Last week I shared an article on the Perils of Owning Individual Stocks. Interestingly enough, this week I ran across an article titled An Innovative Approach To Mitigating Single-Stock Risk.
This article was written by Sean Allocca for Financial Planning Magazine. In the article, Sean discusses a new product called a Stock Protection Fund (SPF), which is designed to help high net worth individuals who have a high concentration in corporate stock. Read on to learn why you should steer clear of these products.
The SPF is basically designed to protect the high net worth investor in the event that their corporate stock declines. In other words, a Stock Protection Fund is a “so-called” asset protection tool.
The way that it works is that an investor would pay into an SPF that would mostly be invested in relatively short term U.S. Treasury Bonds. In fact, it is designed to take money from about 20 different investors. If any of the 20 investor’s stock declines after five years, then the SPF is designed to make them whole.
If (I mean “When”) we go through another significant recession, it is very likely that virtually every stock will decline in value, much the way it did during the 2008 mortgage crisis. And the idea that a Stock Protection Fund will protect all the investors is ludicrous. It’s virtually the same as FDIC protection. If a large number of banks fail, then there is not enough FDIC insurance to protect everyone.
Do not fall for these newly fangled products from Wall Street. Has no one learned their lessons from 2008 when all these derivative mortgage products were created. The only ones making money from fancy Wall Street products is Wall Street and the advisors selling them. Stay away!!!
What do you think of Stock Protection Funds? Have you ever been pitched a product designed to “protect” your investments? How have you protected a concentrated stock position that you cannot sell? Please feel free to share any comments, questions, or experiences you have below.
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