Guaranteed

I heard a radio spot today for an investment opportunity touting a 8% return, guaranteed, with no risk to the principal. They repeated the words “eight percent” and “guaranteed” a lot. I changed the station; it must have been on I-IZ-DUM or K-RETRD or something. Please. Instead of telling me repeatedly that it is guaranteed, answer the real questions I have.

1. How is it guaranteed? What do I get from you if you can’t return my principal? I know you say, “You’ll get your money back.” I’m just asking what if? Go with me on this one. How is my investment collateralized? Soy beans? Pork bellies? Family heirlooms? How?

2. Who is paying 8% that has no credit risk? In fact, who has zero credit risk? I can’t think of anyone. The federal government is a pretty safe bet because they can print money, but even they have some element of risk (collapse, overthrow, etc.) But they don’t pay 8%. Who will pay 8% in this market and has less risk than the government? (And if such a person or entity exists, they are foolish for paying so much and I wouldn’t want to entrust them with my money.)

I’m not saying that 8% returns are not possible, nor am I saying that this specific investment wouldn’t return 8%. It might. I’m just saying it cannot be “guaranteed” in the sense that no matter what, you will get your money back. And I would deduce that your money will be invested in ventures whose risk demands a greater return than 8%, else what is in it for the solicitors? Why buy radio ads? There are no magical products involving interest rate swaps, derivatives, off-shore investing, etc. that return 8% and have no risk. It can’t be done, and even if someone figured out a way to do it, they wouldn’t be using your money to do it, they would use theirs. (Unless part of the formula is having greedy fools send you money.)

It may be nice to envision, but you CANNOT stray too far from the risk-return parabola.