Guaranteed Investment Return

The promise of a guaranteed investment return. Sounds attractive doesn’t it?

If you do not read this article (repeatedly until the lesson sinks in) then I’m afraid that your path to prosperity is at great risk and could very well end up losing your shirt.

You are no doubt reading this article having clicked on an advertisement that says ‘10% pa guaranteed investment return’.

However you should know better not to click on such things and this article will explain to you why that is so.

There is honestly no such thing as a guaranteed investment return and you need to truly understand this, and be wary of financial promoters promising similar things or talking in such an assured and confident way about investment. These sales tactics are effective but the structure of the world, the people within it and its unpredictable nature, ensures that these are simply baseless lies.

I don’t want you to lose your prosperity and the best way to ensure you obtain attractive investment returns is through education.

Education is what will protect you from scams, miss-selling, biased promotion, and taking unnecessary risks with your money.

The financial world is rife with promoters who wish to attract your capital. That is all well and good, nothing would be built and no business would expand without pooling your savings with others and putting them to use.

When you invest it means parting with your money. However you need to ensure that this is temporary and not a permanent parting. You want it to be more of a ‘see you later’ than a goodbye.

I suppose we all aim for a guaranteed investment return

The aims of any investor sound simple enough.

Invest your savings for a return OF your money and a return ON your money.

Return = principal + interest

Yet the process is fraught with difficulty and the desired outcome is far from certain.

Just because businesses, building developments and other projects need your capital, it doesn’t mean you should be giving them yours.

All investments aren’t created equal and there are certain investments that are sounder than others, i.e. you are more likely to fulfil your desire for the return of more money and less likely to lose your shirt.

This brings me back to financial promotion.

The very types of investment schemes that offer the promise of a guaranteed investment return, or other similar promise, can never truly provide it, and are precisely the type of investment you should avoid like the plague.

It would be helpful to remember this phrase,

Don’t lose your shirt chasing dreams in dubious investment schemes.

These financial promoters will sound convincing, persuasive, assured, confident and trustworthy.

But just because they sound confident, have a broad smile and a sharp suit; it doesn’t mean they actually know what they are doing, or have your best interest at heart.

Here is the type of comments they will make that should instantly cause an alarm bell to ring in your head:

  • The price is only going to rise (blatant lie).
  • You can’t lose (blatant lie).
  • You will receive a guaranteed return or income (guaranteed by who exactly, how is that guarantee provided, how good is their word, how financially sound are they etc. – at best it’s a promise, at worst it is a blatant lie).
  • Don’t worry about the details (I can assure you that the details are incredibly important).
  • You can trust me (no you can’t).
  • The costs are competitive (either it’s low cost or it isn’t).

There is likely to be many more examples.

The people who say such things will generally fall under one of the following descriptions:

  • Charlatan
  • Shyster
  • Knave
  • Spiv
  • Spruiker
  • Trickster
  • Snake Oil Salesman

The problem is they don’t exactly go around wearing a name tag with any of the above descriptions.

They will tend to use the same titles that are also used by honest, ethical and technically proficient professionals. Unfortunately at all times you have to be incredibly vigilant and, I’m a little upset to be writing this, but have a view of mistrust towards everyone involved with your money (at least slightly).

The truth about investing

Here’s the truth of the situation when it comes to investing.

Any asset class can lose or make you money. It includes things people generally view as being safe. It includes your castle, otherwise known as your house. It includes the cash you have in the bank (why else would they come with government protection), and it includes lending money to the government via Gilts.

Any asset has attractive features, disadvantages and inherent risks. You firstly need to be aware of these, but you also need to understand them, consider them, accept them, mitigate these risks, or decide to avoid them entirely.

Two concepts are essential to ensuring lasting and sustainable prosperity. One is diversification and the other is price.

With one company’s share for example, the price you pay is key.

The Risk and Return relationship is affected by price.

A low price improves the probability of receiving a good investment return, and a high price increases the likelihood of you receiving the risk inherent in the asset.

The main difficulty with this is that it’s incredibly difficult to know whether you are paying a high or a low price without the benefit of hindsight. Some shares trading at huge multiples of earnings go on to fulfil and exceed their potential, and some shares trading at tiny multiples of earnings end up going bankrupt.

This brings me onto the next key concept – Diversification.

It seems clear to me that if you wish to become exceedingly rich you need to be extremely focused and concentrated in your wealth building activities, but if you simply wish to ensure that you maintain and gradually enhance your prosperity over time, you have to diversify your wealth.

This means not putting too much of your wealth into just one asset, no matter what the asset is.

Your wealth should therefore have a mix of the following:

  • Shares
  • Property
  • Bonds
  • Commodities
  • Cash & Currency

You should also ensure that you are not overly exposed to one particular country or region, but need to maintain your wealth beyond borders.

Confidence vs. Wisdom

The world’s best financial minds truly understand that there is no such thing as a guaranteed investment return, and talk about financial markets in terms of probabilities and uncertainties – their success is based on the fact they understand and embrace the fact this world is uncertain.

Here are some quotes from these investors and speculators which I have found useful in building my own understanding, and you will no doubt also find them useful:

At heart, ‘uncertainty’ and ‘investing’ are synonyms. – Benjamin Graham

If we become increasingly humble about how little we know, we may be more eager to search. – Sir John Templeton

Many more investors assume they have knowledge of the future direction of economies and markets – and act that way – than actually do. – Howard Marks

One of the essential requirements for investment success – and thus part of most great investors’ psychological equipment – is the realization that we don’t know what lies ahead in terms of the macro future. – Howard Marks

We always live in an uncertain world. – Warren Buffett

In the business world, the rearview mirror is always clearer than the windshield. – Warren Buffett

The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market. – George Soros
I hope you get the message. Now contrast these types of quotes to the type of confident, assured and persuasive promotional material and messages you received from far too many financial promoters.

It’s clear to me that those promising certainty are at best arrogant and ignorant, and at worst, knowingly and wilfully lying to you.

Don’t feel bad that you are attracted to the promise of certain and high gains. We are all wired to be optimistic and we all wish to better our financial wellbeing and enhance our prosperity.

The promise of certain and high returns are an appealing prospect and it’s everybody’s financial utopia.

If only the world reflected our desires.

It’s the future

In the following points, I aim to permanently imprint in your mind the impossibility of ANY form of any future guarantee having 100% accuracy:

  • As of 2016 approximately half of the planet has some level of armed conflict (and which also involves many other countries who aren’t geographically involved).
  • The total world debt is 223.3 trillion.
  • A World Bank study identified that between 1970 and 2011, there were 147 systemic banking crises, 218 currency crises and 66 sovereign debt crises.
  • The world population is ageing like no other time in history.
  • The 20th century economy has been fuelled by oil, yet it remains to be seen what technologies and combinations will go on to fuel the economy of the 21st century, or when this will happen.
  • Businesses that are household names in one decade can become bankrupt in the next.
  • The people making decisions in businesses, governments and investing, still share the same genetic makeup as our recent predecessors who drowned suspected witches, and to this day a great number of people still believe in cults, a wide variety of religions (they can’t all be right), and frequently succumb to mass mania and other delusions, such as financial bubbles.

Simply put, the world and all of us in it are a little bit crazy and this craziness appears to come to the fore when we start thinking collectively (or more correctly speaking, we collectively stop).

All promises made essentially have a hint of baloney within them. That is true even for government promises like state pensions (perhaps especially true) and even sound promises like insurance contracts.

Insurance contracts, such as annuities, are not guaranteed. However the insurance companies attempt to manage and mitigate the risks to ensure they fulfil these contractual obligations (and turn over a profit). If they fail there is also an additional layer of protection. This significantly enhances the level of security of these contractual promises, and most of the time they do a good job. However insurance companies, and other financial institutions, can and do go bust and their promises are not the same as a guarantee.

Remember there is no such thing.

You can’t change the world, but you can change how you think about it. You can change how you manage your money to ensure you maintain and enhance your prosperity. And finally you can change who helps you with your finances.

Get in touch today for a personal, independent, and comprehensive financial plan.

Mark Underdown | DipPFS IMC CeMap

Financial Planning Consultant


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