Stock market valuations are at all time highs. When the market will experience its next correction – or what the triggering event will be is anybody’s guess – but it is coming. Just look at the S&P 500 over the last 6 years:
For the first 6 months of 2014, the market is up another 6.2%. If the year ended right now, we would have experienced a 6-year run that averaged 16.4% per year – spectacular in historical terms.
So maybe it’s time to take some profits.
Wall Street investing requires us to sell a position to turn a paper profit into a real profit. But that leaves the perplexing question of what to do with cash on the sideline.
If the market continues to go up – you miss the ride. But re-investing means getting into another position that might be ripe for a correction – wiping out the profit you just captured. Re-investing idle cash is a matter of timing and guesswork – as are most decisions in the Wall Street investing game.
“If only there were a way to lock in profits, and redeploy cash into something that would capture any remaining upside market gains, but lock out any downside market risk?”
Well there is – that strategy exists! Its called equity linked indexing with a floor and cap. Here’s how it works.
Money is deposited into a contract with a large financial institution. The terms of the contract grow your money along with the market’s movement, subject to a floor rate and a cap rate. Consider a contract with a 1% floor and a 13% cap (floors and caps vary by contract).
- If the market gains 8% – your money will be credited with 8% growth.
- If the market loses 10% – your money will be credited with 1% growth (the floor rate)
- If the market gains 18% – your money will be credited with 13% growth (the cap rate)
These kinds of money contract accounts can be great in any market, but are particularly appealing when a market appears to be reaching its peak.
But don’t expect your broker or advisor to bring these kinds of contracts to your attention. This is a “set it and forget it” approach, and Wall Streeters rely on ongoing transaction volume to earn their living.
To learn more, ping me back – or the person who re-posted this article.