Market-linked CDs aren’t for me

Figure standing at bottom of dollar bill shaped like stairs

I recently read that Goldman Sachs planned to offer 4-year CDs linked to changes in the Dow Jones Industrial Average.

Because I’m reassessing my investment strategy in light of inflation indications, I tracked down the preliminary offering documents and took a look.

Although I practiced with a Wall Street law firm for about 35 years and regularly dealt with complex financial instruments for investment firms (including Goldman), I confess that the convoluted terms of the equity-linked certificate of GS Bank USA gave me a headache.

Once I got the gist of it, however, I decided it wasn’t for me.

First, it’s a brokered CD.

If there’s one thing I’ve learned about brokered certificates, it’s that they usually have one or more costs or risks associated with them that comparable CDs available directly from banks don’t have.

The GS Bank market-linked certificate was no exception.

To begin with, it doesn’t bear interest. That’s a non-starter for someone like me, concerned with not only principal protection but with current income (outside of my IRA).

Instead of interest, this certificate pays a "supplemental amount" at maturity, along with its principal value.

The supplemental amount is the principal value times either (a) the sum of the monthly percentage changes in the Dow over the 48-month term (subject to a cap of 1.5% to 2% a month) or (b) 2%.

This seems a bizarre way of measuring market changes over four years, but it’s consistent with other market-linked CDs I’ve encountered.

And, I suppose, an 18% to 24% annual return would be pretty nifty.

But, with my luck, I’d probably achieve only the 0.50% minimum annual return.

Besides, unless you hold the certificate in a tax-deferred account (e.g., an IRA), you pay annual taxes (at ordinary income, not dividend or capital gains, rates) on an equally bizarre hypothetical "interest income" you don’t have funds for until maturity.

There’s just too much ugliness here, including the fact that FDIC insurance, while covering principal, doesn’t cover non-posted "supplemental amounts."

This isn’t to say market-linked CDs, whether tied to stock averages, oil or gold prices, or something else, are always bad for everyone.

Banks I respect -- such as Wells Fargo and Union Bank -- have offered such products, apparently with success, for years.

It’s simply that I need investments that give me peace of mind in my old age.

And a market-linked CD wouldn’t.

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