Welcome to the Business Journal Archives
Search for articles below, or continue to the all new BusinessJournalDaily.com now.
Search
ICDs Offer Protection Against Market Downturn
Many investors in individual, trust and qualified accounts (IRAs, Roth IRAs, 401k, 403b, Educational Savings Accounts, etc.), would like to share in the return potential of a rising stock market without having their hard-earned dollars exposed to risk of a market downturn. There is a way that you can achieve both through a unique deposit investment: Dow Jones Indexed Certificates of Deposit (ICDs). The recent stock market adjustment and economic recession have caused many Americans to watch one-third to one-half of their investments evaporate. Many investors are understandably reluctant to return to the equity market, fearing that additional losses would force them to either postpone retirement or seriously downgrade their lifetime dreams. To make matters worse, interest rates are at a record low, causing bonds and fixed rate certificates of deposits to offer returns that barely keep up with inflation. Now investors can obtain "peace of mind" by investing in ICDs, available at many local banks. ICDs are very similar to traditional fixed-rate CDs, except the ICD pays interest at maturity according to the growth of a stock market index, the Dow Jones Industrial Average. The appreciation is subject to a participation rate (percent of index performance received) which varies from issue to issue depending on prevailing market conditions. The ICD's principal is guaranteed by the issuing bank, if held to maturity and FDIC insured up to $100,000 per account.Most banks have a low minimum ICD investment amount of $1,000. ICDs offer growth potential similar to an Index Mutual Fund with safety similar to a fixed rate Certificate of Deposit. The historical average returns on the Dow Jones Index CDs have been 7% to 8.5% APY since 1950, which is very competitive when you consider the "peace of mind" provided by such an investment. Who Should Consider ICDs? ICDs are a logical choice for "buy and hold" investors wanting to participate in the potential appreciation and diversification of a market index, such as the Dow Jones Industrial Average. ICD investors are those who want the competitive returns available in the stock market but who are unwilling to tolerate the losses experienced with other investments. When held to maturity, ICDs provide un-capped interest potential without having downside principal loss. ICDs are an attractive investment option for people saving for retirement who are in need of an investment that offers a potential high rate of return that keeps up with inflation to support normal living expense increases. Unfortunately, most other investments which generate high rates of return also carry higher risk. Investors, especially those between the ages of 40 and 70, cannot afford the risk of losing their principal for retirement. The principal is protected by the local bank, if held to maturity. Another advantage is that ICDs are insured by the Federal Deposit Insurance Corporation up to a maximum of $100,000 per depositor, subject to the limitations imposed by law. The ICD is linked to the Dow Jones Industrial Average, which comprises 30 "blue-chip" stocks that represent approximately 28% of the market value of all U.S. stocks. Investment Advantages of Indexed CDs:Un-Capped Upside Return Potential Tied to a Stock Market Index Principal Protection from the Issuing Bank, if held to maturity FDIC Insured (up to $100,000 per account) Diversification over a broad segment of the U.S. economy $1,000 minimum investment amount Investors pay no sales fees or commissions Attractive investment for tax-deferred retirement accounts To learn more, ask your personal banker or 401(k) plan sponsor how you can establish an account or use an existing account to invest in ICDs. If your personal banker or plan sponsor does not currently offer ICDs and you would like to receive more information, visit www.bankersindexcd.com. This article is new this week in The Business Journal's small business how-to section. To see what else is new, click here or click on the "how-to" tab at the top of The Daily Business Journal Online home page."