Understanding Structured Derivative Products As An Investment

Structured Note With Carrot Apple JuiceThe best CD interest rate I can find is 2.3% for a 7-year CD offered by Bank of America at the time of this post (5/7/12).  2.3% is pretty weak, but the next best rate I’ve seen from a known institution is around 1.85% for the same duration.

I’m seeking yield to further enhance my passive income streams for financial freedom (highlights the various income streams). My current CD monthly interest income is around $2,800 a month and I’ve got roughly $225,000 in liquid cash that’s sitting in a money market account earning 0.2% interest.

Having $225,000 in a money market earning 0.2% interest is a lousy $400 a YEAR, which means I can’t even buy an overpriced iPad like millions of crazy rich folks are buying nowadays! The amount of money people have to spend on material things makes me so bullish about the economy. People don’t spend money they don’t have, just like I can’t drive a Ferrari Italia that I don’t own.

Everyday I keep my money in a pathetic money market is another day I’m missing out on free money. As such, I have been focused for the past couple of weeks on searching for ideal products to invest my money.

Narrowing the investment choices down to the following:

1) 2.3% 7-year CD with Bank of America.  Guaranteed estimated return $5,175 a year / $431 a month and bringing my CD passive income to $3,243 a month.

2) 6-10% potential returns via peer to peer / social lending. Non guaranteed $13,500-$22,500 a year / $1,125-$1,875 a month.  Have $50K ear-marked to this stream if and when the partnership comes through.  But, could invest more if things work out well.

3) Structured CDs, with a guaranteed rate of 2% for the first two years and LIBOR + 1.45%.  $4,500+ a year / $375+ a month.

4) Online trading via E-Trade or ScottTrade.  No guarantees.  + or – $40,000 a year.

5) Private equity investments.  I’ve received a couple offers to invest in some start-ups in the Bay Area.  70% chance for a -100%, up to a 5-10% chance for a 500% return.

6) Rental property.  Borrow at 3%, earn a rental yield of 8%.  Estimated cash on cash return is 5% therefore $10,000 a year / $833 a month.  Return on principal based on potential appreciation is different.  Problem with rental property is that it is a PITA compared to online income or CDs.

7) Structured Notes.  Similar to Structured CDs, but not FDIC guaranteed, and different return profile.

Not too narrow a list huh?  The goal is to raise the $6,500 gross a month passive income to around $15,000 a month in order to have a comfortable lifestyle enough to take care of a family of four.  The other goal is to have money work for me so I can focus on my business.  The strictly passive income goal (excludes online and all other income) may change over time, but for now, $15,000 a month is what I’m shooting for.

If possible, please don’t get distracted by the capital amount discussed and if it helps, use whatever capital amount that makes you feel comfortable.  The discussion focus should be on understanding structured products and feedback on a couple choices below.


I like the dumbbell approach to investing e.g. high risk + low risk.  As I looked more into Structured CDs, I’ve come to realize that structured CDs are exactly what I like!  Structured CDs guarantee a minimum rate and up to $250,000 of your money back thanks to the FDIC insurance + it has an upside component to its returns based on a derivative.

Structured CD Examples:

1) A 5-year CD rate will guarantee you a 1% minimum return every year for 5-years.  However, if Mitt Romney wins the 2012 Presidential election, the bank issuing the structured CD will agree to pay you 10% a year for the remaining four years!

2) A 3-year CD will guarantee you a 0.5% return for year one, a 3% return in year two, and 4% return in year three if the S&P 500 increases by 15% in year two, and at least 10% in year three.  Every percent beyond 15% and 10% in years two and three will be divided 50/50 eg year two has a 19% increase, hence your 3% return gets a 2% bonus.

3) A 7 year CD will guarantee you 2% the first year, and 3.5% every year for the remaining six years so long as the CPI (inflation) index stays below 3.5%.  Every 0.1% increase above CPI reduces your 3.5% rate by a commensurate 0.1% with a 2% floor.

So excited to start investing in structured CDs until I went looking for them.

I strolled over to Citibank to ask about their latest structured CD offering and to my surprise, they don’t have any!  Disappointed, I asked what else they’ve got.  Structured Notes of course!  Structured notes are investment products that are structured by the bank for their wealth management clients.  The products have Initial Public Offerings and are NOT guaranteed by the FDIC.  Instead, the guarantee, if any is based on the viability of the institution and the markets.

There are a myriad of Structured Note products, and I want to focus on two that sound most interesting and ones where I am actually considering putting capital to work:

Dow Jones Principal Protection Structured Note

* Minimum investment $50,000.

* 6 year note to maturity.

* Receive 0.5% coupon per year for 6 years.

* Receive 100-110% of the upside of the Dow Jones Industrial average from day of structure (May 24, 2012 in this case).  In other words, if I invest $225,000 and the DJIA is up by 20% in 6 years, I will have made a $45,000 return + 0.5% in annual interest income for the duration.

* At the end of 6 years, I get 100% of your principal back at a minimum.  If we go into a horrible bear market and the DJIA goes down 30% in this time period, I get all my money back provided the market is still functional.

* Opportunity cost is 2.3% CD – 0.5% coupon = 1.8% per anum I do not invest in the 2.3% BoA 7-year CD = $300/month or $3,600 a year.

* The return on the DJIA payment is a “bullet” at the end of 6 years.  In other words, all proceeds are paid at once upon maturity.

S&P 500 Buffered PLUS Structured Note

* Minimum investment $50,000.

* 2 year note to maturity.

* Receive 0% coupon over 2 years.

* Receive a 10% downside buffer based on day of offering (June 4, 2012). In other words, if after two years the S&P 500 is down 12%, I only lose 2%.

* Receive 2X the upside of the S&P 500 in two years up to 18-22%.  In other words, if the S&P 500 is up 5% in year 1, my return is 10%.  However, if the S&P 500 is up 30% in two years, I don’t get 60%, but a max 22%.

* Opportunity cost is 2.3% a year to -92.3% of the value of my principal if the S&P 500 goes down by 100%, which is not going to happen.  Also not allowed to receive the 2% annual dividend yield the S&P 500 is currently providing.


I like the S&P 500 Buffered PLUS note because there’s only a two year lock-up and has a nice 10% downside protection before I start losing money.  My bogie for market returns a year is 3X the 10-year bond yield =  ~6% at the moment.  If I can get 2X that return, that yields 12%, which is on par to earn a max two-year return of 18-22%.  Although my bogie is 3X the risk free rate, I’m really always shooting for a 10% per anum return.

The Dow Jones structured note is also attractive because it proves a 0.5% coupon while I wait, returns all my money at the end of 6 years even if the markets go down, and gives me 100%-110% of the upside.  I’m a long-term investor, and if I can find a product that I like, the longer to maturity the better!  The downside is if I do need to tap the $225,000 in capital, I would have to sell the note at a loss. There are no penalties, just the market rate for the note, as a large value of the note is time.


* Understand yourself. You need to first understand your risk tolerance, income generating abilities, and capital needs.  My preliminary requirements are that I want a minimum guarantee return of all my money back (principal protection), with a minimum 30% optionality of up to 15% on the upside, for as long a duration as possible.  Doing the math, If I can get a risk adjusted total expected return on my structured product of anywhere between 4-10%, I am a very happy camper because I expect inflation to be well contained.

* Understand the product. Make sure you have the banker explain everything in as much detail as possible.  Ask for the downside risk and upside risk.  Ask them to provide you examples of various return scenarios.  Make sure you understand everything before you lock or invest your money away.  Spend time reading the entire prospectus for structured notes!

* Focus on big institutions.  I’m sticking with the big banks like Citibank, Bank of America, Wells Fargo, USAA, and Chase because: 1) They are too big to fail, and 2) I already bank with many of them, hence have more leverage.  These aren’t fly by night banks, so I feel confident they will be around, or be bailed out by the government if they get in trouble.

* Everything is negotiable.  Don’t take everything at face value.  Ask for a better rate, or a better product.  There is always something for everybody.  I suggest you come in with as large a war chest as possible, but keep the amount hidden.  The more money you have, the better concessions they will give you.  They will always ask how much you are thinking of investing.  Start with their minimum… perhaps $10,000, and work your way up by asking with each increment what more you can get in return.  When you anchor low with $10,000, and start speaking about $100,000 at the end of the conversation, the bankers will really start bending over backwards for you.

* Get motivated to earn more money.  The banker’s minimum investment to open a structured product investment is $50,000 if I invest $100,000.  Clearly the banker has incentive to bring in as much money as possible to earn a commission (1-3% of principal).  The point is, these products will only be offered to a minority of people because the banker only has so much time and is not going to open 100, $1,000 accounts when he can open 1, $100,000 account.  Having a cash hoard gives you optionality to invest in potentially superior investment returns.

Update: I ended up investing $150,000 in the DJIA structured note and $75,000 in the S&P500 structured note $225,000 in June, 2012. I would not have invested as much in the markets if there wasn’t a downside protection component.

Recommendation: The best thing to grow your wealth is stay on top of your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where to optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. Their 401K Fee Analyzer tool is saving me over $1,000 a year in fees I had no idea I was paying. There is no better free platform out there that is helping me manage my money. The entire sign-up process takes less than a minute and is free.


Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.

You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.

Updated on 12/1/2014. The bull market is alive and well. Don’t forget to rebalance and manage your risk exposure. Everybody feels like a genius during good times.





Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter


  1. says

    Sam, I will preface this with saying that I know little about your situation and that everybody has varying opinions on these products, BUT have you considered looking at a Fixed Indexed Annuity with an income rider?

    If the purpose of the money is for lifetime income then it might be something you could explore. The downside of course if that you tie the money up but you CAN get out if you want (there just may be a penalty). Most annuities come with a 10-year surrender charge (some start at 10% while others start at 15% and go down each year from 1-10).

    I’d have to look at products in California and I don’t really know your age, but there is one annuity right now (for a person age 50) that would give you an 8% bonus and a guaranteed 6.5% compound rate AS LONG AS you take the money as a monthly paycheck for life. $225,000 invested at age 50 would be $456k by age 60 and they’d pay out 4% ($18k/year) assuming you’d want a joint-life payout and assuming your wife was 50 years old as well. The payout would be $20.5k/year if it was on single life.

    With all things considered annuities aren’t right for everybody. If you want greater flexibility I like the S&P500 buffered – that’s a pretty cool product.

    • says

      I’ll take a look at annuities and try to understand what return rates they have. All I hear about them are super high fees, but that’s the same with many of these products.

      At your age, would you take out an annuity then? Doesn’t it seem like it makes sense to take out an annuity as early as possible if you have the cash and liquidity, since it would be guaranteed to pay you for longer?

      • says

        A few things about the annuities:

        1) High fees typically come from variable annuities (there are 3 MAIN types of annuities: fixed, fixed-indexed, and variable). Variable annuities have 2-3% fees PLUS the internal fees associated with the mutual funds they’re tied to.

        2) Fixed Indexed Annuities by themselves (without a rider) have 0 fees – however there is no guaranteed rate in a fixed indexed annuity. The only guarantee of a fixed indexed annuity is that (1) you can never lose money due to the market and (2) you will be tied to a stock market index and get a portion of the return. However, IF you attach the income rider it may add a fee…it just depends on the company and the rider. The 6.5% rider I mentioned in the comment comes with a .6% fee.

        3) I’ve thought long and hard about whether or not I should recommend an annuity to a younger person and I still haven’t come up with a good answer. The answer lies in whether or not you believe in the market over the next 20-30 years. I do believe the market will return better than 6.5% over the LONG TERM, so with that said I’m fine with taking the risk now to earn the greater return.

        With that said, NOT ALL ANNUITIES will offer that great of a rate to younger people. In my comment I specifically said ASSUMING YOU WERE 50 because if you’re under 50 they’re only going to give you a guaranteed rate of 4.5% (with no fee though).

        A FIA (fixed indexed annuity) by itself isn’t for everyone but they have their place: especially for people that are looking to preserve assets and keep up with/outpace inflation by a little amount. If the money is specifically for lifetime income then I think they’re a great product if you attach the income rider.

        I’m pretty confident in our portfolios but I’m not so stupid to think I can guarantee somebody 6.5% ROI each year and also guarantee that I’ll pay them a paycheck for as long as they live.

  2. says

    Good job with the cash, that’s a nice position to be in.
    Personally, I’d invest the money into a single or few rental properties. Again, I’m speaking this way, because where the rental market stands in Toronto. I’m unsure how it is in SF. Is there a university/college close by? Buy a home, break it up into 4-5 rooms and offer student housing. You’ll always have clientele, because student housing never goes down, but always up. Keep that in mind, you’ll always have potential renters. Why pay $900/mth, when they can pay you $500/room, and everyone has a shared kitchen. Just my two cents.

    • says

      The rental market is going ballistic here in SF, which is why I do have it as a consideration.

      However, a 4-unit, one bedroom building in a good area will cost about $1.5 million in SF now. Hence, I would need about $450,000 down to manage that, and borrow $1.05 million. That’s too much imo, and WON’T help me focus on my business.

      • says

        I agree. That is too much to put up and take on. Maybe you can look into real estate in other places. My hubby and I were talking about investing in the US market when house prices tanked. I know plenty who have and it has worked out really well.

  3. says

    Wait, why would the note increase in value in a declining market? That doesn’t make sense. If anything it would lose value, as the potential for the Dow to climb to 13k back from 8k is pretty much zero, pending that were to happen in year 3. Thus, anyone who purchased the note from you in the secondary market would have to price it like any bond yielding .5%. The value would necessarily fall as the appreciation upside is mostly gone.

    I don’t like either note. How liquid is the market for structured products on the secondary market? What’s the typical brokerage fee to buy and sell one on the secondary market? If it’s anything like the secondary market for CDs, the commissions are ugly – so ugly that you’d be best to evaluate this as a European-style option where you cannot exercise it but on a single day in the future.

    If you believe these banks to be too big to fail, your opportunity cost is greater than the yield on the BAC CD. Check out the yield curve for Citi, for example, which has non-callable bonds selling with a YTM of 3.3-3.7% financials.morningstar.com/ratios/r.html?t=S&region=USA&culture=en-US

    • says

      JT, you still panicking about the US markets today? The S&P500 is flat as of 8:12am PST.

      The DJIA structured note has a 100% principal protection feature. Hence, whoever holds the note gets all the principal back based on the level at which the DJIA was during its IPO.

      So what would you invest in?

      • says

        I was never panicking, I just know the results of the Greek + French elections are going to propel volatility.

        The DJIA note is interesting in that you have 100% principal security, but I don’t like the European-style setup and it’s the Dow…IDK why products would even be structured on an average and not an index. Anyway, I don’t really dig the Dow 30. I like that you can go out 6 years, but the Dow 30 is a pretty terrible mix of securities, and even worse when you consider the price-weighting. (Big wager on BAC and AA.)

        Looking through you have Boeing (6 years from today will the US be buying as many war planes?), AT&T (significant risks to the business 6 years out), HP (significant risks to the business 6 years out), AA (pretty much a bet on where aluminum prices go, yet AA is a large part of future upside, since it has a lower stock price). IBM and INTC are probably done moving after Buffett went absolutely nuts to drive them both way up.

        Why not split? Put $100k in the DJIA note since you seem to like it, then $125k in LC. Lending Club’s 36 month amortization + liquidity from note sales removes some of the risk you have to sell the DJIA note at a loss, since that was something you mentioned above. If you keep your LC loans to A-B rated people who want to consolidate debt/payoff credit cards you should be pretty safe.

        We have completely different risk-tolerance and return expectations, so it’s hard to even see this from your vantage point. As you seem to like lower risk, LC + DJIA seems like a good choice for you. Alternatively, DJIA + corporate bonds on the “too big to fail” banks to get .5% plus 3.4% on a 5-year bond. Averaged, that comes to 1.95%, which reduces your opportunity cost to .75%/year for unlimited upside in the DJIA. Anything above 1.5% per year on the DJIA in the next 6 years would beat the CD rate. I would think the DJIA can do better than 1.5% over the next 6 years. We went through the motions before, although the choices were different http://www.financialsamurai.com/2011/09/17/what-would-you-do-with-250000-right-now/

        • says

          BTW, that article was talking about pulling 250K out of home equity in the form of a cheap HELOC. This article is just cash sitting in a lousy MM fund, and discusses structured products. The returns are net of fees.

      • says

        I am glad you did not panic, as your Tweet last night about saying “the markets are going to get fugly tomorrow” made it seem otherwise.

        I’m into the dumbbell approach. I really could care less about a 2% return per annum, and would rather have 0.5% or 0%, if I had a 50%+ chance of making 10% or more a year.

        The DJIA keeps on changing as well, but the correlation is tight with the S&P. So, what about the S&P 2 year structured note then?

        I plan on doing P2P lending, but I have 50K ear marked for that already. I’d like to focus the discussion NOT on the amount of money, which really seems to be a distraction, and something I should probably have just taken out, but more on structured products.

        • says

          I like the DJIA better than the S&P product only because of the longer horizon. Expected returns are positive, and with more time it is likely that you’ll realize that expected upside. The variance is too high in 2-year performance to make the S&P500 SP anything but a gamble. Six years is a lot better as far as the average actually being higher than the price at the date you lock in.

          • says

            OK, thanks and noted. Although the 10% buffer downside protection is a nice compliment to the 200% upside leverage up to 22%. I hear you on variance. Although, I’m bullish, and think the direction is up in 2 years. We’ll just have some digestion pains right now.

            But, the likelihood of actually being down in these 2 years is pretty high.. hence, this could be 2 years of wasted opportunity cost for sure given no coupon.

  4. Bichon Frise says

    Is it fair to compare a CD with structured notes? That provide two totally different things.

    In other news, $15k/month requires a lot of moolah. $4.5 mil by my quick calcs if you care about inflation (no need to argue about my assumptions as almost all reasonable assumptions will lead to a number that is bigger than $225k). And you currently have $225k (or less) making $2800/month and that is a problem how? That’s almost a 15% return on CD’s. Then all of the sudden you have $6500/month you are trying to bring to $15k/month? These numbers are all over the map. And either your head is in the clouds or I am missing something (probably the latter). All seems much more reasonable if this is annual income, not monthly. But, I read it to be monthly.

    Another option that just got a lot less sexier 7 days ago is I-bonds. 8 days ago, I nabbed a full months interest by investing on that day and 3.06% composite rate. with the composite rate falling to 2.2% in 6 months. Not the greatest, but for having the money tied up for just a year (2.65 eff APY), it’s hard to complain in this market.

    It’s unclear what you are trying to accomplish here. For example, why does all the cash have to go into one product? Why not put some in the market, some in those high risk/high fee things you talk about above, some in bonds and some in CD’s? It’s hard to know what the correct thing to do is without the full picture (total port and goals).

    • says

      I can see how you are confused, so let me help you clarify:

      * The $6,500/month is my passive income, of which $2,800 a month comes from CDs. Please read Achieving Financial Freedom for more details.
      I did link to this article in my article, but I will add a (please read) to clarify.

      * My goal is to bring the passive income portion of the various income streams to $15,000 a month somehow, and sooner the better. Hence, I’ve broken down in this article the various options I’m considering to increase the $6,500/month w/ some liquidity I have.

      * Why put some in the market? Why not put some in the DJIA Structured Note with principal guarantee instead if I don’t need the money for 6 years and planned to invest in a 7 year CD anyway?

      Side-note: It is my understanding w/ the Apple sales correlation that many people are cashed up, otherwise they wouldn’t waste money on things that require a large amount of principal to generate income.

      Hope this is clear!

      • Bichon Frise says

        Ok, I assume you have more than $225k in CD’s, otherwise you are making a killing and you shouldn’t change that.

        On to Structured whatever they are called. It should be pointed out that I am a “glass half full” type of person when it comes to thing I don’t understand very well and I truly believe wall st is out to take our money through fees and selling products like you describe above. But, here are my “major” observations.

        *Taxes – do you have to pay taxes each year on unrealized gains?
        *Fees – what are the fees? So 3% right off the top?
        *Dividends – do you just assume dividends are part of the “return”, or are we just talking about growth? If the issuer of the product excludes dividends and keeps them for themselves, your downside protections (which isn’t a full guarantee to return all principal) isn’t as big of deal as touted above and the caps are worse and lower than touted above.
        *Upside cap – is this the entire index or do they include each individual stock? e.g. if stock A increases to 30%, do they cap that stock or do they allow it to bring the entire index up to the cap?
        *Downside cap – just the opposite of upside cap as described above?

        Essentially you are swapping downside protection for a cap on the upside. How this works in your favor is tough to understand without ALL of the fine print. I remain skeptical, but it is not my money. And certainly if you do go forward with this, I would be interested in being a spectator.

        Otherwise, to the market or a DRIP plan even.

        • says

          Taxes due on 6th year bullet.
          Returns are post fees.
          Dividends – don’t get any dividends per the bullet point. hence, miss out on a 2% gross yield on average.
          * There is no upside cap to the DJIA Structured Note, only the S&P500 structured note.

          And of course i have more than $225,000 in CDs to generate $2,800/month! You can do the math on a 3.75%-4% yield. The $225,000 is new money. Please, stop being caught up in the $225K amount. Look how many people are buying Apple products. Tons of people are cashed up. Please look beyond that.

          Finally, please read read the bullets for the structured notes products. Thx

  5. says

    I am guilty of having all of my savings from last year in a pathetic money market account. I normally use CDs but just didnt bother last year bc the rates were so low. I’m glad I read this post because I hadn’t heard of structured CDs or structured notes before.

    The 2 structured notes you found sound pretty good. That’s too bad they aren’t FDIC insured but they have good built in protection. I’m a low risk investor so I’d probably put my money into both of them as long as I didn’t have to pay fees to do both.

    I like your advice on anchoring low too when going to talk with a broker. I would probably give up too much info too soon if I hadn’t read that!

  6. San Diego says

    Sam call me crazy but I think your best long term investment would be to buy land with good water and start a farm. You could create a fully sustainable lifestyle for yourself and achieve true economic freedom. It would be wise to start a variety of businesses on the property such as a winnery, a flower/vegetable garden and a fruit orchard as these activities would provide a diversified revenue stream. I see land and water being 2 limited resources that are going to dramatically increase in value in the next 15 to 30 years. Also food, especially organic food is going to be increasing expensive to buy as the cost of water and land increases. And if shit really hits the fan then you have food and water available. You can’t eat greenbacks or gold bars, these types of materials are only valualbe because we collectively believe they are valuable. Just my $0.02

    • says

      Hmmmm…. yes, kinda crazy, but that’s OK!

      Any particular farms in which states you recommend?

      I actually thought about doing this in Hawaii….. but the property is being sold. Topic of another post.

      • San Diego says

        Thanks for keeping an open mind Sam. I would recomend any state that you feel comfortable living in and is conducive to farming, most states are adequate for farming depending on what your interests are. California and Hawaii would be great locations but land can be quite expensive. However, there is a great video about living in Hawaii mortgage free that I highly encourage you to watch (this is not spam), it may be a big lifestyle change to live in a tiny home but I think such a life has its appeals and charms…


        Im curious if you could see yourself in a similar situation.

        • says

          Got it, thx. I actually have access to a rent/mortgage free home in Hawaii, which is why I’ve got so much temptation to just do my own thing.

          Checking out the video now. Awesome!

        • San Diego says

          Go for it Sam! Move to Hawaii if that makes sense to you and you see yourself being happy there, I would if I was in a similar situation! Life is truely what you make of it. Im only 29 so I still have quite a few more years until I can hang up my corporate monkey suit and trade it for some overalls. Oh by the way if you are ever in SD let me know, my girlfriend and I would love to take you to dinner in La Jolla, we have excellent Sushi here, you got my email…

          • says

            Sounds good man! I love La Jolla. My favorite hotel is La Valencia and walking along the coast. I went to a good Mexican place there. The name escapes me now.

            Work til 35 and revisit your early retirement thoughts!

        • San Diego says

          Yeah La Valencia is awesome! Especially lunch on the terrace with its ocean view, highly recomend the cuban sandwhich. You are probably thinking of the Mexican restaurant Jose’s, its a popular one. I like your idea about grinding it out until 35 and re-evaluating at that point. Seriously Sam look me up next time you are in SD!


  7. Investor Junkie says

    Why does it have to be all or nothing with the selection? Why not some in structured notes, and say P2P lending?

    • says

      Because these structured notes are where I’ve narrowed down the choices that will provide me what I want, a dumbbell approach to investing.

      I’ve got $50K ear marked to P2P as soon as I can finalize a partnership (waiting on them). The point is, every year worked, is another inflow of cash. I’m already diversified and want to focus on these structured notes. Let me know your thoughts on these notes in particular.

      I was hoping people would not get hung up on the amount of capital, and just focus on the two structured notes. Could you do that for me?

      • Investor Junkie says

        Sorry, I don’t have any experience with them. It’s about the only investment I don’t have experience in. They never really have appealed to me.

  8. Investor Junkie says

    If with P2P you already have allocated $50k, then why even mention it? I agree you made this post way too complicated. You also are missing many other types of investments in the “fixed” income area, especially since this is taxable investments.

    Why not?
    – Munis?
    – MLPs?
    – High Yield?
    – Dividend Stocks?

    Granted all are not “guaranteed” fixed income but you are already passed that based upon your investments selections mentioned.

    • says

      Because I could put $275,000 in P2P investing, but that seems like an overkill. Maybe $100,000 in P2P would be better.

      Your choices all have the great ability to lose money. While the structured notes have a 10% buffer, or 100% principal guaranteed.

      • Investor Junkie says

        With my $10k in P2P I’m having an issue of finding notes that meet my very selective criteria.

      • Investor Junkie says

        Munis and High Yield have a chance to lose money? Only if the FED rate rises and you’ve stated you aren’t concerned about that. The others yes.

        • Investor Junkie says

          No, obviously there are many other factors, but if you choose your bonds right do you really think there is much downside risk (ie greater than 10% like you stated)? The biggest risk would be the FED rate, hence why I mentioned just that.

          In addition with the amount of money you are talking about you could easily have a greatly diversified portfolio, get a high blended rate. So even if one default or turned on you you should be fine. So it still goes back to the biggest risk, the FED funds rate.

  9. says

    Thanks for the post on structured notes. I don’t know anything about this product. I should talk to Chase and see what they can offer me. Keep us updated on which way you’ll go.

  10. Hiro says

    Thank you very much for another meaningful post.

    Like you, I’m not sure what to do with the cash at the moment. I’m having about 200k extra cash sitting in my HSBC. Thinking about to pay off some of the mortgage(currently 3.75% 15 yrs fixed in Houston). Really like the idea of rental properties but need to do more research. If you have any basic info about rental properties please send it over. Many thanks in advance.

    The good thing about having cash at the moment, especiallly when I am somewhat bearish economy, is that I can get into the market whenever I like. I understand there is some opportunity cost but I value the liquidity at the moment. What do you think about my point of view?

      • Hiro says

        sorry, i hit the enter button before reply back to your question.

        I like the 2 yr structured note option just simply it’s a shorter term product
        with a limited down size. The note actually sounds like a strangle to me,
        which isn’t a bad position to have at the moment.

        • says

          Thanks Hiro. It is like a strangle. I don’t think the markets collapse or rip on the upside by much more than 10-20% over the next two years either.

          I don’t mind if you pay down your 3.75% mortgage. That’s 1.45% higher than I’ve seen anything else.

  11. says

    You are always someone I learn from, thank you. Just from what you have said, I think I would invest the minimum in the two-year note and 175 in the 6-year. Or maybe 100 in the two-year, and 125 in the six-year. Also, your Mitt Romney structured CD was amusing!

    • says

      No problem! Glad you found the example enlightening. It really is a potentially real structured product that a derivatives team at a bank could come up with!

      Sounds like you are leaning more towards the DJIA Structured Note. Me too. I like the idea of no downside, 100% upside, since afterall, leaving the money in the bank would be only 0.2% interest a year anyway!

      • says

        And two years is nothing, so once you get it back, then you can buy a rental property. Do you find it a bit flabbergasting that everyone STILL thinks investing in real estate is a good idea?

        • says

          Do people think that? All I’ve seen is people say stay away from RE. I think RE is a no brainer now, however, it does NOT simplify my life, which is why I’m leaning towards these notes and not RE.

  12. says

    If the goal is to provide passive income now/in the short term, then neither structured product would appear to meet your needs – one offers no yield and the other a paltry 0.5%.

    If the goal is to boost your passive income in two/six years time (without caring about yield before then), and it was a choice between the 2.3% CD, the 6 year Note and the 2 year Note, my vote would be for the two year Note. There’s no such thing as a free lunch but leverage on the upside combined with the downside buffer is a pretty compelling risk reward ratio. I’d probably go in with the intention that if the market was down on maturity and I had no better ideas, I’d roll the money into an S&P index fund. Effectively, I’d be telling myself if the markets are up in two years time, then I beat the market. If the market’s down, then I’ll buy at a discount to today’s prices.

    I don’t find the six year that attractive. Firstly, six years is a long time for most of us and a lot of things can happen in that time – marriage, children, illness, divorce and a visit from the four horsemen – which require needing the money early. Second (and you need to check the fine print on the contract), you are betting not so much on what the market does over six years but in where it will be on a specific date in six years time (or possibly some average for a few days at around that time). You could end up trading a lot of opportunities to make money and taking on the possible risk of seeing your investment mature in the depths of the next financial crisis.

    As a side question, have you run the numbers on creating your own structured product using a combination of CDs/short term bonds and options?

    • says

      The goal is not really for income now since I don’t touch any of my passive income as I have active income to rely on.

      I’m frankly just looking for the maximum return on investment, and if that means a 6 year note, so be it. I will calculate the IRR over the 6 years.

      6 years is a long time, but so long as one has various sources of income, then there’s no use for the cash that I plan on investing. Of course, everything go come to a halt, but there is still $6,500 a month in gross income to draw from, penalty free.

      Trading is hit or miss. I can easily lose money as I can make money. I’ve been good for the past 3 years, but eventually, that run will come to an end.

      Haven’t done a personalized structured product. I need to make clear that this money is not all my money, it is a slice of money that I plan concentrate my investment in something. There’s no point diversifying the slice of income that is part of a larger , diversified portfolio.

  13. says

    If you’re picking between the two? The DJIA note is more interesting from my perspective – the way you have the bullet points it seems you are capturing DJIA return + .5 percentage points for a small cost in opportunity costs.

    If you’re looking for something else, I like to buy Tax Free Munis while I’m thinking about where to invest. Don’t fight the California Tax Board – embrace it!

  14. Nunzio Bruno says

    Hmmm this one was a stumper for me. What I would do is probably stay out of structured debt all together. I like the property idea and would definitely consider it. I might also get a little active with management and create a portfolio. If I were in your situation while I would a fix a percentage of it to good quality credit I think I would do a percentage of solid value and dividend plays then get aggressive with with about 20% – like trying to nab some FB IPO action. Over 5-6 yrs I think you’ll have better luck earning a return out in the market with a diversified portfolio in the market then parked in structured debt instruments.

      • Nunzio Bruno says

        Right right! Sorry I mispoke (mis-wrote) I was trying to refer to the three options you liste :) You are definitely right on the stress to the FB IPO.

  15. BusyExecutiveMoneyBlog says

    I really like this post and conversation. Lot’s to learn here. The real question is where rates are going? Is there a strong liklihood that Ben will have to raise rates after 2014. If so, then you could potentially be back in the 4%+ range on CD’s by then. The structured stuff is new to me but sounds a lot like point spread betting (with some gaurantee’s of course). I’m focused on building the “nut” today and constructing a cd ladder once rates are respectable again. So, capital preservation is key.

  16. kartik says

    Have you considered Fixed Deposits in a Foreign Country, particularly India? A lot of banks with operations in India (eg. SBI, IDBI, Kotak Mahindra etc) are currently giving a 9-10% interest rate on deposits made in Indian Rupee. (The interest is tax-free in India and obviously taxable in USA)

    That is a guaranteed investment return. The only downside risk that you have is the currency fluctuations between the USD and the INR.

  17. Eric says

    I take it on these structured notes that returns on the DJIA or SP500 are price only and do not include dividends? Does that still pencil out? Also, do these pencil out if your time horizon is much longer than 2 or 6 years? Missing out on upside potential can be very costly if you have the time horizon to wait out any correction that happens over that time period making the protection on downside only a psychological benefit. Curious to hear your thoughts.

    • says

      Don’t get the dividends as stated in the post. There are new offerings every year and the terms will depend on the environment at the time.

      There is a huge and REAL benefit that one won’t lose money in the DJIA SN.

  18. AWJ says

    The S&P 500 Buffered PLUS Structured Note interests me, but my broker is Schwab and they have no idea how to acquire the S&P 500 structured note you mentioned. How do I go about purchasing these structured products?


  19. Anonymous Student says

    These seem like pretty lucrative products Sam! I was suspicious after looking at the word “structured”, because it got me thinking about CDOs and structured tranches of bad mortgages – but these don’t look to shabby!

    Still – what’s the incentive for the person on the other side of the deal for this proposition? I understand part of it is the high capital buy in compared to other investments, but it seems to me that whoever is on the other side of the deal seems to believe they can beat the S&P or the DJIA index with the money you’re handing them?

    • says

      That is a good question. The other side of the trade definitely is profiting in some way. I’m sure it’s just a straight up margin lock given it is an offering. Banks don’t want risk on their books.


Leave a Reply

Your email address will not be published. Required fields are marked *