Stress Free Stock Market Investing

Is it possible to have an investment what goes up when the stock market
goes up and goes up when the stock market goes down?

It is possible and it’s called a market-linked certificate of deposit (CD). Most
people are familiar with fixed rate certificate of deposits. For instance right
now if you buy a 1-year CD you’ll be guaranteed a fixed interest rate of
about 1%. You can think of a market-linked CD as a variable rate CD.
Instead of giving you a fixed interest rate you’ll receive a variable interest
rate based on the performance of the a stock market index like the DOW
Jones Industrial Average.

Let’s look at two scenarios to see how the market-linked CD works during
periods when the stock market went up and when it went down. We’ll
compare a 4-year market-linked CD to the Vanguard S&P 500 Index Fund
and a balanced portfolio made up of 50% stocks and 50% bonds.

You can see that when the stock market is doing very well as it did from
1996-1999 the market-linked CDs lag. Market-linked are capped on the
upside. In this example, the CD was capped at 56%. This means that the
maximum return an investor can obtain is 56% even if the stock market goes
up 155% as it did during this period.

However, during a falling stock market, market-linked CDs do well by
comparison. Over the past 4-years a $1,000 investment into the Vanguard
S&P 500 Fund is now only worth $807 while the market-linked CD held its
value and returned $1,020. Market-linked CD investors didn’t lose any
principal. In fact, these CDs typically pay a minimum return. In this example
the minimum return was ½ percent per year.

Market-linked CDs are for investors who can’t take the stress of investing in
the stock market when it is struggling but who want to enjoy some of the
returns when it goes up. Market-linked CDs, like the fixed rate CDs most
people are familiar with, are FDIC insured.

So there is a way to make money when the stock market goes up and not
lose money when it goes down.