Investor Beware

Last month, the Wall Street Journal published a very interesting read titled, “When Interest Rates Go Down, the Hucksters Spring Up.” The author of the article, Jason Zweig, noticed a firm marketing an investment product with a 10-year term returning annual yields as high as 17.1%. Not only was the firm offering these insanely high rates, but they guaranteed up to $10 million in insurance coverage. 17% risk-free sound too good to be true? The author thought so as well. After further investigation, he uncovered more unrealistic claims, a falsified resume, and fine print that did not match up with the marketing material and investors’ expectations. If you haven’t seen or read the article, I encourage you to go back and take a look at it.

This example feels like hyperbole but is a cautious reminder that investors and advisors need to strongly scrutinize whenever they hear something too good to be true. In the world of investing, the adage “there’s no free lunch” holds particularly true. Achieving returns necessitates taking on some level of risk. This principle is fundamental to sound investment strategy and helps safeguard against unrealistic expectations and potential pitfalls. At the heart of investing lies the relationship between risk and return. Simply put, to achieve higher returns, one must be willing to accept higher risks. This concept is often illustrated by the risk-return tradeoff, which shows that investments with the potential for higher returns typically come with greater volatility and uncertainty. For instance, stocks generally offer higher returns compared to bonds, but they also come with a higher risk of loss. Conversely, safer investments like U.S. government bonds provide lower returns but offer greater stability. It’s essential to understand that every investment carries some degree of risk, whether it’s market risk, credit risk, or interest rate risk. Even so-called “risk-free” investments can be affected by factors such as inflation and changes in economic conditions.

Evidenced by the example above, lower interest rates may be contributing to an increase in fraudulent or misleading marketing of financial products. Investors have grown accustomed to the easy 5% in money market funds and other ultra-short, fixed income investments. It looks more and more likely that the Fed will cut rates this year, which will impact the yield of these investments. This may lead investors to want to believe in offers of higher returns with less risk, while not fully understanding the underlying investments and risks associated. Also, the opposite is true, where firms market equity investments with significant protection against loss of principal. While the downside protection may be true, they might not be totally forthcoming about the limited upside participation. Instead of searching for investments that claim to offer the best of both worlds, the solution is to have an appropriate asset allocation that is in line with your financial goals and risk tolerance.

Sometimes it is more difficult than others to understand how and why investors are misled, and whether it is intentional or not. Unfortunately, it often happens when there is monetary gain such as benefiting from a kickback or some other form of compensation that doesn’t align the advisor with the client’s best interest. At Greenleaf Trust, we free ourselves of this conflict of interest by having no proprietary products. This allows us to make unbiased decisions for clients, ensuring their investment strategies are both prudent and aligned with their financial goals. If you’ve come across a too good to be true investment or are wondering if your asset allocation is appropriate for you, we stand ready to help.