When a Financial Product Sounds Too Good to Be True

It probably is. I’ve recently heard about such a product, one that guarantees you 10% return for the next seven years, and 5% for life after that. It’s even in writing. Doesn’t that sound great? Who wouldn’t want that?

But the devil is always in the details. Let’s examine the details of this particular offer, which is an annuity. Let’s say you invest $100,000 in this product. At 10%, you’ll double your money in about seven years. You’ll have $200,000.00. Fantastic. So far, so good, right?

But here’s where the details come in. If you read the fine print, you’ll probably discover that the $200,000 does not belong to you. You can’t ask for a check for that amount. You’re not allowed to touch that $200,000. In fact, if you do, there are penalties. Instead, you can take an income from the 5% for life that was guaranteed, which will be $10,000. So let’s say you were paid $10,000 a year for the next ten years. How much have they paid you now? $100,000. Guess what just happened? Over that ten-year period, you were paid back the money you originally invested. In a nutshell: You invested $100,000 in this product, you waited seven years to see $200,000, and then you had to wait ten more years while you were paid $10,000 a year. You made back your money 17 years later.

The guarantee was all true. The value of your investment rose by 10% and you did get 5% for life. But I don’t think this is a good deal. If it were, I could retire right now. I could put all my clients in this deal and never have to do another day’s work. I wouldn’t have to worry about the market. I wouldn’t have to worry about anything. Unfortunately, there is no free lunch, and there’s no such thing as a risk-free product that guarantees a 10% return. And if someone tells you there is, read the fine print very carefully. Ask questions. Be an informed consumer. Remember that the devil is in the details, and if something sounds too good to be true, it probably is.

TO POLITICIANS: STOP BEING NICE

I wish the politicians would stop being nice. We’re getting closer to the fiscal cliff, and all this playing nice stuff is getting on my nerves. We’re all Americans. We’re not Democrats. We’re not Republicans. We’re Americans, and the politicians need to do what’s best for the American people. Take the gloves off and let’s get the fight going.

They’re wasting time. The fiscal cliff deadline is January 1st. We don’t have a lot of time to get this thing resolved. I’m concerned that they’re just going to talk nice, not resolve anything, and have a fight at the last hour-and that the market will drop dramatically as a result. I don’t doubt that they will find a way to extend the deadline, but they might wait to make a decision with only seconds left on the clock, like they did last year.

During the debt ceiling debate last year, we saw the market go down 19% before they finally decided to raise the debt ceiling. I think we’re seeing all the earmarks of the exact same thing. Do you want to take massive losses while you wait for those guys to resolve their problems? Why not take some profits off the table? Then, when they do announce that they’re gonna postpone, band-aid, or resolve the situation, how about going in the market at that time? Maybe buying in at 19% down? I don’t know if the situation will play out like that, but I think we can learn from the past. We can use past experience to navigate this market in hopes of coming out without losing too much money. And we can hope that the politicians stop being nice and get down to work.