Investment CDs – The Catch

Some people wonder if they can get the best of both worlds.

Is it possible to participate in the stock markets without losing your money?

The answer, as usual, is “it depends”. You are able to earn market-like returns without losing your money, but there are some strings attached. One way to do this is with a variable annuity that has certain guarantees, and we’ve discussed those in the past.

Another option is an investment CD, sometimes known as market-linked CDs. These are FDIC insured certificates of deposit that are somehow linked to the markets.

Every CD is different, so you’ll have to read the offering disclosures and fine print, but here’s the gist of how they work: you win if the market does well, and in the worst-case-scenario in most cases is that you get your money back.

Doesn’t sound too bad, right?

It may be a perfect fit. However, you need to understand the drawbacks. Again, you also need to read the fine print and understand what you’re buying.

Since the allure of investment CDs is fairly obvious, let’s focus on the drawbacks.

You might get all your money back, but you have to wait until the CD matures (which could be several years)

  • The particular investments linked to your CD may not do as well as the market in general
  • If the market does too well, you might get “knocked out” and you only get your money back
  • It is very difficult to sell an investment CD in the secondary market before it matures
  • Market volatility (up or down) can knock you out, even if the market ends up higher

If you’re going to use an investment CD, investigate how you can get tripped up. Make sure it is FDIC insured unless you’re really willing to roll the dice.

These products are sophisticated, and they’re a perfect fit for some people. For example, if you have the time (many years until you need the money) to take risk that you don’t have the stomach for it, an investment CD may give you the potential for higher returns with the peace of mind that comes with a guarantee.

As always, remember there is no such thing as a free lunch. Financial products can help you sleep at night, but you pay a price. With annuities, he pay fees and sacrifice flexibility. With investment CDs, you have to commit and hope the market doesn’t knock you out.

For more, see what the SEC says about investment CD products.