When I first delved into structured products in 2012, there was skepticism, mainly because they were somewhat implicated in the financial crisis due to their complexity and investors’ lack of understanding. This situation was similar to that of some homeowners with adjustable-rate mortgages who didn’t fully grasp their loan terms. Critics argued that I could create similar investments myself using options for less cost.
Despite the pushback, I’ve always been open to exploring different investment types. Structured products appealed to me because they offered downside protection and the potential for upside gains.
What is a Structured Product?
A structured product, or market-linked investment, is a pre-packaged strategy that can be based on a variety of underlying assets like a single security, a basket of securities, options, indices, commodities, debt, or foreign currencies.
My Experience with Structured Products
When I left my job after 11 years, I took my severance and invested it in the S&P 500 and Dow Jones, despite the risk. It felt like I was gambling with house money, especially since my severance was briefly withheld due to a paperwork review.
To mitigate the risk of market volatility, I turned to structured products. Investing in these helped me comfortably invest a significant amount of money into the market, starting in 2012, without the fear of losing it all.
Performance of My Structured Notes
I’ve been monitoring the performance of my structured notes closely. Here’s how some of them have fared:
1. DJIA-linked Note: This note provided 100% principal protection at its expiration in 2018. If the DJIA had fallen by 40% from its 2012 level by 2018, I would have gotten my entire principal back. Luckily, it didn’t, and although the return was less than if I had invested directly in the DJIA, the protection provided peace of mind.
2. S&P 500-linked Note: This note promised a 20% return if the S&P 500’s drop was less than 30% at maturity in 2018. It performed in line with the index because the S&P 500 was up by the time of maturity.
3. Euro Stoxx 50-linked Note: This note was a bit of a gamble on the European market catching up with the U.S. market. It promised a 38% return if the index was up even by a small margin at maturity in 2018, providing substantial protection and an excellent return compared to the actual market performance.
Key Takeaways
Investing in structured products has taught me several lessons about managing risk and rewards. These investments are not well understood by many, which can lead to skepticism. They do come with higher fees compared to standard index ETFs, but for someone looking for specific risk management features, they can be valuable.
Before investing in structured products, consider your risk tolerance, the investment’s time horizon, and what you’re giving up in exchange for protection (like potential dividends). Also, understand the terms laid out in the prospectus and the financial stability of the issuing institution.
Conclusion
Overall, my structured products have worked as intended, providing market exposure with built-in downside protection. While I might have sacrificed some potential gains, the protection these products offered was worth it, especially considering my financial goals and risk tolerance.
Structured products can be a practical part of a diversified investment strategy, especially when approaching them with a clear understanding of their mechanics and risks.
