Are Equity-Linked CDs Right for You?

Are Equity-Linked CDs Right for You?

Pretty much everyone knows what Certificates of Deposit – affectionately known as CDs – are, so let’s not bore ourselves with another description. However, I’d like to share my thoughts on equity-linked CDs which, although they have been around since the 1980s, seem to be generating a lot of renewed buzz, good or bad.

Let me be crystal clear, right off the bat, though. This discussion is not going to amount to any wholesale declaration of whether these CDs are “good” or “not good.” Such comments don’t fit my mold at all. In fact, my goal here is to expose the ridiculously unprofessional and, quite frankly, shameful spin that surrounds the discussion about these CDs.

Instead of plain vanilla fixed interest, equity-linked CDs tie your interest to the performance of a given stock market index, such as the S&P 500 or DOW, up to a certain predetermined cap. So in a generic sense, if the underlying index does well, you stand to earn a higher return, up to the cap.

Of course, like any normal person would and should expect, there are tons of caveats involved, from exactly how your interest will be calculated to penalties for early withdrawal to maturity periods to taxation and a whole host of others. It therefore makes sense to be sure that before you choose one of these – or any other investment under the sun – you comb the fine print and know for certain that it fits your intended situation. That is where an objective, thorough, thoughtful, and above all honest financial advisor comes in handy.

Now to the point I’m trying to get at. Be extremely skeptical of those so-called know-it-all “experts” who have issued blanket “good” or “bad” judgments on equity-linked CDs, for the simple reason that they haven’t reviewed every one of them. I’m also guessing they probably don’t know you personally, let alone what your investing goals and principles are.

For a classic case that makes this point, contrast an objective review by the Securities and Exchange Commission with Frank Armstrong III’s column in Forbes, where he basically branded every equity-linked CD as “garbage.” I’m hoping you take your investing decisions rather seriously – meaning you give it more thought than any columnist, TV expert, blogger, or other financial “expert” can give you in a five-minute overview.

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