Is there such a thing as a guaranteed return on investment?

We live in a world of unprecedented consumer guarantees. When you buy a shirt online, you expect to be able to return the shirt if it doesn’t fit you.

If your Aldi pineapple turns out to be spoiled, you can get your money back and get a new one for free.

We are accustomed to guarantees that protect us from all kinds of minor financial setbacks. Unfortunately, Guarantees don’t work the same way when it comes to investing.

If you expect a guaranteed return on your investment, your investment portfolio could end up underperforming (or worse, falling victim to an investment scam). Here’s what you need to know about warranties when it comes to your investments.

What is the guaranteed return on investment?

A guaranteed return on investment is a fixed rate of return that you can rely on when investing in a particular product. Most investment products involve risk. It’s rare to find an investment product that is sure to rise over time.
For a long time, many investors believed that real estate values ​​would never decline. But the housing market crash of 2008-2009 taught them otherwise. Real estate does not offer guaranteed returns year after year.
Stocks are another investment with a high degree of volatility. The stock market is not a high-yield savings account. Stocks can rise 25% in one year, and fall 30% the next. It’s true that stocks will outperform safe investments in the long term, but in the short term, anything can happen.
For the most part, bonds offer lower returns in exchange for lower volatility. When you take out a bond, the borrower guarantees that he or she will pay a specific interest rate in exchange for borrowing your money. However, bonds usually do not provide guarantees. Companies and governments that borrow your money may default on their loans. This could mean that you lose money.

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Legitimate types of guaranteed return on investment

Most investments do not offer a guaranteed return on investment, but some investment products do. They include but are not limited to the following:

• I-Bonds I-Bonds issued by the US Treasury offer a fixed rate of return for six months at a time. The rate of return depends on the inflation rate in the US economy. I-Bonds are designed to earn a guaranteed return that matches the inflation rate in the US economy. These bonds became incredibly popular in 2022 and early 2023 when inflation approached double digits for the first time in nearly half a century. It is not unusual to find a guaranteed return on investment of approximately 7%.
• advice. Treasury Inflation Protected Securities (TIPS) They are also issued by the US Treasury and are also indexed for inflation, making them a great short-term investment. However, TIPS work differently than I-Bonds. TIPS receive adjustments to their principal value plus interest payments every six months. The principal will never go down below your initial investment, and you’ll be able to keep the interest income you earn every six months. TIPS have a guaranteed minimum of 0% with upside potential proportional to inflation in the economy.
• CDs. Certificates of deposit (CDs) are investments issued by a bank with a guaranteed interest paid every month. Your return can be locked in for periods ranging from 6 months to five years or more. Unlike most investments, CDs are FDIC insured. This means that even if the bank goes bankrupt, you will get your money back (including the interest you accrued before the bank went bankrupt). Many retirees use CD ladders to earn interest while also keeping short-term retirement funds in a relatively liquid investment.
• Pensions. Annuities provide a lifetime income option for investors who want a guaranteed stream of income throughout their lives. Annuities are somewhat similar to personal annuities that allow investors to shift a portion of their investment portfolio into an investment with lower guaranteed returns. Before purchasing an annuity, speak with a certified financial planner and check the costs. You may end up overpaying for a guaranteed return.

Note:Savings accounts don’t offer a guaranteed return on investment (the interest rate can go up and down), but your money is protected by the FDIC if you stay within limits — meaning you can’t lose money.

Where you should be skeptical of a guaranteed return

Many investment salespeople (including many who call themselves financial advisors) use aggressive marketing techniques to make you believe they offer a product with unique guaranteed returns.

Often the worst offenders are advisors who sell whole life insurance products. Whole life insurance products build cash value over time (as you make premium payments). The cash value in the account never goes down, and in some cases even goes up. Therefore, whole life insurance products offer a guaranteed rate of return of at least 0%.
If a 0% guaranteed rate of return sounds bad, it should be. But the marketers behind compound interest calculations and other related whole life insurance products do a lot of complicated math to make you think the security is better than it really is. For most people, life insurance is the best option.
Another place where the term “guaranteed return” is used is in online group loans. Farm loans, mortgages, and other crowdfunding loans do not provide guarantees, and the borrower may go out of business or fail to make timely payments. In fact, we’ve been seeing this more and more lately.

Even a company that has always paid its investors may fail to make a payment during a cash crunch. Lending money to a company always involves risks. Don’t believe the slippery language that makes a return more certain than it actually is.

Are secured investments better than other investments?

All things being equal (including investment returns), it would be better to choose an investment with a guaranteed return rather than one without one. But most guaranteed investments don’t offer returns that beat inflation.

To grow wealth over the long term, your investment returns need to stay ahead of inflation, and that means investing in some riskier assets. However, by paying attention to your asset allocation and building a diversified portfolio, you can protect against downturns. However, even a diversified portfolio can lose value during difficult market conditions.
With a long-term mindset, you can be willing to stick to their investment plan even during recession years. By continuing to invest during a recession (and even buying more during a market downturn), you will likely become a successful investor over the course of many decades. Those who panic during recessions and move everything into guaranteed investments are likely to lose their money to inflation in the long run.