CDs That Pay 12 Percent?
It’s not guaranteed, but it's possible.
June 21, 2010
As I sit here writing this:
What could be worse than that?
During these days of uncertainty and historically low-rates, I’m often asked “how can I get attractive returns on investments (ROI) that also keep my money safe?”
Let’s take a look at some of the common choices that fit such a mold:
So, is all hope lost?
Don’t give up. There may be some hope. While no product is perfect by any means and no investment should ever be made without first knowing all the facts, investing for safety and decent earnings these days requires a bit of exploration and creativity.
With that, here are a couple of ideas that may help:
CDs That Pay 12 Percent?
It’s not guaranteed, but it's possible.
Back in the bad market of 2001, many people sold stocks and threw their money into cash. Afraid of jumping back into the market, they went searching for new products, one of which was something called an “index annuity.”
Offered by insurance companies, this version of a fixed annuity links its returns to the performance of an index such as the Standard and Poor’s 500 (S&P). If the index goes down, contributions and prior-year earnings are protected from loss. But if the index performs well, earnings are determined by the performance of the index, often with a “cap” or by some other means of measuring the interest credited.
As many investors started putting their money into these products, banks scratched their heads wondering how they were going to compete.
In some cases, the answer led many banks to replicate the concept of an index annuity, but do it within the framework of a CD with some differences thrown in, thus giving birth to “structured products,” often referred to as “Growth CDs.”
Many of these so-called Growth CDs offer the backing of the Federal Deposit Insurance Corporation (FDIC). The big difference between these CDs and ones commonly found at retail banks is that in a typical CD, one knows exactly how much interest they’re going to earn before investing in it. It’s the “bird in the hand” scenario. Regardless, if it’s a three-month or five-year CD, your clients know exactly what they’re going to get.
The interest one receives from a Growth CD, however, is not pre-determined. Somewhat similar to the means by which index annuities earn their returns, the earnings on a Growth CD are determined by the performance of a stock market index, such as the S&P 500 or many other indexes now available in these type of products such as the various European indexes, Asian indexes, commodities, gold, oil, currencies and other market sectors that can help round out an entire portfolio with these instruments.
If the chosen index goes up, your client has the opportunity to earn more interest than the “bird in the hand” bank CD offers. Similar to the index annuity, however, these CDs often come with a limit on earnings, these days some offer no limits. On the other hand, if the selected index goes down in value and your client holds the CD until maturity, your client will get their money back. Some Growth CDs not only guarantee they’ll get their money back, but also provide a minimum rate of return even if the index goes down over the period of time it’s held.
Keep in mind: If your client breaks the Growth CD prior to maturity, they may be subject to a penalty and furthermore — they’ll get fair market value for it — which may be more or less than the amount put in. But again, if held to maturity, the assurance your client has in these type of CDs is that in worst-case scenario, they gave their money a shot at market returns, but instead got some minimal interest and their money back, which these days to many is quite an attractive package.
For risk-adverse investor-clients who want to keep their money safe and also have the possibility of earning market returns, these unique CDs may be something to consider.
Especially when I lose to a straight flush, I usually have a mouthful of things to say and in this column, things aren’t much different. For some closing thoughts, here are two other areas in which you clients can look for attractive returns:
Financial Armageddon or economic prosperity?
My poker hand or my neighbor’s?
These days, questions such as these can be tricky to answer and in this age of uncertainty, hopefully some of the ideas above are of help.
|Additional Resources:||AICPA PFP Section|
Alan Haft is an investment advisor representative with an insurance license, author of three books including the national bestseller, You Can Never Be Too Rich, and makes frequent appearances in national print, television and radio media such as The Wall Street Journal, Money Magazine, CNBC, BusinessWeek and many others. The amounts represented in this article should all be considered hypothetical and for example only.
* For full disclosure, Haft is a part of a firm that utilizes all industries which typically includes us receiving percentage based fees for brokerage servicesas well ascommissions when implementing insurance based plans. Haft does not work for any particular financial company or industry nor should this column be construed as an endorsement or condemnation for any particular product. Readers should note that all views and vendor recommendations as expressed in this article are solely the author’s and do not necessarily reflect the views of the AICPA CPA Insider™ or the AICPA.
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