fund was Russell 2000 until 2003).

Out of the last 40 quarters, 35 unique return periods were available for testing. Of these 35 periods, the absolute value of 18 month returns were under 27% in 26 periods (or 74% of the time). The absolute value of returns were greater than 27 in 9 periods (or 26% of the time). In other words, looking back on the last 10 years, you would get a payout only 74% of the time.

Additionally, 9 out of 35 periods (26% of periods) paid out 7.5% or less. I used 7.5% as the threshold of what one would expect to earn from a fixed income investment for 18 months (a CD or something?). In other words, a total of 52% of the time you would have been better off investing in a fixed income product yielding 5% per year versus this structured product.

The average return of the 35 unique periods was 9.4% with standard deviation of 8.86%. This return was almost as high as the 10.1% return of the Vanguard Small Cap Index Fund. However the returns going forward (out of sample) may not be as good as they were in-sample.
__________________
FUEGO is offline   Reply With Quote
Old 09-04-2008, 10:24 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Really short answer: its a way for an investment outfit to charge you 1-2% for an index fund.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 09-04-2008, 10:33 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
Quote:
Originally Posted by cute fuzzy bunny View Post
Really short answer: its a way for an investment outfit to charge you 1-2% for an index fund.
I think it is a touch more complicated than that. I'm sure they are getting their fee.

But it's a crap shoot that would only pay out more than fixed income about half the time (historically speaking). What's the point of the investment? Reduced volatility of returns without sacrificing a whole lot of return (based on in-sample data)?
__________________
FUEGO is offline   Reply With Quote
Old 09-04-2008, 10:46 AM   #8
Thinks s/he gets paid by the post
 
Join Date: Nov 2007
Posts: 1,052
Shorter answer: It's a derivative product. RUN!!
__________________
Art G is offline   Reply With Quote
Old 09-04-2008, 11:43 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Quote:
Originally Posted by FUEGO View Post
What's the point of the investment?
Its a way for an investment company to get a normally conservative investor to put money into a very volatile investment that offers a suggestion that they will enjoy most of the upside with less of the downside, with "principal protection". Almost any way it turns, the investment company makes money. And they do so with money from a customer that probably wouldnt have bought the bare product, and certainly not from them.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 09-04-2008, 01:10 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by explanade View Post
Just was talking to a rep. at a brokerage where I recently exercised stock options.

They're offering me access to what they claim are investments only available to corporate customers, such as CDs in the secondary market (not that unique but on their web site for "retail" customers, they don't show up).

But she was talking about "barrier" investments offered by banks like JP Morgan, UBS, HSBC. One she talked about was something tied to the Russell 2000 index.

You invest a minimum of $10k, no transaction fees because any costs are priced into the terms.

Your principal is protected. The term is 18-months. In the case of this one barrier investment, which closes in 2 weeks, if the Russell 2000 is within 27% higher or 27% lower than at the time of the investment, you would get your principal back plus the difference.

If the Russell 2000 is down 20%, then you get a 20% gain. Similarly, if the Russell 2000 is up 25% in 18 months, you get a 25% gain.

If the Russell 2000 falls outside the plus or minus 27% range, then you just get your principal back. In other words, your money has had zero return but your principal is intact, other than losing some purchasing power in real terms.

Has anyone ever heard of these barrier investments? This is new for me.
Run away.....they make equity index annuities look like a great deal.......
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 09-04-2008, 01:30 PM   #11
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 3,419
Yup, that is how they positioned it, as an alternative to fixed-income, offering principal protection.

Thanks for the statistical analysis Fuego.
__________________
explanade is online now   Reply With Quote
Old 09-04-2008, 02:36 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Nov 2007
Posts: 1,052
You only thanked Fuego?? WELL! I never!!!
__________________
Art G is offline   Reply With Quote
Old 09-04-2008, 06:06 PM   #13
Thinks s/he gets paid by the post
ladelfina's Avatar
 
Join Date: Oct 2005
Posts: 2,713
These kinds of products are widely promoted in Italy.. usually on some "basket of stocks". It did always smack to me of an annuity-type thing, but I have no experience with them.
__________________
ladelfina is offline   Reply With Quote
Old 09-05-2008, 08:37 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
FinanceDude's Avatar
 
Join Date: Aug 2006
Posts: 12,484
Quote:
Originally Posted by explanade View Post
Yup, that is how they positioned it, as an alternative to fixed-income, offering principal protection.

Thanks for the statistical analysis Fuego.
The only ones JPMorgan has that are intriguing are the internal structured notes they use with private banking clients. Of course, you need $25 million or more to be a private banking client, but I digress.

In 2004, they were offering a 5% return for 6 months, or 11% for 12, using a basket of foreign currencies that they hedged. JPMorgan originated and backed the notes, and I heard they did quite well with them..............
__________________
Consult with your own advisor or representative. My thoughts should not be construed as investment advice. Past performance is no guarantee of future results (love that one).......:)


This Thread is USELESS without pics.........:)
FinanceDude is offline   Reply With Quote
Old 09-05-2008, 08:53 AM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
In 2004 I got a sandwich from Subway, and it was unusually good. Turns out they didnt get their delivery of crappy bread so the manager bought some good bread at a nearby store to tide them over.

That might happen again. Maybe even at the same Subway!
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 09-05-2008, 10:54 AM   #16
Recycles dryer sheets
Canadian Grunt's Avatar
 
Join Date: May 2007
Location: Edmonton
Posts: 197
Easy decision really. As Warren Buffet prescribes. If you don't understand the product 100% then don't invest. Based on what you described give the investment a pass whether it is good one or not.
__________________
it's the journey that matters
Canadian Grunt is offline   Reply With Quote
Old 09-06-2008, 02:33 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Aug 2006
Posts: 1,356
Hear, hear!

I don't get this desire for everyone to make these crazy complicated investments.

I think that the next decade is shaping up to be a great one for stocks. Just buy a few index funds and ride the wave up, baby!

If you want to get really fancy (and there is no good reason to), you can buy some individual stocks of good companies. I think MSFT is a steal right now.

If the volatility of the stock market scares you, add some bonds, a little REIT exposure, a little gold if you must, etc.

If the volatility of that diversified group of investments scares you, increase your cash.

Don't buy these crazy goofball products, though!

Quote:
Originally Posted by Canadian Grunt View Post
Easy decision really. As Warren Buffet prescribes. If you don't understand the product 100% then don't invest. Based on what you described give the investment a pass whether it is good one or not.
__________________
Hamlet is offline   Reply With Quote
Old 09-08-2008, 10:39 AM   #18
Thinks s/he gets paid by the post
 
Join Date: Nov 2007
Posts: 1,052
I think it's a heck of a stretch to go from, "don't buy crazy products" to "just buy index funds and gold".
__________________

__________________
Art G is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Reduce electric bill by installing radiant barrier in attic? soupcxan FIRE and Money 102 08-19-2009 09:26 PM
Alternative Investments godoftrading Other topics 2 07-22-2008 09:24 AM
Radiant Barrier? Leonidas FIRE and Money 29 05-28-2008 09:42 PM
energy investments windsurf FIRE and Money 17 09-07-2005 01:06 PM
7 Investments that you don't need mickeyd FIRE and Money 21 12-18-2004 11:06 AM

 

 
All times are GMT -6. The time now is 02:21 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.