Seeking a safe haven for investments

"What you get in exchange for that cap is a buffer on the downside, say 15 percent. So if the S&P 500 drops 15 percent, you're even. If it drops 20 percent, you're down only 5 percent. You give the upside away to protect the downside."

Many funds exclude dividends like that. But historically dividends have accounted for a substantial portion of return on stocks. Also, returns on these funds are taxed as ordinary income rather than capital gains or tax-advantaged dividends. "That can be a significant bite," Evensky says.

The issuers generally use derivatives to guarantee your returns and reduce their own risks. Much of the hefty fees go to fund those derivative positions. Derivative expenses can top 2 percent of fund assets, and those expenses, of course, are subtracted from fund values.

"If anyone is going to guarantee you something, it's going to cost," Evensky says. "The better the deal, the more suspicious you should be."

The principal-protected notes often work better for issuers than buyers, says Patti Houlihan, a financial adviser for Houlihan Financial Resource Group in Reston, Va. "These kinds of things are a way for the underwriters to bring money in and hopefully share some of it with you," she says.

"They have use of your money for whatever the period of the note is, and you have nothing but a structured product. There is nothing structured by any financial institution that doesn't give them the most opportunity for return and you the most opportunity for risk."

Issuer risk

Perhaps the biggest risk is that you're betting on the financial health of the institution issuing the notes.

"When I had principal-protected notes explained to me, the people representing the companies structuring them told me it's like buying zero-coupon Treasury bonds at 80 cents on the dollar and then putting the other 20 cents into puts and calls [options]," Houlihan says.

"That sounds good, but the rest of the story is that it's not U.S. Treasuries behind it. You're giving them your dollar, and they are the guarantor. If it was Lehman Brothers, (which was liquidated last fall), I wouldn't want them guaranteeing anything."

Indeed, "many people got badly burned when they had structured products with Lehman," Sheldon says. "When Barclays bank took over part of Lehman, I don't believe they honored the agreements. That put holders in a bad position."


And you don't know which company may become the next Lehman. "We do structured notes with JPMorgan Chase," Evensky says. "Two years ago, who would have thought there was any risk with them? Today we put a limited amount with JPMorgan."

Variable annuities

As for variable annuities, they are a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you. The value of your investment -- and the payouts -- will vary depending on the performance of the investment options you choose.

The investment options for a variable annuity typically include mutual funds that invest in stocks, bonds, money market instruments or some combination of the three.

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