Do you wish you could capture the future growth of the major world markets with zero risk of losing money?
Well, this article reveals how to do exactly that.
The stock market has been one wild ride since 2008. After a 20-year bull run, a huge 50% drop in 2007/2008 wiped out trillions of dollars of wealth in just over a year’s time. It was gut-wrenching to say the least. A few people even committed suicide over it. Then in just a few months, the markets grew by more than 20%.
Now, three years later, we’re getting close to where the market was at the beginning of 2008… but we’re still seeing way too many days where the Dow Jones Industrial Average (DJIA or the “Dow”) rises and falls by more than 300 points in a single day.
It’s enough to make you want to just “get out”… park your money in a CD, and move on. But when you are only getting maybe a half a percent from savings and money market accounts, it just seems like there has to be a better alternative… and there is… using what I call “Zero Loss” investing.
There are several “Zero Loss” investment alternatives available and each type is a little bit different; in this article, I will focus on the advantages, disadvantages, and how they work in general.
How Zero Loss Investments Work
In most cases, these types of investments are contracts or certificates of deposit (CD’s) offered by banks where you invest your money for a period of months or years. When the contract or CD matures, you get back your original investment plus a percentage (which can be more than 100%) of the growth of the market index or indices. If the index (or indices) have a net loss, you simply get back your original investment… guaranteed.
For example, if you paid $10 per share or unit and the index goes down relevant to the index on the date the certificate was created (or stays flat), you lose nothing; you simply get your $10 per share back. Assuming the “participation rate” is 100% and the index goes up 50% over the 2-year life of the certificate (for example), you would get 100% of the growth. Since 50% of the $10 investment is $5… and since your participation rate is 100%, you get 100% of that $5. Thus, you would get back $15 for your “zero loss” investment.
Advantages of Zero Loss Investing
The advantages of zero loss investing is pretty obvious… you get 80% to 125% of the growth of the index (or multiple indices) with zero risk of loss of principle. This means you can invest your “sensitive” money such as savings for college, retirement, etc.
Since in most cases you can buy these certificates on the market just like an exchange traded fund (ETF), you can structure your investments to mature just before you need it. For example, if your son or daughter is going to start college in 24 months and you will need $15,000 at that time, you could simply invest $15,000 in a Zero Loss investment that matures in 22 months. This way you will receive your original investment plus any growth a couple months before you need it (don’t forget to account for the bills coming due a couple months before the semester starts).
Disadvantages of Zero Loss Investing
The only real disadvantage is you really must plan to hold the investment until it matures to ensure you don’t lose any money. These certificates will float in value based on their underlying index (or indices). If they are up relative to what you paid, you can sell them and take your profits. However, if you need the money and they are currently down, you will only get whatever the current market value is… which can be less than the face value of the shares. On the other hand, if you hold them until they mature, you will at least get back the face value.
“Zero Loss” Investments Are Not Really “Zero Risk”… Although They Are Close!
Generally speaking, “Zero Loss investments” are considered zero risk, but they do have two types of risk which I will discuss in a moment. First of all, if you invest properly, there is virtually zero risk of losing your principle (i.e., the money you invested). Your principle is guaranteed against loss.
The first type of risk, however, is the risk of Guarantor Default… in other words, if the organization guaranteeing your investment goes bankrupt, you could lose money… but in general this risk is very low. In fact, some of these investments are actually guaranteed by the FDIC (the same group that guarantees your bank accounts).
The second type of risk, which is always present in all investments, is called “opportunity risk”. Opportunity risk is the risk you incur because you could have invested your money elsewhere and made more money than with the investment you selected.