Secret 38THE SECOND SECRET TO PORTFOLIO INSURANCE

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Another way to buy stock and get insurance with it is to buy

a structured product. There are financial instruments that trade

like closed end funds where you are actually buying an index of

stocks (i.e. S&P 500) (i.e. index mutual fund).

These instruments trade like a listed stock and can be

bought and sold during the day. When you buy them, it is like

buying a mutual fund (closed end), but they have a built-in insurance.

They guarantee you a certain price when they mature,

usually in five to six years, but you can trade them up to the day

they mature.

Each of these instruments or structured products has different

terms and a guarantee by one of the big brokerage houses.

These structured products have strike prices like options and will

rise at a similar rate to the underlying stock index. However,

there is a cost for this insurance, usually reflected in a slightly

smaller gain.

In the mid 90’s, I bought shares of one of these instruments.

It was the Stock Index Return Security (SIS), a structured product,

that reflected the Mid Cap 400 Index. I paid $8.75 for each

share and was guaranteed 10 at maturity. I sold my position several

years later for about $32 a share.

Let’s take a look at an example. Merrill Lynch has a structured

product whose symbol is MLF that tracks the S&P 500

Index. Referred to as an S&P 500 “MITTS”, the MLF are senior

unsecured debt securities of Merrill Lynch. It has a strike price

for the S&P 500 Index of 1011, but at expiration on 7-1-05 only

gains in S&P 500 above 1119.49 would be reflected in the MLF

price.

The difference reflects the cost of downside protection. The

market price of the MLF was 9.94 on 4-24-02 when the S&P 500

Index was 1094, but the guaranteed price at expiration is 10 regardless

of what the market does, even if the S&P 500 Index were

to lose 50% or more of its value.

In other words, here is the way, in a sense, to buy a stock

mutual fund without any downside risk due to a fall in the value

of the index.

The MLF is traded on the American Stock Exchange along

with most structured products. Before buying one of these securities, make sure to read the prospectus. For such information

call 1-800-THE AMEX, or check their web site, amex.com.

As good as all this sounds, particularly when your concern is

for insurance, you still have to be alert. Before purchasing shares

in one of these structured instruments, do your homework. Always

do your homework!

Another way to buy stock and get insurance with it is to buy

a structured product. There are financial instruments that trade

like closed end funds where you are actually buying an index of

stocks (i.e. S&P 500) (i.e. index mutual fund).

These instruments trade like a listed stock and can be

bought and sold during the day. When you buy them, it is like

buying a mutual fund (closed end), but they have a built-in insurance.

They guarantee you a certain price when they mature,

usually in five to six years, but you can trade them up to the day

they mature.

Each of these instruments or structured products has different

terms and a guarantee by one of the big brokerage houses.

These structured products have strike prices like options and will

rise at a similar rate to the underlying stock index. However,

there is a cost for this insurance, usually reflected in a slightly

smaller gain.

In the mid 90’s, I bought shares of one of these instruments.

It was the Stock Index Return Security (SIS), a structured product,

that reflected the Mid Cap 400 Index. I paid $8.75 for each

share and was guaranteed 10 at maturity. I sold my position several

years later for about $32 a share.

Let’s take a look at an example. Merrill Lynch has a structured

product whose symbol is MLF that tracks the S&P 500

Index. Referred to as an S&P 500 “MITTS”, the MLF are senior

unsecured debt securities of Merrill Lynch. It has a strike price

for the S&P 500 Index of 1011, but at expiration on 7-1-05 only

gains in S&P 500 above 1119.49 would be reflected in the MLF

price.

The difference reflects the cost of downside protection. The

market price of the MLF was 9.94 on 4-24-02 when the S&P 500

Index was 1094, but the guaranteed price at expiration is 10 regardless

of what the market does, even if the S&P 500 Index were

to lose 50% or more of its value.

In other words, here is the way, in a sense, to buy a stock

mutual fund without any downside risk due to a fall in the value

of the index.

The MLF is traded on the American Stock Exchange along

with most structured products. Before buying one of these securities, make sure to read the prospectus. For such information

call 1-800-THE AMEX, or check their web site, amex.com.

As good as all this sounds, particularly when your concern is

for insurance, you still have to be alert. Before purchasing shares

in one of these structured instruments, do your homework. Always

do your homework!