Our Firm
Floyd Miller Investments Strategy
The market may be the absolute best place to invest
over the next few years or the absolute worst. The fact is
we cannot predict what the future will bring.
Risk Management - The Traditional Approach
Stock market risk is conventionally dealt with by retention,
with an attempt to minimize and control it through diversification,
asset allocation and having a long-term time horizon. The
problem associated with this means of risk management for
stocks/mutual funds are well documented and give investors
a false sense of security, especially when overall markets
are unchanged or increasing as they were in the 1990's.
Asset allocation, diversifying investment funds between stocks,
bonds, cash and other areas (such as real estate), helps to
reduce risk but does not protect the investor from dramatic
downturns in the market.
Risk Management - Floyd Miller Investments
Approach
The primary objectives of an intelligent investment strategy
should be to preserve capital and build upon it at a consistent,
moderate rate in both bull and bear markets.
So what do we do about market risk? There are four things
we can do concerning risks:
1) avoid it, 2) attempt to control or minimize it, 3) retain
it 4) or you can transfer it.
Listed below are examples of how a person can respond
Avoiding Risk
If
we are concerned about a plane crash we don't fly.
If
we're concerned about stock market risk we don't invest.
Controlling Risk
If
we are concerned about our health we watch our diet and excercise.
We
try to minimize market risk by asset allocation and diversification.
Retaining Risk
We
decide to take the risk that our $50 lawn ornament will be
stolen.
We
decide to invest all of our 401-k in our employer's stock.
Transferring Risk
We buy a homeowners policy to transfer our risk of loss by
fire to an insurance company.
We
buy a market-linked investment to transfer the risk of loss
in the market to the issuer.
The majority of people who have money to invest put a substantial
portion into the stock market. The minority chooses to deal
with stock market risk by complete avoidance. But there is
an opportunity cost in missing out on the sometimes-exceptional
gains that investing in the market can provide. The answer
to this dilemma is to transfer the risk of seeing in the market
to a third party.
When you transfer the risk of loss of your house to a third
party you pay a premium, even though you hope you never have
to submit a claim. When you transfer the risk of market ups
and downs to a third party you continue to hope that the market
goes up in the long run even though you may not receive 100%
of the increase. The fact that you may not get a return as
high as the overall market is the "premium" you pay for the
guarantee on the principal of your investment.
Tools of Risk Management
There are a variety of tools that can be utilized to
intelligently design an investment strategy that creates protection
from the usual risk inherent in investing in the market, while
allowing for potential growth that is tied to market performance.
The primary tools utilized by Floyd Miller Investments are
Equity Index Linked Investments. These allow investors to
benefit from the potential growth of the stock market while
limiting risk to their underlying principal.
Each person who has saved and accumulated wealth and invested
has had to choose between these two options:
1. Give up a degree of safety in return for greater opportunity
for growth, or;
2. Sacrifice growth opportunity in return for a higher degree
of safety.
Equity Index Investments provide a third option to consider,
one that offers the power of money in the market with the
comfort of money in the bank.
Equity Index Linked Notes
Issuers of principal-protected equity linked notes such as
Merrill Lynch and Salomon Smith Barney promise to return at
least the original investment, regardless of market performance,
at maturity. Unlike bonds, however, principal-protected equity
linked notes generally pay little or no periodic interest.
Instead, at maturity, the issuer of the note repays the original
principal of the note plus an amount based on the appreciation
of the underlying stock index (such as the S&P 500). Terms
of the notes vary widely and they are based on a variety of
indexes including sector and foreign indexes. Equity Index
Linked Notes are subject to the creditworthiness of the issuer.
Market Index Linked Certificates Of Deposit
Unlike traditional CD's that pay a fixed rate of interest,
the market rate CD is linked to the performance of a participating
stock market index. If the market goes up, the investment
does too. Yet, regardless of what the market does, the
investor will get back the original principal amount at maturity.
In addition, the principal is FDIC insured up to $100,000
per depositor per depository institution. Any gain in
the Market Index CD is the obligation of the issuing bank
and is not insured by the FDIC.
Historically, these CD's have been issued for a term of 5
to 10 years. However, the issuing bank usually provides
for quarterly redemptions after the first year. The
Market Index CD is designed to be a "buy and hold" investment
and is therefore subject to the risk of possible loss of principal
if redeemed prior to maturity.
An investor in a market index CD can participate in the upside
associated with an increase in the market with a FDIC insured
guarantee of principal.
Tax consequences. The investments are
subject to rules that require the payment of taxes prior to
maturity and are best suited for tax-deferred IRA accounts.
No current Income. Instead of periodic
coupon or dividend payments, you will receive your principal
back at maturity plus a percentage of any stock market appreciation.
Investors do not receive dividends relating to the underlying
index.
Fluctuation in market price. As the principal
is protected only if the investment is held to maturity, the
market price of the investments will fluctuate. As market
prices are influenced by supply and demand, and a variety
of other factors, the secondary market price of the investments
may not always correspond to the price movement of the index.
Other factors. Although the insurers of
equity linked notes generally have strong credit ratings,
they are still subject to credit risk. Should the index
show a negative price return at maturity, the investor may
receive only the principal amount of the investment regardless
of whether or not the index was higher at some time prior
to maturity. Equity-index products may include conditions
that reduce or limit the return including call features, participation
rates, caps and averaging provisions. Some investments
may involve a penalty for early withdrawal. Read the
offering document for details.
Equity Linked Index Annuities
These tax-deferred contracts are written and guaranteed by
insurance companies. There are many different terms
and variations available and some offer the flexibility of
allocating among several major indexes. The more attractive
contracts offer annual compounding, no ceiling on the amount
of gains as well as an annual reset provision. The reset
provision allows the index credit to be added and "locked
in" on each anniversary. It can never be taken away,
regardless of future index performance. Annuities are
designed for longer-term needs such as retirement. Most
will allow for additional deposits of as little as $100.
Equity Linked Index Annuities are not FDIC insured and have
no bank guarantee. They are subject to the creditworthiness
of the issuing insurance company.
Equity Linked Life Insurance
These contracts provide an appealing
alternative to traditional life insurance policies that accumulate
cash value. The more attractive policies offer a minimum
guaranteed annual rate (such as 3%) as well as offering the
potential to earn a percentage of the performance of a major
stock market index such as S&P 500. Most policies
provide an annual reset feature. Cash value life insurance
is purchased for long-term goals including retirement and
estate creation.
Conclusion
Floyd Miller Investments strategy focused on preserving capital
and building on it at a consistent, moderate rate in both
bull and bear markets. To achieve this objective, we
primarily use market-linked investments. These investments
are particularly suited for investors who have an investment
objective of principal protection with long-term growth potential.
They are not suited for investors who have the objectives
of current income, need for liquidity, or who have an aggressive/speculative
risk profile.
Floyd Miller
Investments - your source for principal protected investments
As with all investments, these products
involve certain risks and may not be suitable for every investor.
See a prospectus for a description of each offering, including
risk factors. Floyd Miller Investments does not give legal
or tax advice. Please speak to your legal or tax professional
for such guidance. This document is neither an offer nor the
solicitation of an offer to purchase any security.
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