A Safety Solution in Certain Annuities
Written By: Jeff Peterson | Posted: Tuesday, July 6th, 2010
This week I am going to tell you about a basic strategy to be involved in the market without risking any of your principle. I must say that "safety" for your digits is not safety of your purchasing power...there is literally no way to know how much your money will by in the future based on current information. THAT BEING SAID THERE IS A SIMPLE WAY TO INSURE THAT THE NUMBER OF DOLLARS YOU HAVE WILL ONLY GO UP AND NOT GO DOWN. The strategy involves the use of options. Imagine desiring to buy a house that is near to a piece of property that is being considered by the city planners as a location for a beautiful new park or a new dump. If the park is built the value of the house will go up 20%. If the dump goes in the value will go down 40%. One strategy is to buy an option from the current owner for 3% the value of the house and if the park goes in, exercise the option and buy the house. If the dump is built you would allow the option to expire, and you would not loose the 40% decline in value.
This is exactly what is done in certain annuity contracts. The insurance company buys options on the movement of an index of stocks e.g. the S&P 500. If the market goes up the option is exercised. If the market goes down it is not. The money to purchase the option is gotten from the companies long-term bond portfolio and results in the contract holder not having to come out of pocket any additional money to buy the options directly. This strategy has out-performed strait market positions many different times in the last 25 years since they were first introduced in early 90's.
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