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In an attempt
to shed light on a Biblical passage, Woody Allen once said, The ever-inventive securities industry offers a helping hand in the form of a put on the S&P 500 Index. You can purchase this "insurance policy" for an amount equal to approximately 3% of your annual returns. If the market stays exactly even for the next two years, you will have lost 3% per year. If the market rises by 10%, you will have a net 7% gain. But, if the market loses 20%, you will have had a net loss of only 3%, the one-year cost of the "policy." If you are worried
about the market declining further, the great advantage of This huge potential tax hit partially explains why many people who would have moved to more conservative positions during the market bubble of the late 1990s postponed doing anything - to their regret. That raises another question: Why do people hesitate to change their investment mix or to sell big winners within a retirement plan, where there is no tax hurdle? Psychological factors are at work here. "Status quo bias" is a powerful emotion that actually serves people well during normal times. However, these are not normal times, and someone approaching retirement may want to keep his or her stocks and mutual funds while casting an anchor until this uncertainty blows over. Stock market history provides a perspective. After the crash of 1929 and 1930, the market rose significantly in 1931, only to retreat in a long downward spiral over the following seven years. More recently, we had a market that went essentially nowhere for seventeen years (from 1965 until 1982). For any number of reasons, then, some of us may be willing to pay what amounts to an insurance premium to protect our retirement money. That brings us back to the concept of a put. A put is a right to sell something in the future at a higher price than you can buy it for at that future time. Therefore, if something goes down in value, you have the right to buy it at the low price and sell it for the higher price that someone contracted with you to pay. (The opposite of a put is known as a call. A call is the right to buy something in the future at a lower price than its current market value). The concept of a put is not new. Phoenician traders invented it over 2,000 years ago. What is new is that you can buy a put on the value of the S&P 500 index. The purchase of puts is called "hedging." Sophisticated trading firms, known as hedge funds, employ this strategy to protect their wealthy clients from market declines. By buying a put on the S&P 500, you are harnessing the same technique for your portfolio that these hedge funds apply to billions of dollars. Why is the S&P 500 index such a critical benchmark? For openers, it is the world's most popular single investment. Almost all major mutual fund and brokerage houses offer versions of this investment, which mirrors the performance of the 500 largest public companies in the U.S. The value of these companies makes up 70% of the entire U.S. stock market. The other 6,000 public companies are only 30% of the market. Studies show
that 70% of any single stock's long term performance, on the average,
is a function of what the market as a whole is doing. It's the
"rising tide phenomenon." This explains why most mutual
funds, over time, generate results that are reasonably close to
The
Parent company intends to make additional capital contributions, as necessary,
to fund operating losses and to ensure the Company has sufficient operating
resources to continue its operations. Securities
owned are recorded on a trade date basis and are valued at market. Depreciation
of furniture and equipment is provided on the straight line basis generally
over 5 years and leasehold improvements are amortized over the shorter
of 5 years or the life of the lease. Purchases
and sales of securities are recorded on a trade date basis. All securities
transactions are cleared through the Parent. The
Company considers its investment in money market funds to be cash equivalents.
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