High return but with low risk. Could there be such a thing? There is if you believe what Wall Street has to offer, always ready to cater to an innate desire of investors with products so complicated that it virtually guarantees that they make money…and we are not referring to the investors here.
And that is where structured products come in. But what in the world are these? How about a bank CD or an annuity or a non-traded REIT or a master limited partnership or a limited partnership or lord knows what, offering you the safety for example of a CD or the safety of an apartment building or the safety of an annuity in such a way that if the stock market grows in value, you get a piece of that profit but if the market goes down, you don’t lose money. That sounds like a pretty good combination, doesn’t it? Unfortunately, there is no such thing which of course is not evident from that impossible to decipher contract you signed.
The returns these products promise in reality come out to a much smaller portion of the actual gain of the stock markets. And liquidity…forget about it. They typically require you to own that “investment” for anywhere from 3 to 10 years. If you liquidate prior to that period, you waive all of the supposed extra profits that have been promised along with massive surrender charges. Also, the commissions on a lot of these products alone are as high as 10%. These MLPs, these non-traded REITs, these equity-indexed annuities and other structured products pay more in commission to the agent or the broker selling the product than you will earn as the consumer buying it. Which implies that if you want to make the kind of returns they are promising you, you got to go get a license and start selling these products to your friends and family because you will make more money at that than buying the products these supposed financial guru is selling you.
Back to our simple advice…if you are pitched a product or a strategy which sounds too good to be true or if you cannot go back and explain the essence of it to a 12-year old, that usually is a big red flag which means you got to stay the heck away from that product and the person selling it.
Image credit – Tim Simpson, Flickr