Whenever you hear your broker or a representative from your financial institution starts to use words like “safety” and “stability” in reference to new investment vehicles, you can bet that we are all about to be in for a wild ride in the market! While investments that minimize risk and come with guarantees are definitely worth taking a look at, keep in mind that you will almost always have to give something up in order to gain something – in life and in the market.This three-part series is going to take a closer look at principal protected notes.  

These notes seem (on the surface anyway) to offer investors a guaranteed return of principal AND the chance to participate in the gains of the market. I always say that anything that appears to be too good to be true probably is, and a closer look at these highly structured investments shows that they are actually far from the no-lose proposition they appear to be on the surface. 

Similar to equity-indexed annuities, with principal protected notes, you agree to invest money in the notes for a pre-specificed amount of time which is usually between two and seven years. The return on the notes is usually directly linked to the return on a certain pre-specified index, so if the index rises from the time you buy the note to the time the note matures, you earn a pre-specified percentage of the return. On the flip side, if the index falls you simply get your initial investment back.