Bungee

September 26, 2014 | Dian Chaaban


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A client of mine would define himself as quite the adrenaline junkie – I would agree. He’s been sky diving, bungee jumping, dog sledding, shark diving, white water rafting….you name it, he’s likely done it. What strikes me as odd is that with the amount of ‘risk’ he puts his life in, he was far more risk averse than the average person when it came to his investment portfolio.
 
When we first met, he had 80% of his portfolio invested in GICs and a few Canadian banks made up the remainder. We’ve since rebalanced his portfolio to reflect his tailored plan and met today for a review of his portfolio to date – as you may have noticed – the S&P/TSX Composite registered one if its worst weeks of performance since early June – which prompted him to naturally feel a bit nervous. While we were chatting, I brought up the concept of PPNs (Principle Protected Notes) for a portion of his portfolio and related them to his bungee jumping. A PPN, is a structured investment product that consists of two parts:
 
1) The bungee cord – Similar to a GIC, it is an investment that promises to return to you the original amount you invested, usually after a six to ten year period.
 
2) The free fall feeling - The second part of the PPN is the upside potential of the equity market since the PPN’s performance is usually linked to a market index, a fund, or an underlying basket of equities that offers the potential – but not a guarantee – of a profit on your investment
 
In other words, the PPN is a more complicated and sophisticated version of an index linked GIC – or – a way to feel like you’re free falling into the market with a bungee cord that can spring you back to where you started. PPNs and structured notes are an interesting strategy for investors to consider and understand – but they aren’t right for everyone.