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November 27, 2021

So there really is no free lunch

Marketsblog112798 by Gordon Powers, Sympatico / MSN Finance

Buried in this Canadian Press item about soaring fund redemptions, there’s a brief mention of the $1.4-billion in “involuntary” sales recently triggered by principal protected notes providers switching into survival mode. 

What this really means is that thousands of investors are only now realizing that there’s no chance of them realizing a profit on the PPNs they bought, even if markets take off like a rocket in the coming years. 

Several vendors, including both Bank of Nova Scotia and Bank of Montreal, have recently triggered "protection events" on various note products. Essentially these are stop loss orders, which are automatically set in motion when losses hit a certain level. 

The basic premise for these PPNs was that you could invest your money in various stocks, funds, or commodities for a set period and be guaranteed of doing no worse than breaking even in the process.

The principal protection was created by investing a large chunk of the money in a strip bond which, when it matured, would cover the full face value of the notes. The balance was in stocks. But, now that the stock portion has dwindled to nothing, there's no longer any chance of ever generating positive returns.

Talk about buying high and selling low.

Even if the markets bounce back in nine months, the only thing left is the underlying bond. Note holders are now out of the money permanently, despite the fact that the notes don’t come due for years. 

The problem with all this is that it overlooks the erosion of their money’s value through inflation.

Simply breaking even several years down the road really means losing money in real-world terms. Just ask anyone who’s been retired for awhile to estimate their purchasing power now rather than when they got started.

Didn’t like PPNs then, don’t like them now.



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...