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Commodities and Asset Allocation

COMMODITIES AND ASSET ALLOCATION FOR MARKET-LINKED CDS

Market-Linked CDs (MLCDs) are one of several safe money vehicles offered by Abrams Insurance Solutions, Inc., and they can be a smart choice in today’s environment.  The interest credited to the CD is based on a basket of stocks or commodities – the following article shows how a mix of both may be in the investor’s best interest.

With interest rates near historical lows, Government Bonds and Traditional CDs no longer offer returns that outpace inflation.  This has lead to a substantial rise in the purchase of MLCDs which were originally developed by Chase Manhattan Bank in 1987.  MLCDs are one of the few products available still offering the potential for returns greater than 3% without risking principal.

Potential benefits of MLCDs.

  • Safety – Principal Protection.1
  • Insurance – FDIC Insurance.2
  • Potential – Historical returns have averaged 3.54%.3

The Basics.

  • The issuing bank will return 100% of your principal at maturity.
  • If the bank fails the FDIC will return your principal as long as your deposits do not exceed statutory limits.
  • MLCDs pay interest each year based on the performance of stocks or commodities.4
  • If you need to sell your MLCDs prior to maturity the issuer will buy it back at the current market value.5

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Commodities and Asset Allocation

Originally Published 9/17/2010 in Resource Investor

Which asset class would you expect to generate the better performance over the past four decades or so – domestic stocks, commodity-linked securities or a portfolio split evenly between the two?

Roger Gibson, one of the nation’s most influential voices on asset allocation, offered his answer with the following chart on the subject.  He uses the S&P 500 Index for U.S. stocks and the S&P GSCI Commodity Index for commodities, and he assumes annual rebalancing to maintain the 50-50 allocation.

Commodities and asset allocation

His math shows that an investment of $1 in the S&P 500 in 1971 would by this year have grown to $32.07, and that an identical investment in the S&P GSCI would have increased to $36.26.

But look at what happens when 50 cents goes to each of the asset classes at the start – by 2010, that original dollar would be worth nearly $52.

As Roger puts it in the webcast, “The whole outperformed the components. And it did so as a result of the reduction in volatility relative to the components.  That is also an outcome that you did not ever have to predict what was going to happen in the short run.  All you had to do is have balanced representation and keep rebalancing and keep holding.”

The S&P 500 Stock Index is a widely recognized capitalization – weighted index of 500 common stock prices in US companies. The S&P GSCI is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.  Diversification does not protect an investor from market risks and does not assure a profit.
 
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The above summary is not intended to be an offer to purchase CDs.  Interested depositors should request full offering documents from their financial consultant.  1MLCDs are 100% principal protected when held to maturity based on the credit strength of the issuer.2 MLCDs are FDIC Insured up to statutory limits, which are described in detail in the offering documents, generally  up to $250,000 per bank, per account registration. 3 23 MLCDs on this platform have paid interest with an average payment of 3.54%, however past performance is not a prediction of future results as each MLCD offers different variables which will affect actual interest paid.4 Interest is subject to a CAP with caps currently ranging from 5% – 9.625% depending on the particular MLCD.   5If MLCDs are sold back to issuer prior to maturity, depositor may receive less or more than original deposit.
About Chris Abrams

Chris and his team work with clients across the country to help them navigate the insurance and financial world. His mission is to help people and businesses have the protection they need at the lowest possible price. He works on behalf of his clients and not the insurance companies. When not researching the latest financial and insurance topics, Chris can be found spending time with his family, traveling, cooking or running on the beach.

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