Is there a way to invest without losing your shirt (and pants)? Now in early fall this year, although you would not know it by the summer weather here, small investors are still feeling tentative about not piling back into the market. Who can really blame them when market values are swinging back and forth like yo-yos?“I feel like I have no control at all”, one investor said recently. “It is as if some invisible hand is pulling strings behind the scenes that us outsiders (not connected to serious investment managers) just don’t know about.“And the activity is not to my advantage since I don’t think I would be comfortable playing the shorting strategy end of the money side, hoping to cash in when stock values tank. Nor do I feel that the old strategy of buy and hold is working. I just don’t know what to do. My money has been sitting earning nothing for years, it seems!”Appetite for risk is downWhat investors are really saying is that they would like to invest, but they don’t want to lose. Not an easy request to honour, since the words invest and don’t want to lose are diametrically opposed to one another. For those that feel that they must deliberately avoid risk altogether, it still means losing at least some of the value of your capital due to the insidious effects of inflation (higher in Bermuda than the US). Inflation aside, some investors had decided that anything saved from now on must be protected. In other words, they know what their real risk tolerance is, not what they thought it was. Clients getting close to lifestyle changes, such as retirement or relocation, have become permanently conservative, and that is probably a good thing.This is the way investor thinking will be until we have another huge bull run in the markets, and then watch those thoughts change!When your friends and neighbours are boasting of getting 50% returns, it will be tempting to follow the leaders of the band. How many remember the dramatic scale of valuations during the tech stock boom? Many did not realise back then that those numbers were simply not sustainable, but for a while it was like striking gold.The Investment Company Institute’s www.ici.org data from the end of August 2011 reported that money was flowing back into mutual funds, the top inflow choice being hybrid mutual funds (generally, a combination of equities and bonds in varying allocation percentages).There are those, though, who would still like to have cake and eat it, too; that is, take a little risk, but have some type of an assurance that one’s capital will be there when needed, if such a thing is possible.Always Innovative, the investment industry has something for everyone.Because of this investor uncertainty, structured notes were developed to offer the investor a chance to gain by assuming some risk that the market values will rise, while more than relatively protected that they will not lose their original investment, if market values go down.Structured notesThis is a very different concept than buying mutual funds, or taking most individual stock or bond positions where it is has to be clearly understood that the entire amount invested is at risk.Investors over the last three and a half years since the last investment downturn in 2008, do remember clearly the old caveat, “past performance does not guarantee future results.”Structured notes have found favour worldwide with segments of the investing public who will always remain risk-averse due to market fluctuations and economic uncertainties.There are many variations on their structure, i.e. some products are linked to increases in stock or bond indexes, capital growth funds, some structured around convertible bonds, commodities, certificates of deposit, Treasuries, high grade corporate bonds, and currencies.How Do They work? Investment professionals understand only too well the emotional factors that affect investor decisions. Constantly alert to changes in investor moods more recently reflected in net redemptions (or simply lack of participation in) of investments, innovative new products were launched to meet the new conservatism.So the reasoning went, why not combine the higher safety of a certificate of deposit (CD), or a high grade corporate with a fixed time frame but link it in some way to equity (or other indexes) that may fluctuate short-term, but tend to appreciate over the long term, or to indexes that are not correlated to either stocks or bonds, such as futures contract indexes on real physical commodities, energy, oil, gold, silver, wheat, sugar, coffee, soybean products, etc.Why not hedge the CD in your domestic currency by linking to the changes in a basket of foreign currencies. If your currency holds steady, you haven’t lost anything; if it depreciates, you pick up the gains on the foreign currency appreciation.Too good to be true?Combining the elements of safety and protection with exposure and linkage to major capital markets, forward thinking investment industry specialists have managed to provide the critical elements to buffer both major investor emotions the desire to see assets appreciate faster than inflation, and the mitigation of the fear that they will lose their entire asset base.Sounds almost too good to be true, but there is a catch (yes, there is always a catch). Should the investment climate turn out to be poor, or indifferent, the investor will merely receive his capital back.On the other hand, should financial markets boom, then the investor will participate in a percentage of the gain, the complete amount of which is generally not known until the Fund close date.These investments are not foolproof, and may be reliant on the financial strength of the issuer financial institution. And there are fees attached, but what did you expect, something for nothing?When Should you use them? Many retail investors will seek refuge in structured notes, sometimes referred to as principal protected funds, particularly in times of economic uncertainty where financial markets are even less predicable than usual. Structured Notes should be used for long-term goals because of the time frame and lock up period involved.Next article- we pick apart a couple of these notes in understandable laymen’s terms.The Investment Company Institute (www.ici.org) is the national association of US investment companies, including mutual funds, closed end funds, exchange traded funds and unit investment trusts.Members of the ICI manage total assets of $12.9 trillion dollars and serve more than 90 million shareholders.ICI is the primary source for statistical data and research on investors and retirement plans, both on a domestic and international basis. This is an excellent website for review of investment patterns and demographics.Martha Myron, JP CPA CFP (US) TEP, is an international Certified Financial Planner™ practitioner in private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with US and multinational connections, and US citizens living and working abroad.She is a Masters in Law candidate in International Tax and Financial Planning and the American Citizens Abroad Country Contact for Bermuda. For more information, contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners.