A Principal Protected Free Lunch?

As I write this, the S&P 500 is threatening to touch 1000 again. That would represent a gain of 47.8% since it’s low on March 9th, essentially delivering a good five years of appreciation in five months. That’s probably inspiring feelings of enthusiasm for investing in the stock market in many of you.

On the other hand, the last time the S&P touched 1000 was on Election Day, November 4, 2008, meaning the market has merely broken even over the past nine months. And it’s down 20% since this time last year. So maybe not so enthusiastic.

Oh what to do? You don’t want to miss out on the big gains if the market continues to recover, but you are really scared of the possibility that it won’t recover and will go down again.

Enter the miracle of principal protected notes, otherwise known as market indexed CDs. These allow you to have it both ways, more or less. You can’t lose money and you get at least some of the potential upside from the stock market. A typical proposition might be that you deposit $1000 today and in five years you will get half the gain in the S&P over the next five years or, should the market not go up, your $1000 back. Sounds like a free lunch, doesn’t it?

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