When it comes to listening to pitches from brokers and advisers, what you hear isn’t always what you get. Unfortunately, financial terms used to describe an investment’s features and benefits can mean different things to different investors, advisers and even to different investment firms and insurance companies. Ultimately, products that are sold on the basis of safety, guarantees, flexibility or expected returns can yield very different results. Yet these words are bandied about as if they each have a universal meaning.
In a financial world plagued by jargon, small print and scams, it’s more important than ever that investors not accept vague promises or rely on their own interpretation of words used to persuade them about where and how to invest their life savings. Instead, they must be prepared to ask the right questions and separate perceptions from reality.
Of all the investment terms out there, none has the same persuasive power of the “G” word. On the surface, an investment guarantee sounds like the perfect choice, but, according to Viktoria Palushaj, market analyst for the CitrinGroup, investors need to peel back the layers that come with a guarantee. “Since no two guarantees are the same,” she says, “investors need to know who is guaranteeing it. What is — and is not — being guaranteed? Can the company make good on its promise? And what evidence and strategy do they have in place to support their investment claims?”
Palushaj adds that since investors bear the ultimate risk of losing their money, they need to go as far as learning if outside third parties are involved, and what stake those parties have in the guarantee. Bud Hebeler, retired executive, author and founder of AnalyzeNow.com, suggests that investors be cautious about guaranteed products loaded with lots of disclosures and fine print. “When the guarantee has to be explained over 20 pages and it’s not in 12-point font, investors should be on guard.”
Safety can be a comforting word. We all strive for safe neighborhoods, schools and, in many cases, investments that shelter our hard-earned savings. Hebeler shatters the notion. “Nothing is safe!” he says. An investor may prefer to avoid that reality, but with any investment comes risk — the archenemy of safety.
Drummond Osborn, a Certified Financial Planner professional and owner of Osborn Wealth Management, says safety is a relative concept: “Safe as compared to what? Is it as safe as an FDIC-insured CD, a U.S. Treasury bond — or is it just safer than a stock?”
Palushaj puts the traditional measure that bonds are safer than stocks to the test. “On paper,” she says, “bonds can appear safer than stocks because bond owners get paid first if a company goes bankrupt. But if you receive just pennies on the dollar, are they really safer?”
How much you stand to earn on an investment is the exciting part of the investment process. Many investors dream of being the financial guru whose stock-picking ability makes family and friends rich. However, just as the word “left” is always accompanied by “right,” and “up” is inextricably tied to “down,” returns must always be weighed against the risk being taken to achieve them.
“When returns are being discussed, investors need to understand all the risks being taken. The greater the return a product is offering, the greater the risk involved,” says Palushaj. Hebeler says, too, that the time-tested disclaimer — “past returns are not indicative of future returns” — is there for a reason. “The markets are driven by events, not statistics, and since you can’t predict events such as war or natural disasters, you can’t depend on past returns and good track records,” he says.
Palushaj cautions investors about the recent stock market highs. “This year the market is running away, which has made people more willing to take more risk,” she says. “But they need to know how the asset has performed over slower periods as well.”
Gymnasts and acrobats are definitely flexible, but flexible investment products may not bend as easily as investors may think. Evaluating the true flexibility of dates, dollars, rates and fees is an important part of agreeing to the terms of any contract. Hebeler has read his fair share of agreements purported to be flexible and asks, “Flexible for whom? It’s usually a one-way street for the company offering the product, where they have all the flexibility to make changes while the investor does not.”
“Flexibility usually comes with a cost,” says retirement coach Christine Moriarty. The cost can affect overall investment performance or penalize investors who have income or emergency funding needs that don’t coincide with the contract terms, anniversary dates or exceed annual withdrawal limits.
“Make sure the contract really meets your needs,” says Moriarty, “that you aren’t being told only what you want to hear and you’re not being sold the product of the month.”
Investment phrases such as “we’re in it for the long term” or a bond classified “long term” can equate to periods as short as two to three years or as many as 20-plus years. Being clear on an investment’s time horizon is important because it allows investors to compare it with other holdings as well as economic data and market trends.
Instead of using a vague time frame to evaluate an investment, “Use an entire business cycle to gauge how an investment performs, examining it during both boom and bust phases,” says Palushaj.
“Whether you’re buying a stock or bond, investors need to understand why they are buying it and at what point they should consider selling it,” adds Osborn. “Investors shouldn’t just accept or assume a longer time frame will fix a poor investment.”
Investors can avoid some of the pain and discomfort that comes from taking popular financial words for granted by being armed with some helpful questions, getting time-tested advice and knowing that “what you hear isn’t always what you get.”