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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75805  
Subject: Re: May want to re-think traditional allocations Date: 9/27/2012 2:45 PM
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Well, I muted my speakers and revisited that site with fingers poised to pause the video as soon as it started playing. Purused their information and examples.

Malarkey.

This would only make sense to someone who knew very little about investing or the markets, to whom every concept is new. And who believes that there is such a thing as "a short-term, high quality bond fund that is yielding 5%/year." These people would be known as "gullible marks" -- because there is no such fund.

They are taking a well-known concept and dressing it up to make it sound exotic, plus misleading (read: lying) about the expenses.

This is just the standard DIY guaranteed indexed annuity. Put enough money into a safe fixed-income vehicle to grow (note: "grow" not "blossom") to even in 1 year, and buy a 1-year call option on the index.

Misleads ("lies"):
1) The claimed 5% on the fixed-income is not available. There is no such thing right now. 1.5% to 2.5% is all that you can get.
2) The equity fund expenses. The expense fees of the fund are baked into the price. Not only into the price of the fund, but also the price of the call option. It is not a separate fee (and therefore there is no "you must sell 6 shares to pay the expenses"), and there is no way to avoid it. None.
3) Therefore, the total expenses are the fund's 1.25% fee PLUS the 1% IOP fee, for a total E/R of 2.25%.
4) The E/R of the fund. Does anybody pay 1.25% anymore? The average E/R for Large Blend etf's is 0.33%. SPY is 0.09%, Fidelity Magellan is 0.60%
5) Are there even listed options for mutual funds? I don't see any on a quick look. Options on ETFs, options on indexes, yes. But I didn't see any options on mutual funds. Or are they eliding the difference between a mutual fund and an ETF?

What you can do on your own right now, with $100,000:
1) Buy CSJ (1-3 year credit bond ETF) yielding 1.70%. $98,328 will grow to $100K in 1 year.
2) With the remaining $1672 buy a one year at-the-money call option on an equity ETF.
2a) EFA is 53.72. The Sep'13 54.00 call is 4.20. So buy 398 options. (Which you can't-- the contract size is 100 shares.)
The break-even price for EFA is 57.92, or 7.8% above the current price. If it closes below 57.92 the call expires worthless, and all you have is the $100,000 from CSJ.
But IOP would charge you 1% fee, or $1,000. Which happens to be almost half of the gain you got from CSJ. So instead of breaking even you'd have a net loss of 1%.
2b) SPY is 143.85. The Sep'13 144.00 call is 9.71. So buy 172 options.
The break-even price for SPY is 153.56, or 6.8% above the current price.

Nothing magic, nothing hard to do, anybody can buy these issues, no pixie dust.

6, of misleads) You don't capture the first 8%-9% of the equity's gain. 1% fee + 6.8% or 7.8% of the gain.
You only get the gains that are in excess of that. That's pretty darned expensive to get to break-even.
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