Avoid Structured Notes

Wall Street professionals have come up with another product designed to make them lots of money but it leaves investors scratching their heads. Structured notes are created by financial institutions and peddled as giving investors the opportunity to make big profits while protecting their principal. We should already be suspicious.

One popular type of structured note guarantees that your initial investment will be returned after a specified period even if the underlying security declines in price. But you will only receive a portion of the total gains if prices of the security rise. Another type of note called a reverse convertible, designed for income investors, offers double digit yields for a specified period. But if the underlying security has fallen in price more than a specified amount when the note expires, you will receive shares of the depressed security instead of your principal.

Commissions plus high fees (some specified and some hidden) can sap total returns. And tax treatment of gains and losses will complicate your tax returns.

Instead of falling for these gimmicky products, buy solid dividend-paying stocks, low-fee index funds and exchange-traded funds.

Posted November 15, 2006.