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...most obvious risk to Citi is that, five years from now, the S&P will be lower than it is today, and Citi will have to make up the difference. But because the market's natural bias is up, what with growth and inflation, it rarely falls over any five-year stretch...
...only been in this business 25 years," confessed the president of a large brokerage firm, "but I can't for the life of me figure out how Citi can be offering people double...
First, it turns out, you get none of the dividends the S&P 500 stocks pay over those five years; Citi keeps them. From 1961 to 1992, the S&P 500 has grown at 10.2% a year -- but only 6% a year if you exclude dividends. Second, Citi doesn't double the five-year gain in the S&P, if there is one. It looks at the average of the S&P over those five years, compares that average with the S&P when you started, and doubles that gain. Well, if a tree grows to be 5 ft. tall...
...worse than that, because while trees only grow, the stock market sometimes shrinks. (Many of you are too young to believe this, but it's true.) What makes this deal work so well for Citi is that the downs reduce the average of the ups. Say the S&P, which is today near its all-time high, drops 25% over the next year, then just bounces around aimlessly until the fifth year, when it explodes, gaining back that 25% loss plus an additional, mouth- watering 50%. (These things happen too.) Had someone just bought the S&P 500 and held...
Avalon--(formerly CITI). Call 931-2000. On Saturday at 7 p.m.: Hoodoo Gurus. 19 and over. Tickets are $15.50 in advance and $16.50 at the door. On Wednesday at 8 p.m.: L.A. Guns. 19 and over. Tickets are $15.50 in advance and $17.50 at the door...