Wall Street Potholes

Chapter 3Why Structured Notes Are Rarely the Best Choice

Kevin Brolley

Caveat Emptor!

Today's investment markets have not been easy to navigate. The painful memory of 2008 still hangs over us and has made us reluctant to allocate much money to the stock and bond markets, and many of us are sitting on too much cash that is earning next to nothing. We worry if today's markets are really on solid footing or if they have been artificially supported by the accommodative policies of the Federal Reserve. Scaremongers have railed for years about the onset of higher inflation and a collapsing dollar, while we have watched inflation fall and the dollar strengthen. These uncertainties have left most of us underinvested in the rally that began in March of 2009 and, what's more, now we are reluctant to commit at these higher prices. As the pundits are fond of saying, this has been one of the most hated bull markets in memory.

Amidst these challenges, chances are your broker has brought up the idea of investing in structured notes. Notes with high coupons well in excess of what you are earning on cash, or notes that promise you, say, 90% of the market's upside while guaranteeing that your principal will be returned if the market falls, are pretty attractive in this environment and you will do well to consider them. You will also do well to bear in mind that with those potentially attractive returns come potentially unattractive risks and drawbacks.

This chapter will discuss some of those ...