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In Part 1 of this series, I defined the 4 main wishes I had for investment vehicles, and spoke in depth about thematic ETFs that would cover the main controversy taking place today, namely inflation and recovery versus a deflationary double-dip, whether the market resembles 2003 or 1930.
In this second installment, I want to discuss my fervent wish to take investment risk where Uncle Sam will guarantee my principal if I am wrong. This must be a fool's errand, or tilting at windmills. Surely such a liquid, government guaranteed investment could never exist. It doesn't yet, but the it's possible that someday it could, and you need to learn about the opportunities and drawbacks of these approaches.
Previously illiquid investment vehicles are becoming liquid to gain demand. Firms like Ally Bank and Bank of America are offering no-penalty CDs that allow you to close the account and retrieve your funds for any reason. You are getting multiple times the yield of government securities with no risk. If you are an investor with 250k or less in bonds, there is no reason to own treasury or agency securities with short maturities instead of no-penalty CDs - the default risk is the same (zero), the price volatility is zero, and the yield is higher.
The second approach is the EverBank story. EverBank is the only bank to my knowledge that offers foreign currency and thematic investments in CD and deposit account form. By thematic, I mean that they combine currencies in an investment based on themes, whether it is resource rich countries like Australia and Canada, or countries with strong balance sheets like Singapore and Switzerland. All of these investments are FDIC insured against bank failures, but not against the actual investment performance. This means that if EverBank fails, you will get back the the market value of your investment, but if a country like Mexico has a currency crash, you will not get back your original principal in US dollars. But you will of course have the upside if the US dollar declines under the weight of our debts.
In fact, if you are excited about the emerging markets theme that has been popular in recent years, you can buy a MarketSafe CD that is denominated in the currencies of the BRIC (Brazil, Russia, India and China) countries with the same default protection. If you believe that those emerging markets will continue to outgrow the US in the future, they are a compelling choice in which to diversify your savings. The only problem with this one is that it is illiquid, with a 3-year maturity.
Now, if only one could combine the principal protection of a CD with the investment risk of the EverBank CD, we would be in business. I can't think of any way that would be possible, except in a case where the CD investor would pay interest to the bank for a protective put-type provision on the investment. Somehow I don't think that a CD investor will ever pay interest to a bank.
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6 comments:
In Canada we do have a product like this last one you mention, inflation-protected GICs, if I have the name right. Principle is protected but you have the upside of whatever inflation does. Sounds like more and more people are starting to think like you are in the U.S. about inflation. Which makes me wonder about the effects of crowds.
I think you're right about the herd mentality, it definitely snowballs during an extended rally. If you buy individual TIPS here in the US the principal is protected even with deflation, but oddly enough it doesn't work if you buy TIPS funds.
What about a variable annuity with it's guaranteed income or withdrawals benefits? I know it's not exactly what you are looking for but wouldn't that be the closest? You give up some of the performance for downside protection.
Hmm, I thought that you could not access all your money without a surrender charge?
The guaranteed income can be a plus in many cases for sure.
They have some with no surrender charges of course they usually have higher internal expenses for those type. I'm not saying it's the best just another thing to think about it your conversation.
No one is complaining about the extra cost for the guarantees in todays market.
That's a good point, kind of like paying for an upside option with a fixed return on the downside.
An asset allocation convertible bond, if you will.
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