Why Suze Orman Says You Should Forget This Investment That ‘Makes Absolutely No Sense’
On an episode of Suze Orman’s “Women & Money” podcast, money expert Suze Orman gave her take on market-linked CDs.
“Forget market-linked CDs,” she said. “They make absolutely no sense. You want to invest in the market? Invest in the market. You want a CD? Buy a CD. Do not combine the two.”
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A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. It typically has a fixed interest rate over a set period of time that’s often higher than rates offered by regular savings accounts. Two months ago, Orman wrote a post on LinkedIn saying that a CD is the “smartest move you can make” to lock in a safe return of 5% or more.
She didn’t discuss her view on market-linked CDs in detail in the podcast episode, but they can be risky.
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What Is a Market-Linked CD?
A market-linked CD, also known as an indexed, equity-linked or structured CD, is a CD tied to the performance of a market index, such as the S&P 500. This type of investment offers diversification, protection (against bank failure) of the principal amount up to $250,000 by the FDIC and potentially big returns. The CD will do well when the market does well, but the opposite is also true.
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Risks of Market-Linked CDs
A 2016 study by The Wall Street Journal found that market-linked CDs frequently underperformed standard CD accounts when taking fees and other limitations into account.
A case in point is James Maher, chief executive of Archford Capital Strategies LLC in Illinois, who invested $30,000 in a five-year market-linked CD from Bank of America. This CD tracked the S&P 500 and returned just 61% of the index’s increases. Maher told The Journal that he knew he would have earned more by investing directly in the stock market, but he appreciated the extra security.
There are other downsides as well. Market-linked CDs offer little liquidity and typically have longer terms that can last years, whereas a standard CD can mature in as soon as a month. Also, returns on a market-linked CD are unknown until the maturity date and are exposed to market volatility. Traditional CDs, on the other hand, have fixed returns, which you can calculate when you open the account.
Although the market-linked CD is linked to the market, returns are considered interest. Investors typically have to pay income taxes on market-linked CDs instead of the lower long-term capital gains taxes paid by stock investors.
The bottom line is that market-linked CDs can offer diversification and convenience. However, Orman recommends investing in the stock market or standard CDs instead.
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