4 Year CD Goldman Sachs Style

New 4 Year CD Tied To DJ Industrial. Will Wall Street Ever Learn?

Check this out. Goldman Sachs is selling a 4 year CD that is linked to the Dow Jones Industrial Average. Another product designed by Wall St. to be sold rather than bought by investors.

This 4 year CD is FDIC insured and they are guaranteeing you a 2% total return over 4 years. The upside is that you can also make a return that is tied to the Dow Jones Industrial Average. So you will get the same rate of return as to what the Dow does, subject to a CAP of 1.50%. The rate of return will be the sum of all monthly returns over the 4 year period, with no compounding of interest.

Having worked on Wall St. for 13 years, it amazes me that after all the scandals, Wall St. is still designing products that they think the public will buy . . . even though the product might not be the best thing for the client.

And with these packaged products, there is always a catch. Here are the 2 catches of this 4 year CD:

1 – If the stock market crashes you will get your money back, plus a 2.00% TOTAL return for 4 years. How would you like to buy a 4 year CD for retirement in your IRA and be guaranteed to make a whopping 2% TOTAL over those 4 years? That’s 0.66% per year, not 6.6%, which is a little over half of one percent. Compare that to any other 4 year CD you can currently get which would earn you approximately 1.60% as I write this.

2 – No compounding of interest. You will get the sum of monthly returns of the Dow, capped at 1.50% per month with NO compounding. One of the best ways to make money as an investor is to have the money you make work for you, year in and year out. That is, if you can actually make money every year.

3 – Your upside is capped at 1.50% per month. Even if the Dow goes up by 8% in one month, you will only get 1.50%.

Think of your money being in 2 buckets. You have a safe bucket where you don’t want to lose anything. And then you have a risk bucket where you are prepared to take some volatility. Put your safe money in safe stuff like CDs, U.S. Treasuries, pre-refunded municipal bonds and FDIC insured money market accounts that are not tied to the stock market. You could easily make more than 0.66% per year if you were not investing in an equity indexed CD.

Put your risk money into things that have an upside with no cap. And make sure that your interest can compound. If you are taking risk, why not shoot for unlimited upside?

This product launch seems like a total jinx for investors. The stock market hasn’t performed well over the past 10 years and it’s due for way, way better performance, even 5-6% per year. If that happens, investors who buy this Goldman Sachs 4 year CD will leave major moolah on the table because their upside is capped and there is no compounding of interest.

Who is going to make more money? The investor? Or Goldman Sachs? I am all about capitalism and businesses making money but this one is ridic. I would pass on this 4 year CD.