Guaranteed Fresh

Conservative investments–meant to preserve capital with low risk, low return yields–have always had a place in anyone’s portfolio. While riskier equity markets provided long term growth, fixed income investments level that out and give balance. Even outside of the markets, there are a number of income vehicles that people can use to ensure that they don’t run out of money during retirement.

In Canada, for example, we have annuities, life income benefits, registered retirement income funds… Even on top of that, we have government sponsored social retirement tools. We have the Canadian Pension Plan, the old age security, and the guaranteed income supplement. We even have group benefits plans with defined benefits guaranteed to pay out during retirement. Lots and lots to choose from. Except there’s one small problem: They’re not actually guaranteed.

What Does Guaranteed Mean Anyways?

So I thought I’d look up “guaranteed” in the dictionary and it’s defined as a promise or assurance, especially one in writing, that something is of specified quality, content, or benefit. So in terms of financial tools, “guaranteed” essentially is saying that you’ll have “x” amount of money at “y” time.

What Does Guaranteed Actually Mean?

Alas promises can, have and will be broken. Now to be fair, many tools such as the CPP or things like it don’t make claims of being guaranteed. I bring these up since people depend on them and treat them as if they are guaranteed. The problem is–and this isn’t just relevant to finance; it’s relevant to all area in life–is that nothing is for certain.

One only needs to look around the world at all the defaulting bonds and collapsing pensions to see what “guaranteed” means. However someone doesn’t simply guarantee something and not be able to back it somehow, some way. In “sue crazy” America, or anywhere in the world, the only thing “guaranteed” is your right to get pissed off and sue. That is, of course, if you have the money to sue the government or the bank.

When someone offers something that’s guaranteed, what they’re trying to convey is their confidence in the product. “I am so sure of this that if it doesn’t work, I will give you your money back, guaranteed.” It’s a powerful word to toss around, and is a great marketing piece, and it’s just unfortunate that so many fall into it.

What Does This Mean For You?

If you were a financial advisor 50 years ago, you could’ve been the dumbest advisor in the world and still make a good amount of money for your clients, since the markets performed so well. Markets were on the rise and bonds were offering double digit returns. Retirement was so easy to attain.

Well, now it’s a bit different. As a financial advisor, people would suspect that my advice would be to work with an advisor. It’s not. And after this post, you’d think it’s to avoid guaranteed financial tools. It’s not. It’s simply to create awareness and more acuteness of the financial world around you. The more “guaranteed’ something is, the more we come to depend on it. The more we depend on something, the more blind-sided we are by misjudgements. This may all sound a bit strange.

I wrote about the CPP and other retirement tools earlier this year. This isn’t to slag them. Think of this as encouragement to read the fine print.