Index Funds with Zero Risk

[coldsteel333]

I had my wife's Financial Adviser trying to sell me on and s&p Index Fund That capped yearly growth at 20 % and capped losses at 0 %. Seemed Interesting is anyone familiar with this?. My question is this something that can be done through TD without just buying the Spy with a break even stop without getting eaten up by commissions as i add per paycheck to my roth. Also is there something like this out there that is inverse and more short oriented?

[CoffeeR]

I had my wife's Financial Adviser trying to sell me on and s&p Index Fund That capped yearly growth at 20 % and capped losses at 0 %. Seemed Interesting is anyone familiar with this?. My question is this something that can be done through TD without just buying the Spy with a break even stop without getting eaten up by commissions as i add per paycheck to my roth. Also is there something like this out there that is inverse and more short oriented?

Almost all products like this are insurance products of some kind. This is likely an equity-indexed annuity. Run, *RUN* away from any insurance company that tries to sell you an investment product. IMO, with the exception of SPIA's most (all?) insurance investing/saving type insurance products are lousy. They benefit the seller (the financial advisor and insurance company) at your expense.

If you want to know more about alternate investments, check out a book by Larry Swedroe: The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Equity-index annuities fall under the Ugly category.

I would reconsider my relationship with any financial advisor that recommends these kinds of products.

[MustacheAndaHalf]

I don't understand insurance investments well, since I always flee long before they get explained.  But from what I've read, all of them have large surrender charges that are hidden in the contract and never mentioned.  So you think you're investing $5,000 with no risk, but if you want your money back, suddenly you discover you've lost a significant amount.

Another way to think of it: an S&P 500 index fund costs about 0.04%/year when you buy it directly.  How can they remove all negative years without charging you anything?  Plus the insurance salesman gets a commission, and the company needs to profit off this (and they are far less efficient than a standalone index fund).  Where are all their costs and profit coming from?

I'd recommend you separate insurance and investment.  If you need term insurance, that's one thing, but beyond that there's a lot of pitfalls found in investment/whole life style insurance products.

[JAYSLOL]

Before I found MMM I had some money tied up in a "market linked" GIC which is exactly what you are describing, principle guaranteed and growth capped at 9% per year.  Sounds fair, right?  No, its garbage.  They didn't give me fair market growth up to 9%, I was given a tiny percentage of actual market growth up to 9%, but the market would have needed to go up like 50% a year for them to actually give me the whole 9%.  As it was I ended up making a whopping 2% over 3 years in funds that had I put them in REAL MARKET I would have made at least 10 times that.  Sure, it was "no risk", it was also no fucking reward.  I would avoid anything remotely similar to this again at all costs.

P.S.  Ditch the financial advisor!

[frugalnacho]

I had my wife's Financial Adviser trying to sell me on and s&p Index Fund That capped yearly growth at 20 % and capped losses at 0 %. Seemed Interesting is anyone familiar with this?. My question is this something that can be done through TD without just buying the Spy with a break even stop without getting eaten up by commissions as i add per paycheck to my roth. Also is there something like this out there that is inverse and more short oriented?

You are probably making the assumption that your positive growth is directly proportional to the index's, but it's almost certainly not.

[bacchi]

If you care to, you can simulate this product with options.

https://lifeinvestmentseverything.blogspot.com/2012/01/rolling-your-own.html

There would always be a drag on your portfolio, however.

It's far more simpler, and more profitable, to plow money in an index fund (VTSMX) on auto-pilot and don't look.

[pecunia]

Your money may not be liquid with a deal like that as well.  Before I began receiving wise mustachian advice, I purchased such a product from Symmettra.  It has made me money but below market.  My money is tied up until August of 2020 unless I pay a penalty.

[Indexer]

I can't find the article now, but a year or two ago the Wall Street Journal did an analysis on products like these.

Here is what you need to know:

Fixed annuity: pays a fixed interest rate and can't go down. Basically a CD from an insurance company without the FDIC insurance. Since they are lower risk they don't require as much regulation, oversight, and the brokers who sell them don't need investment licenses.

Variable annuity: performance is linked to investments in a sub account. A pretty standard option is an S&P 500 index fund. Since they can fluctuate and lose value they are highly regulated and the brokers who sell them have to be licensed to sell investments. Basically a mutual fund with a annuity wrapper around it... and much higher fees.

Indexed annuity: In reality it's a fixed annuity disguised to look like a variable annuity with no risk. They can't go down and the rates they pay are based on how a particular index performed. Since they can't go down they have very little oversight and the brokers don't have to have investment licenses. HOWEVER, they don't give you returns identical to the index. They give you proportional rates and have caps. If the SP 500 is up 10% you might only earn 5%, and if the SP 500 is down you get 0%. Now, remember that this is really a fixed annuity disguised to look like a variable annuity. Why would the insurance company pay more interest on an indexed annuity than a fixed annuity if they have the same amount of risk?  Short answer, they don't pay any more. They just look like they could pay more in the sales literature. By the time you offset the +5% years, the +1% years, the 0% years, ect. and then add in fees these products are engineered to pay out similar returns to a fixed annuity. The WSJ's analysis concluded that after a 7 year period many indexed annuities averaged similar returns to fixed annuities over the same period.

Reporting returns: This isn't commonly known, but mutual funds and annuities don't report returns the same. Mutual funds report past returns AFTER fees. Annuity sales literature normally talks about 'future' projected returns and they can get away with telling you the returns before fees.

Example:  Indexed annuity returns 6%, 0%, 7%, 0%, 6%, 2%, 5%.

Average returns: 3.71%.

Now let's say there is a 1% fee. Make that average returns: 2.71%

An ex-annuity salesman once told me about an annuity that guaranteed 6% payouts for life, and of course many annuity salesmen spun that to mean 6% returns. However, the normal fees were 1.5% and the extra fee to get the guarantee of 6% was 1.5%, so after fees the 6% turned out to be a 3% guaranteed payout.

Things to look out for:  The commissions on indexed annuities are high, which is why brokers sell them. They also have really long surrender periods. Your money could be tied up for 10 years. These products are also very complex and the math is designed to confuse you into believing you can get high returns with no risk. Anytime you see high returns and low risk remind yourself that every investment is an exchange of capital and that both parties want the best terms they can get. If they could get capital at lower rates why are they paying more? Likely because the risk is higher or the returns aren't what they seem.

[Loren Ver]

Wow.  This is why I come here.

For me, I don't do anything that sounds good but I don't understand.  So I run from a lot of "opportunities."

Then I come here and read random threads and come across several people explaining something that is rather complex in a way that is highly understandable and applicable.

Hats off to you.  Thank you!

[coldsteel333]

I went to thank everyone that she’d light on this question. I am new to this forum and I can believe the well thought out responses I revived in just a few day. I honestly didn’t think I’d have one answer much less several in depth ones I learned from. I never did the product because I too thought it to good to be true, you guys totally  verified my gut feeling. I day trade and swing stocks fairly successfully. But my retirement is pourly planned. I just can see shoveling money into a index fund at these levels. I mean a 10 run up would be a major stretch and unless your gonna try to time the top you could find yourself back to square one on that money 2 years from now.