When the stock market is losing money, companies come out of the woodwork promoting investment products that guarantee returns. People are much more susceptible to “guaranteed” investment products when the market is an emotional roller coaster.
I had a client email me today asking about an outrageous claim that one radio host was making this afternoon as she was guaranteeing an 18% return in a year in her investment program.
Legitimate investment strategies are highly regulated by both the Securities Exchange Commission and the National Association of Securities Dealers. There are very strict laws the prohibit anyone licensed to represent securities to make implications or outright guarantees of investment returns.
If that is the case, then how do these programs broadcast on the radio and make outrageous claims? Well most of the time, they are not true investment products but actually insurance products that look like investment products.
So, if you are approached by the next great guaranteed investment, ask the following questions:
- If the return is guaranteed over a period of one year, ask if you will receive your original investment at the end of the period plus the guaranteed return with no strings attached. So, for the lady claiming the 18% guaranteed one year return, I would want to know that I could get back my original investment plus that 18% in a check with no strings attached.
- If the return is tied to one of those equity indexed annuity products where they promise you will never lose money and you will also make money when the stock market goes up, ask them if you are guaranteed to get the investment balance that you see each year on your statements with no strings attached.
- If you get the answer of yes to any of these questions, then ask to get it in writing with a written explanation of the guarantee.
The reality of the situation is simple. The only guarantee that can be made when it comes to investing are risk-free investments such as a CD. If you are attempting to make a return greater than what you can make above and beyond a risk-free investment, then you are taking risk of some type. There is no free lunch. However, there are promises and guarantees with many strings attached.
By the way, if anyone can provide an investment with a huge return and guarantee, please let me know. I would stop taking risk and trying to manage money and just sit back and reap the rewards of a nice fat guarantee. Of course, so would everyone else in the investment business and no one would take risk.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
