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Market-linked CDs
Old 03-08-2018, 06:04 AM   #1
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Market-linked CDs

I was told about these at a bank the other day and it sounds too good to be true. So I thought the best thing is to ask here.

The Market-linked CD is FDIC insured up to $250k, performance is tied to an index like S&P 500, and the interest I was quoted was they would earn 5% the first year 10% the second year 15% the third etc. (I'm sure those are cumulative numbers and it really amounts to 5% each year). It cannot be less than 5% but the CD can be called at any time. I don't know if there is a time requirement or if you can withdraw at any time without penalty.

That is really all I know about them. Does anyone have experience or knowledge of these? Right now 5% is pretty good sounding especially when I am at the "holding on to what I have" stage and not trying to beat the market.

Cheers!
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Old 03-08-2018, 06:48 AM   #2
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I don't know much about them, but looks like you might be better off investing in conventional:

https://www.investopedia.com/article...linked-cds.asp
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Old 03-08-2018, 06:52 AM   #3
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I have never bought or considered a market-linked CD because everything I have read up till now indicates you are usually better off in terms of interest earned with a traditional CD. I’d be interested to know direct experience.

I’m very suspicious about that 5% being a guaranteed minimum rate, in addition to the dubious way the multi year interest earnings was presented. Usually there is an earnings cap and market-linked CDs can earn 0% if the underlying assets underperform some minimum target.

My understanding is that early withdrawal is usually not an option on such a CD or early withdrawal penalties will eat into principal.

Without the knowing the isssuer or specific product, it’s impossible to evaluate.

Just one reference from an issuer. Lots more info available online. https://www08.wellsfargomedia.com/as...linked-cds.pdf
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Old 03-08-2018, 08:29 AM   #4
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Useful Rule of Thumb: The more complicated an investment product is, the more likely it is that it was designed to make money for the seller, not to make money for you.
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Old 03-08-2018, 08:31 AM   #5
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At least the WF brochure says you will not get all your money back if you withdraw early.

These things go by many different names. As soon as one name gets a bad reputation, they change the name.

And let me give you an example of slickness of the brochure. If there is something under "Advantages" labelled as "Accessibility" do you think it means that you will have easy access to your money whenever you want?
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Old 03-08-2018, 08:54 AM   #6
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I took a chance on one once. It was a little different than the one described by the OP. It was for 5 years and linked to the s&p 500. I can't remember the details but the guaranteed rate of return was like a bottom of the barrel cd with lot's of upside potential but could not exceed a certain market cap. Well over the first 4.5 years it was performing very well but unfortunately hit the cap. Of course I was paying tax on the gains throughout the term and then I had to go back and recap the lost earnings on my next tax return. The IRS didn't balk but the MS State tax commission did. PITA to get straight with them but they finally signed off.

No more linked cd's for me.
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These have been discussed here before
Old 03-08-2018, 09:44 AM   #7
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These have been discussed here before

I don't recall anyone being a fan of the product.
I was presented with this opportunity at a seminar presented by the 3rd party "wealth advisers" affiliated with Penfed FCU. I looked into it but it just seemed like I could find better CD rates for the fixed part of my savings and a better "market link" using equity index funds. Anytime one product tries to accomplish two goals, the compromises required render it mediocre at both goals. The instant I saw something promoted that way ( 5% the first year 10% the second year 15% the third etc.), I would run.
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Old 03-09-2018, 05:29 AM   #8
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Thanks for all the replies. I thought it was too good to be true especially the way they presented the interest earned each year.
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Old 03-09-2018, 07:22 AM   #9
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I know nothing about these vehicles but your first sentence said "...sounds too good to be true...".

IMO, caveat when/if they're using cumulative annual returns (5%, 10%, 15%) as part of the pitch.
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Old 03-09-2018, 08:38 AM   #10
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Quote:
Originally Posted by Badger View Post
I was told about these at a bank the other day and it sounds too good to be true.....
You got it.... and if it sounds to good to be true, then it is.
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Old 03-09-2018, 11:57 AM   #11
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I’m really curious about that 5%. Seems like it would be the cap, and 0% is the minimum.
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Old 03-09-2018, 12:55 PM   #12
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Quote:
Originally Posted by audreyh1 View Post
Iím really curious about that 5%. Seems like it would be the cap, and 0% is the minimum.
Not me. I never spend any time trying to understand products that smell like this one. Sure, I may someday miss the investment opportunity of a lifetime, but ignoring these things as a matter of principle also keeps me from stepping in a lot of cow pies.
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