Structured notes might sound complicated, but they’re a useful investment tool, especially if you’re looking for alternatives to CDs, which are traditionally safer but offer lower returns. Unlike CDs, structured notes come with a higher risk, but don’t worry—you don’t need to be rolling in dough to start investing in them. While your bank might prefer you to start with about $100,000, you can begin with as little as $25,000.
Most large banks like Citibank and Bank of America offer services to help you get started with a minimal annual fee, in my case, just $50 for unlimited trades. After the tumultuous market drop in March 2020, finding ways to hedge investments became crucial. Here’s how I ventured into structured notes with Apple as an example.
Back in December 2012, I chose to invest $40,000 in Apple’s Equity Linked Securities (ELKS) rather than putting it into a 2% CD. Apple’s stock was down significantly, and buying the note seemed like a smart move at the time. Here’s the breakdown:
– Coupon Rate: The note promised a 3.5% return over six months, which annualizes to 7%.
– Duration: The note lasted six months, ending in June 2013.
– Protection Threshold: It offered a 20% downside protection, meaning as long as Apple’s stock didn’t fall below $408 by June 2013, I’d get my full $40,000 back. If it fell below that, I’d lose corresponding to the stock’s drop.
– Upside Potential: If Apple’s stock stayed above $408, I’d make a 3.5% return, far beating the CD’s 2%.
The rationale was simple: despite Apple’s downtrend, it was trading at a favorable price-earnings ratio and had a robust cash reserve and a history of innovation. The note seemed like a good bet against further significant drops and a way to make a better return than parking my money in a CD.
But investing in single-stock structured notes isn’t for everyone. It’s risky, especially with tech stocks that can be volatile. Most of my structured investments are in broader indices which tend to be more stable.
This strategy is part of a broader approach to manage risks and earn returns. Besides structured notes, I diversify with real estate and private growth companies. Real estate offers tangible assets and potential income through rent, while investing in private companies can lead to substantial gains as these companies grow.
For those looking to manage their finances better, tools like Personal Capital help track investments and minimize fees, offering a comprehensive view of your financial health. They provide an excellent retirement planning tool that predicts your financial future based on current data.
In essence, structured notes can be a valuable part of a diversified investment strategy, offering protection against downturns while allowing for potential gains in a market upswing. Just be sure to assess your comfort with risk and consult with a financial advisor to find the best strategy for your needs.
