Key Takeaways

• Like some inventions, financial products that try to do too many things at once often don’t do any of them well.
• The words “growth” and “guarantee” rarely go together.
• Look for products and services that are simple and easy to understand and that offer a high probability of success based on a track record.

Do you remember the classic 1976 Saturday Night Live skit in which Gilda Radner holds a bottle of something called New Shimmer floor wax and then Dan Aykroyd grabs it and says, “No, it’s a dessert topping”? They argue back and forth—“floor wax” …. “dessert topping”—until Chevy Chase walks in and says, “Hold on, folks—it’s both.” The tagline? “New Shimmer—for the greatest shine you’ve ever tasted.”

It reminds me of my early days in this business, when real estate limited partnerships (RELPS) were all the rage back in the 1970s and 1980s. Everyone, especially those in the 50 percent tax bracket, was using RELPS for tax write-offs. However, the underlying real estate assets in the RELPs were often garbage. Many RELP investors never got the return they needed on those products. Many believe that RELPs and other financial instruments combining real estate and tax write-offs triggered the savings and loan crisis of 1989 and the subsequent recession in 1991.

When it comes to investments or everyday products and services, look for things that are simple and easy to understand and that deliver a valuable benefit based on a high probability of success, ideally based on past performance.

I remember when variable annuities first came out many years ago; they were pretty simple and inexpensive. The idea was to achieve personal tax deferment and growth of funds. But now you can buy annuities in which you have annual expenses amounting to 3 percent or more to get various kinds of “guarantees.” So you’re basically giving up half of your potential return just to get a guarantee on your investment. That doesn’t make sense. Growth and guarantees never go together. I’m not saying ignore annuities and similar products completely, but be wary of multifunction products that are hard to understand—like the financial version of New Shimmer.

We see it in the investment arena all the time. Vendors often visit our offices to pitch us on highly complex products that we can’t fully understand. So we just take a pass.

You really don’t need these all-in-one investment products if you have dedicated investments for growth, you have investments that protect against inflation, you have guarantees for your cash and you have something that generates income. But when you try to combine all these objectives into a single product, you essentially get a watered-down version of all of them. And that’s sure to leave a bad taste in your mouth.

So, until next time, enjoy.

Gary

www.coylefinancial.com
800-480-7913 | coyle@coylefinancial.com 

We value your comments and opinions, but due to regulatory restrictions, we cannot accept comments directly onto our blog.  We welcome your comments via e-mail and look forward to hearing from you.