Market Linked CD

[scfr]

Has anyone ever had a market linked CD? Were you happy with it? Here are some details on one I'm considering:

3 Stock Basket (Johnson & Johnson, Proctor & Gamble, Home Depot)
Principal FDIC insured
Interest paid to linked checking account annually (accrued interest not FDIC insured, but it is once it has been moved to the checking account)
5-year term (penalties for early withdrawal are steep, so it really would be a 5-year commitment)
Interest Rate: Minimum 1% / Performance-Based Annual Interest Rate 6%
Performance Event: Closing Price, on July 30th of each year, must be higher than it was the prior July 30th for each and every one of the 3 stocks, in order to receive the 6% annual interest

So, you're guaranteed 1% and may get 6% depending on how those 3 stocks do.

The funds will not be needed in the next 5 years. They are retirement savings that are in a plain vanilla MMA. This money will not go in to anything that is not FDIC insured or backed by the US government. What do my esteemed fellow forum members think? Go for this CD or wait for rates on regular CDs or Treasuries to go higher?

[humandraydel]

Has anyone ever had a market linked CD? Were you happy with it? Here are some details on one I'm considering:

3 Stock Basket (Johnson & Johnson, Proctor & Gamble, Home Depot)
Principal FDIC insured
Interest paid to linked checking account annually (accrued interest not FDIC insured, but it is once it has been moved to the checking account)
5-year term (penalties for early withdrawal are steep, so it really would be a 5-year commitment)
Interest Rate: Minimum 1% / Performance-Based Annual Interest Rate 6%
Performance Event: Closing Price, on July 30th of each year, must be higher than it was the prior July 30th for each and every one of the 3 stocks, in order to receive the 6% annual interest

So, you're guaranteed 1% and may get 6% depending on how those 3 stocks do.

The funds will not be needed in the next 5 years. They are retirement savings that are in a plain vanilla MMA. This money will not go in to anything that is not FDIC insured or backed by the US government. What do my esteemed fellow forum members think? Go for this CD or wait for rates on regular CDs or Treasuries to go higher?

I never trust these fancy convoluted investments. Typically they just try to confuse people with a small chance of a bigger return which makes it difficult to assess the true value. The 3 stocks you mention have a dividend yield of ~3%. 5 year Treasury Bonds yield 1.42%. Assuming that 2 out of 5 years the 3 stocks are up, you'd get 6%, 6%, 1%, 1%, 1%, which is an average of 3% (which basically just matches the dividend). If all 3 stocks are up only 1 out of 5 years, you'd get an average of 2% return which is barely above the 5 year treasury and 1% less than the dividend.

Personally, I'd be more inclined towards something like 70-80% 5 year treasury and 20-30% S&P500 index. At least then you know exactly what you've got.

[scfr]

Interesting ... I've read about some Market-Linked CDs that use very complicated formulas, but the one I'm looking at seems really very simple.

Anyone on the forums ever had one of these CDs?

[snafu]

I don't want to sound snarky but my first reaction to your query was very negative. Inflation is increasing nearly daily which is obvious when you fill car with gas or go to the grocery store. I understand parking cash short term in Money Market or CD but even retirement sums for folks over 65 y/o need to have a portion of their portfolio in equity if the money is to extend a lifetime. I hear your fear, it is a repeat of the Great Depression era. We all took a hit in the Great Bush debacle but nearly all moderate portfolios have returned to profitability. If your portfolio had been in a low cost index fund in January when the DOW was 12,938, it's 15,207 today - you do the math.

I've likened it to buying a car. We've all bought really terrific cars and occasionally a lemon. The bad experience didn't make us decide to never, ever have another car. It can drive us to doing a better job of research.

http://www.moneytalksnews.com/2013/07/05/beginning-stock-investor-heres-all-you-need-to-know/

To your initial question, what is the benefit to the seller...what is the benefit to you, the buyer?

[scfr]

I don't want to sound snarky but my first reaction to your query was very negative. Inflation is increasing nearly daily which is obvious when you fill car with gas or go to the grocery store. I understand parking cash short term in Money Market or CD but even retirement sums for folks over 65 y/o need to have a portion of their portfolio in equity if the money is to extend a lifetime. I hear your fear, it is a repeat of the Great Depression era. We all took a hit in the Great Bush debacle but nearly all moderate portfolios have returned to profitability. If your portfolio had been in a low cost index fund in January when the DOW was 12,938, it's 15,207 today - you do the math.

I've likened it to buying a car. We've all bought really terrific cars and occasionally a lemon. The bad experience didn't make us decide to never, ever have another car. It can drive us to doing a better job of research.

http://www.moneytalksnews.com/2013/07/05/beginning-stock-investor-heres-all-you-need-to-know/

And the connection between your commentary and my question / situation is .....