Author Topic: Structured Products & Equity Linked CDs  (Read 1010 times)


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Structured Products & Equity Linked CDs
« on: May 02, 2016, 10:08:59 AM »
Just wanted to put this piece of information out there for anyone who might be considering using these or who might be getting solicited by a financial salesman.

These products come in many shapes and sizes, but some popular ones are the type that guarantee no potential loss and participation if the market goes up.  A good financial salesman can make these products sound like the perfect solution.

While prudent in some situations, please don't get suckered into buying one of these if you intend for that money to be invested for longer than a year or two.  This is an absolute no-no for retirement money, emergency savings, etc. 

While the no possible loss is nice, the reality is that a 0% rate of return is still below the rate of inflation, so it's a negative rate of return.  This is imprudent over long investment horizons.

As for the upside in the market, you only participate in some of the upside, not all of it.  Your financial salesman might think you do, but ask him about the 'participation rate'.  You don't.

Finally, and here is the key, these products do not incorporate dividends into your total rate of return.  Since dividends will likely make up 40% of your total returns, this is significant.  In a year like 2015, when the market was flat, dividends pushed total returns into positive territory.  Had you held a structured product, you would have gotten 0%, which is more like a -2% real rate of return.

These products are fine if you have an extremely short time horizon, like your son/daughter has to go to college in two years and you've got a chunk of money set aside.  But for any goal that lasts longer than say 2 years, it's a loosing proposition.