Are derivatives a tool to improve your investments?

Want to safeguard your investments?? Stocks can be great, but what if you could limit downside risk, even if it means some potential gains are capped?? The good news is, there's a way.

Derivatives can be a powerful tool for navigating market challenges.? While they can be more complex than stocks or bonds, with risks like liquidity and counterparty issues, using them strategically can significantly benefit your portfolio.? The key? Working with a qualified advisor to minimize those risks.? Derivatives can be a valuable weapon in your investment arsenal, but let's explore when they might be the right fit for you.

The time is ripe for derivatives. These financial contracts, linked to things like stocks, bonds, and even weather forecasts, are becoming increasingly relevant for several reasons:

• Rising interest rates: Interest rates heavily influence derivative pricing, and higher rates can create exciting opportunities. For instance, structured notes, a type of derivative, thrive in high-interest environments. While rates are currently elevated, this might not last forever – that's why now seems like a good time to consider them.
• Strong economy, uncertain world: Our 2024 Mid-Year Outlook highlights a strong economic forecast, but geopolitical tensions worry investors and might make them hesitant to invest. We believe staying invested is crucial, and derivatives can help hedge against these uncertainties, allowing for a longer-term investment view.
• Greater accessibility: In the past, only the savviest investors could access derivatives. Today, when we see particularly promising opportunities, these instruments are becoming more readily available for individual investors, often in custom-tailored forms.
• Tailored solutions: No matter your goals, whether it's protecting your assets, generating income, or something else entirely, derivatives can be personalized to help you achieve them.

Demystifying Derivatives: Power Tools for Your Portfolio

Ever heard of derivatives but weren't sure what they do? These financial contracts can be like tools in your investment toolbox, helping you achieve various goals. Let's break it down:

• Think of them as agreements: Derivatives are contracts between two parties, typically bought on exchanges or negotiated privately. They can be based on various things, like stocks, bonds, or even the weather!
• Flexibility is key: These contracts come in many forms, each with its own purpose. Some common types include:

Forward and futures contracts: These lock in a price for buying or selling something in the future.

Options contracts: These give you the right (but not the obligation) to buy or sell something at a certain price by a certain time.

Structured products: These combine a bond with a customized derivative strategy.

Swaps: These involve exchanging cash flows based on the performance of different assets.

• What can derivatives do for you? Here are some ways they can be used:

Protect your investments: Derivatives can act like a shield, helping you minimize potential losses in your stock portfolio.

Boost your returns: While there's always risk involved, some derivatives can be used to create a more attractive risk-reward profile for your investments. Imagine limiting your potential gains in exchange for a guaranteed minimum return.

Generate income: Derivatives can unlock income streams from various assets, potentially offering a more attractive option than traditional fixed-income investments.

Remember, there's always risk: Derivatives are powerful tools, but they're not without risks. It's crucial to understand the specific terms of any derivative before investing.

Let's see how derivatives can work in action.

The scenario: Tom, an avid skier, wants to buy a vacation home in Switzerland. He believes the tech sector will outperform the market in the short term, but he doesn't have the cash to buy stocks outright due to his upcoming house purchase. He also doesn't want to disrupt his diversified portfolio by selling existing holdings.

The solution: Tom's investment team helped him choose a call option on a promising tech stock poised to benefit from a new AI product launch. Call options give him the right, but not the obligation, to buy the stock at a certain price by a certain time. This way, Tom limited his upfront investment (the option's premium) and capped his potential loss.

The outcome: The tech stock's price increased after the product launch, generating a positive return on Tom's call option. He then exercised his option to buy the stock at a discount.

In short, using call options allowed Tom to:

• Gain leveraged exposure to the tech sector without a large upfront investment
• Maintain his portfolio diversification
• Limit his downside risk

This is just one example of how derivatives can be used to achieve specific investment goals. It's important to remember that derivatives are complex financial instruments and should only be used by investors who understand the risks involved.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.