The original role of Wall Street/Bay Street was to allocate capital to the most promising projects and to take a small fee for the effort. Wall Street/Bay Street has transformed into marketing and sales machines designed for access to investors’ wallets. Structured notes are another example of how Wall Street/Bay Street separate investors from their money. Promoted as an innovation that allows investors to benefit from stock market uptrends while protecting them from stock market declines, they do so by going to cash at pre-determined market drops. That is the opposite of what successful investors do.
If you review the Six Habits of Highly Successful Investors, you will note that habit number five is to buy low and sell high. Successful investors buy bargains that emerge during market drops. They don’t go to cash.
Do you need more reasons to stay away?
Here is one. Since structured notes have a bond component and derivative component they are promoted as offering security type diversification as well as asset type diversification. Do we really need diversification additional to owning a market index exchange-traded fund that has 500 stocks as the Monday Morning Millionaire Program suggests?
And here is another. One of the great benefits of stock market investing is the high level of liquidity. Buy and sell orders are executed in fractions of seconds. With structured products, you get zero liquidity.
Need more? Another benefit of stock market investing is the constantly quoted prices. The matrix pricing used with structured notes is highly questionable. It lumps bonds with similar features (maturity, credit rating, coupon, type of issuer, etc.) and applies a general yield level to the entire category. Since structured notes rarely trade after being issued, the pricing is as loopy as it is pointless.
Need even more? Well, American banks do fail. (No Canadian bank failed during the great depression nor during the 2008 recession nor any other time.) The structured notes they issue are their debt obligation. If they fail, their creditors take a beating.
The bottom line is, stay away!