Investor Education Centre > Useful Tips & Knowledge > Why there is no such thing as ‘Guaranteed Income investments’
Why there is no such thing as ‘Guaranteed Income investments’
If you browse the internet, you’ll see dozens of articles telling you that if you invest in this bond, that type of property, or this stock, you’re going to get ‘guaranteed investment income’ of 8%, 10%, or more. That sounds great – but it’s unfortunately never true. There’s no such thing as guaranteed investment income; let’s look at why.
1. Banks Can Close
It’s not a pretty thought, but not all banks survive major market turmoil. If your bank suddenly closes, you may face a significant struggle to get your money back. This situation can happen with investment funds or other investment schemes, too. Consider the victims of Bernie Madoff’s Ponzi scheme in the United States, where victims lost millions of dollars. Only now are some of them beginning to get their money back.
2. Interest Rates Change
Since 2008, interest rates have been falling all over the world. This often means that investments are worth less now than they were when money was originally invested. When people talk about guaranteed income from investments, they often think only of how much money they take out of their investment versus how much they put in. If they bought a property for $500,000 and got back $600,000 when it was sold, they’ve made a profit.
But when considering investments, it’s important to consider the rate of return. This reflects inflation as well as buy and sell prices. Inflation can mean that a $600,000 sale price is actually worth less (in terms of purchasing power) than the $500,000 invested; this makes the investment an actual loss.
3. Markets Fluctuate
Many investors, from hedge fund operators to private investors, put some amount of money into the stock market. This makes sense; carefully purchasing stocks can increase income quickly. But big drops in the stock market can have terrible effects on the global economy and individual investors. A study by Tilburg University's school of economics points out the widespread global effects of the dot com bubble burst. Many other studies have also analysed the significant effects of the housing bubble burst as well.
While these factors may sound like reasons to avoid investments, they’re not. In fact, investing your income and wealth is a way to grow it and make your life easier, especially if you’re approaching retirement age. What these factors do argue for is to make sure your investment portfolio is diversified. By investing in several different areas, you insulate yourself from major fluctuations in different markets.
And, as always, be wary of anything that seems too good to be true. If you find yourself interested in a guaranteed investment scheme, make sure you understand all of the details. Ask the company if you will be able to get your initial investment back if the scheme were to close or begin to lose money, for example. An investment company who is unwilling to answer your questions or provide transparency regarding your money may be a company that you want to avoid.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.