Tuesday, May 29, 2012

Dictating Rates of Return

When someone promises a "guaranteed high rate of return" it probably is a con.  Some people think they can dictate to the market, their rates of return.   It can't be done.

I ran into a fellow the other day and we were talking about investments.  I sort of ran though my investment philosophy - to invest for the long haul, cut expenses, live within your means, put a little bit aside over a long period of time - that sort of thing.

He replied, "Well, that is all very well and fine, but I have to catch up on my retirement savings, so I need to invest in something that will give me a high rate of return!"

This sort of floored me, as it seems, from his perspective, that investments came in different flavors, just like at Baskin Robbins, and you could just choose to get a high rate of return.

It is sort of like how some people think the President sets gasoline prices (which this fellow thought as well, he wasn't particularly bright).   Every morning, the President gets up and decides how much gas will be.  Obama picks $3.89 a gallon.   Newt Gingrich tells us he would select $2.50.

Of course, this sort of thinking is idiocy.  If you really could set gasoline prices, why not pick the lowest one?  And if you could really just dial-in your rate of return, why on Earth would anyone pick low rates of return, when higher rates are there for the picking?

And the answer is, of course, that there are no investments with guaranteed high rates of return.   The rate of return is directly proportional to risk.  And when an investment does yield a high rate of return, it is likely because it is risky - and may yield no rate of return in the future, or go broke.

But all that was lost on my friend.   He needed a high rate of return, and he was going to dictate to the market what rate he would get.   A nice theory, but flawed in so many ways.  And yes, I believe he was one of those followers of "visualization" theory - in other words, not all there.

I tried to let him down gently, but he would have none of that.   What was sad was that he had failed to plan for retirement, mostly though making bad investments in other get-rich-quick schemes.   At this point in his life, he felt backed into a corner.   It was too late to adopt a safe and sane strategy of investment.  Rather, he had to double-down his bet, he thought, so that he could cash in on some long-shot.

It was sad to watch, because you know how it is going to play out - he will end up broke and wonder what happened to all his money.

And what happened to all his money?   There is an army of people out there who make money from people like him - raging true believers, who are willing to invest in any "sure thing" that they hear about on the web, or on a sign on a lamp post.  They listen to the financial channels, they sign up for advice from the clown-suit people, they buy Facebook stock.

Maybe it is too late for him to fully fund a comfortable retirement.   But it isn't too late for him to get out of debt, put aside a little money, so he can make the best of a bad situation.   But alas, his plight is that of many poor people - money passes through their hands like so much water - not understood and completely mystifying as to where it went.

All you can do is look away from the horror.