SS+D FINANCIAL NEWS AND INFORMATION
March 19, 2010
THE "PROTECTED PORTFOLIO"
The Investment Dilemma
We have found that many clients have changed their view of market risk since 2008. They are now concerned that the current market recovery, begun in March 2009, has stalled and fear that coming inflation will drive up interest rates. These clients seek an asset-protection strategy that does not give up the chance for reasonable return.
The “Protected Portfolio”
We create an investment policy for our clients that includes an asset allocation consistent with their risk tolerance and investment time horizon. However, our clients want more protection; they want to protect their investments against the risk of another overall market decline like the one that occurred in 2008. Increasingly, we recommend that our clients invest part of their assets in broad market indexes using publicly-traded, long-term options. We describe this investment strategy as a “Protected Portfolio.” It adds protection against loss of principal while maintaining the opportunity to participate in market gains. The key component of this protection is the use of option contracts called LEAPS that cover diverse market indexes.
Long-Term Equity Protection through Use of LEAPS
LEAPS are long-term publicly traded option contracts with expiration dates that are longer than one year. Structurally, LEAPS are no different than short-term options, but their length offers investors efficient exposure to prolonged trends in the market. They are also more tax efficient. The use of long-term options has grown rapidly since 2005 when they first came on the market with LEAPS on SPY.
Diverse Market Application
To employ the “Protected Portfolio” strategy, SS+D Financial clients purchase long-term options on broad market indexes using exchange-traded funds (ETFs). SPY, the ETF based on the S&P 500, came on the market in the early 1990s. The use of low-cost ETFs has now expanded to cover all major market indexes. Investments in ETFs allow us to combine the benefit of options with asset allocation. Long-term, publicly-traded options are now available on ETFs covering indexes on domestic and international markets. The breadth of the ETF options market assures investment liquidity and minimizes counter-party exposure.
The Benefit of a “Protected Portfolio”
The use of options allows our clients to participate in broad-market investments while 99%, or more, of their assets remain in cash or treasuries. With this strategy, clients profit if markets go up, and they reduce or eliminate losses if markets decline. For example, currently, we can obtain the following results based upon the performance of the S&P 500 for options expiring in December 21, 2012:
• A buffer against any annual losses down to 17% while at the same time participating in market gains up to 17%; or
• Other customized mixes that provide income for when the market is flat.
Comparing a “Protected Portfolio” to Other Broad Asset Classes Since 2006
Customized for Each Client
We work with each client to coordinate his or her “Protected Portfolio” with more traditional strategies. The “Protected Portfolio” allows us to fine tune a portfolio to an investor’s specific goals, return requirements and tolerance for losses. We can also design a client’s “Protected Portfolio” to provide income in flat markets. For the right client, the “Protected Portfolio” is, simply, a superior strategy. Used wisely and selectively, options are a form of insurance on your portfolio, protecting your money from sudden, violent market swings.
Total Support
At SS+D Financial, whether we manage a traditional asset allocation investment or employ our “Protected Portfolio" strategy, we work closely with you to monitor your investments. At least annually, we compare your investment results to the goals in your Financial Plan to make sure you are on track to achieve your financial goals.