While you would probably love to be able to reap the gains of the stock market, you may not be willing to endure the risk and volatility that comes with that territory. At this point, you may be too close to retirement to be willing to subject your portfolio to a possible market downturn. However, you may also be concerned that your savings are not growing fast enough to provide for your needs in your later years, particularly if your portfolio growth is not staying abreast of the current rate of inflation.
Fortunately, there is a way to participate in the gains of the stock market without the downside risk. The banking industry has been kind enough to create a hybrid type of security called a market-indexed certificate of deposit. This unique investment alternative is conceptually similar to an equity-indexed annuity, except that it does not grow tax-deferred. It does not pay a set rate of interest of any kind, but simply invests the principal into one of the major stock market indices, such as the S&P 500 or the NASDAQ 100, or even precious metals such as gold and silver. Of course, these CDs are FDIC insured, just like their traditional cousins. The only risk that the investor assumes with these instruments is the possibility that he or she will only receive their principal back, without posting any kind of gain. This would obviously happen if the markets performed badly during the term of the CD, which in most cases will run from 3 to 7 years. But there is no chance that an investor can lose his or her principal in a market-indexed CD; no matter what the markets do, the FDIC will guarantee the investment up to $100,000, just like any other CD.
Of course, if the markets perform poorly and only the principal is returned, then the investor has “lost” the interest that would have been paid from a traditional CD. One other possible disadvantage that these CDs present is a greater lack of liquidity than interest-bearing CDs. Many market-indexed CDs are illiquid for the first year, and thereafter are only accessible by paying a steep penalty. But the risk-to-reward tradeoff inherent in this type of CD may be hard to beat.
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