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An Investment for Those Who Do Not Want to Be in the Market

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How to participate in an investment that, by some measures, has produced zero net return over 12 years. Plus, some important historical notes.

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MINYANVILLE ORIGINAL

Editor's Note: Max Isaacman is the author of Blizzard of Money and Winning with ETF Strategies.

Stock market investors are wounded and weary from the last 12-year bear and sideways market.

As judged by the S&P 500 Index (INDEXSP:.INX), over that time the market produced zero net return while being scarily cut in half twice along the way, which is enough to drive investors away for a generation or so. Investors have become ready customers for products and strategies that promise avoidance of losses, rather than good possible returns.

In this negative stock market sentiment time, coupled with low volume, an investor not in the market could be giving up a chance for real profit, especially on a one to two year outlook.

Yet, turning away from the stock market could have the consequence of not participating in a market advance.

Many potential investors are not aware that the market has been rising without them over certain time periods. Franklin Templeton surveys individual investors annually, asking investors what the market had done the previous year. In 2010, 66% of investors said the S&P had fallen in 2009, when it actually had gained 26.5%. In 2011, 48% of investors said the markets were down in 2010, when the S&P had risen more than 15%. And in September 2012, 53% of investors think the S&P declined in 2011, when the index actually rose 2%.

Brokerage firms create investments that their clients want. What clients very much wanted before the market break in 2008 were AAA-rated, government-guaranteed bonds that were backed by various collateral, the most familiar of these being single-family mortgages. This market collapsed when people could not make their mortgage payment. What clients want may not be the best investment.

Alternative Investment #1

If a person can't afford or doesn't want to take the risk of being in the stock market, then she shouldn't be in the market. But with the riskiness of stocks embedded securely in the public mind, there is a stealth danger that investors could assume more risk than they mean to, through investing in something that seems to offer safety. For instance, bonds and dividend-paying stocks could be looked at as being cash or money market substitutes, which they clearly are not.

One safer investment than the stock market, while still a way to participate in the market, is Market Linked Certificates of Deposit (MLCD). These CDs participate in stock market moves, with the feature that if the CD is held to maturity, the government agency FDIC guarantees the return of principal, no matter what the market does. Maturities are usually in the four- to six-year range. Usually there is interest paid for the time the CD is held. Many of these CDs have a "Death Put," meaning that if you die before the CD matures, your heirs can redeem the CD at par. [MLCDs are offered by Chase Bank (NYSE:JPM), Wells Fargo (NYSE:WFC), and many other banks.]
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No positions in stocks mentioned.
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