Hi everyone,
Does anyone have any insight into the Wells Fargo Market Linked Security linked to the SPDR S&P 500. CUSIP 94986RVB4.
It has a150% upside participation with a maximum total return at maturity (7/31/2018) of 138%. No interest is paid.
If the value of the fund decreases by < 10%, the principal is preserved. If >10%, then it has 1-1 downside, so you could lose 90% of your principal.
I bought $50,000 on 11/4/14 S&P- 2040 (pre boglehead days-won't be doing this again!).
It is now worth $42000 if sold.
What sage advice can you render for me? Should I keep till maturity and hope that the S&P 500 is above 2040 on 7/31/18 so that I can have a decent upside; or just sell to preserve whatever principal is left and move into a Vanguard fund to reduce risk?
Thanks all!
Wells Fargo Market Linked Security
Re: Wells Fargo Market Linked Security
Anyone able to help?
Re: Wells Fargo Market Linked Security
38% upside and 90% downside potential? I think the House wins again.
It all depends on your ability and willingness to take the risk. If you think you can ride out the market and won't go broke with losing $40,000 while hoping for a 38% income potential, you can keep the investment until 2018.
However, you will have to pay phantom tax before maturity if the S&P rises to such a level that you have an appreciation.
I would sell it, take the tax write-off and learn something from it.
It all depends on your ability and willingness to take the risk. If you think you can ride out the market and won't go broke with losing $40,000 while hoping for a 38% income potential, you can keep the investment until 2018.
However, you will have to pay phantom tax before maturity if the S&P rises to such a level that you have an appreciation.
I would sell it, take the tax write-off and learn something from it.
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Two Headed Mule
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Re: Wells Fargo Market Linked Security
Assuming you have accurately described the product's terms, you should keep this.
If you sold now and reinvested the 42K and the market did nothing for the next two years, you'd have only $42K (plus the dividends that are excluded on your product). On the other hand, if the market does nothing from here and you keep the product, you get your 50K back (the S&P has lost just under 10% from the 2040 level). In fact, if the index ends anywhere between 1836 and 2040 at maturity, you get your 50k back, a much better result (within that range) than selling, receiving 42K, and reinvesting. The market would have to produce spectacular results (well above 2040) for the selling and reinvesting option to produce better results than the product (when the fractional participation/total cap above the 2040 level kick in).
The downside is also better. Selling now and reinvesting your $42K, if the market losses 10% from here, you end up with around $38K. With the product, you'd end with around 45-46K at maturity (the first 10% of loss to this point is absorbed by the bank, so you'd lose a little less than 5K on the second 10% leg down from here). Even if you would go to cash with the 42K to "preserve principal", the index would have to be below around 1713 at maturity to receive only $42K on the product.
Mule
If you sold now and reinvested the 42K and the market did nothing for the next two years, you'd have only $42K (plus the dividends that are excluded on your product). On the other hand, if the market does nothing from here and you keep the product, you get your 50K back (the S&P has lost just under 10% from the 2040 level). In fact, if the index ends anywhere between 1836 and 2040 at maturity, you get your 50k back, a much better result (within that range) than selling, receiving 42K, and reinvesting. The market would have to produce spectacular results (well above 2040) for the selling and reinvesting option to produce better results than the product (when the fractional participation/total cap above the 2040 level kick in).
The downside is also better. Selling now and reinvesting your $42K, if the market losses 10% from here, you end up with around $38K. With the product, you'd end with around 45-46K at maturity (the first 10% of loss to this point is absorbed by the bank, so you'd lose a little less than 5K on the second 10% leg down from here). Even if you would go to cash with the 42K to "preserve principal", the index would have to be below around 1713 at maturity to receive only $42K on the product.
Mule
Re: Wells Fargo Market Linked Security
How is the current value determined? Is it set by the market, or is it based on the current value of the S&P? And if it is based on the current value of the S&P, does it already include the downside protection?
If the value is set by the market, then selling it on the market to take the $8000 capital loss is a good deal; the security isn't worth significantly more than any other investment on the market.
If the value is set by Wells Fargo, you might compare the current and final value under various scenarios. If you sell and invest in an index fund, you will receive the returns of the index, including dividends, which would be about 5% by the time your security matures.
If the value is set by the market, then selling it on the market to take the $8000 capital loss is a good deal; the security isn't worth significantly more than any other investment on the market.
If the value is set by Wells Fargo, you might compare the current and final value under various scenarios. If you sell and invest in an index fund, you will receive the returns of the index, including dividends, which would be about 5% by the time your security matures.
David GrabinerRe: Wells Fargo Market Linked Security
Thanks for sage advice everyone. The value is simply based on the SPDR S&P 500. A lot to re-evaluate.