A Good Idea To Pursue Growth While Limiting Risk

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BERLIN – Many people understand that growth investments such as stocks have provided a good opportunity to increase wealth over the long run. And yet, the potential downside risk keeps many people from investing in stocks, even when this aversion could stand in the way of achieving important financial goals, like saving for college, planning for retirement, or meeting future health needs.

Recently, however, ways of investing have emerged that allow the pursuit of growth with less risk. These investments offer participation in the appreciation potential of stocks and other growth opportunities with protection of principal — a welcome combination.

Investments that offer the opportunity for growth but protect your principal have features of both stocks and bonds. These assets typically offer you an opportunity to participate in the growth of a particular market index, like the S&P 500 or Dow Jones Industrial Average. You may, for example, be offered the right to receive a certain percentage of the price appreciation of a market measure — often as much as 100 percent or more but not always — in a given period of time.

At the same time, these specially designed assets promise to repay all, or substantially all, of their principal at maturity, even in the event of dramatic market price declines. They may be structured as debt obligations or bank deposits. They are typically offered with a final maturity date of between one and five years or occasionally longer.

Initial offering prices start as low as $10 per unit, which gives you an affordable means of purchasing an investment that may be viewed as more diversified than individual securities. As a hypothetical example, you might purchase such an investment for $10 a unit and be entitled to receive that principal amount, plus a payment equal to 100 percent or more of the price appreciation (excluding dividends) in the ABC Composite Stock Price Index between the security’s offering date and maturity.

You may enhance the investment performance of your total portfolio by adding high-quality growth investments to balance a portfolio otherwise overweighted with fixed income investments like low-earning bank accounts, certificates of deposit and money market investments. Such a strategy can also offer a sound choice when it comes to investing in specific markets or sectors around the globe. In addition, principal protection can help you stay with a well-planned investment strategy and remain invested even during turbulent times, instead of selling on price declines and failing to benefit from the long- term growth potential of stocks.

Keep in mind that growth investing with principal protection carries its own set of terms. To begin with, this kind of investing is not designed for investors seeking current income. You do not directly own stocks and typically do not participate in the dividends paid by any stocks that may be included with the market index. In a sense, the dividends or interest you give up may be viewed as the cost of the protection associated with these investments.

When it comes to new or little understood investments, it’s particularly important to get all the information you need to make an informed decision about investing. If you want to invest in ways that assure protection of your principal, but at the same time offer the opportunity for growth, talk with your financial consultant.

(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)

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