No Whammies aaannnddd…STOP

Remember the game show, “Press Your Luck”?  A contestant would earn spins and the number one goal of the spin was to not get a whammy.  A whammy meant that your earnings from the game went to zero.  Getting a whammy was based purely on luck.

Recently, one of the largest banks in this nation released a small offering of a structured note.  A structured note is a little complicated, but often has some characteristics of both a bond fund and an equity fund over a defined period.

This sales product offers 1.5x leveraged exposure to a collection of 3 ARK funds.

ARK funds have gained in popularity this year for providing exposure only to emerging technologies.  Some of the funds have done quite well due to having a significant exposure to Tesla (up 645% YTD on Dec 17, 2020). 

Here are the basics of the product:

  • 6-year maturity date
  • Worst performing of the three funds determines your return
  • Multiply worst fund by 1.5 IF greater than original investment
  • Less 0.75% sales commission
  • All dividends go to the bank and are not reinvested to help drive performance
  • You can lose money

This investment product is like playing Press Your Luck.  Your returns are wholly reliant upon the stock price in December 2026.  The beginning price of the note is as of December 4, 2020.  That is a frothy buy price for Tesla.

This does not make any sense to me.  You are engaging in a game of chance and there is no reason to do that when investing in publicly traded stocks.

When a bank creates a product like this, they have two things in mind:

  1. Are the odds in the bank’s favor to make money?
  2. Can we create a story around potential outcomes that can be used to sell it?

You could make money.  You could lose money. Or you could get your money back less the 0.75% commission of what you invest to essentially spin a roulette wheel. You must understand that the bank is not attempting to put the odds in your favor to take some of their money.

I tell someone every day:  I cannot be certain where stock prices will be next week, next month or next year.  And we do not invest in stocks for specific 6-year returns.

We invest with a multi-decade time horizon in mind.  This harnesses the beauty of compounding interest, and allows us to ignore the noise of a large up or down day.

Ignoring short-term price movements is a great skill to possess.  Buying this silly product means you must pay attention.  Do not press your luck on what a stock price will be on a random date in the near future.

-Mark Hume

BCR Wealth

BCR Wealth

From retirement planning to asset management and protecting your family's financial future, BCR Wealth Strategies provides clear guidance and comprehensive support to help you verbalize and realize your financial objectives.