I saw this headline on a half-page ad in the Vancouver Sun this past week – 4 colours – no-one could possibly miss it. The headline in very large print read INVEST RISK FREE with a very, very small asterisk directing readers to the bottom of the ad for the usual disclaimers.
I must say that it continues to amaze me that companies (in this case a very large bank) would continue to advertise such absolute rubbish. In this instance, the institution publishing the ad was promoting their version of an equity-linked GIC. The theme being, buy this product, hold it until maturity and regardless of what happens to the stock market index chosen as the benchmark, you will be guaranteed to get your money back. With this fact, the ad promotes this as a “risk free” investment – oh, by the way, this was for a non-registered product. If the benchmark market went up, then within certain limits, the holder would get back some interest return on the positive side – no losses.
Let’s examine this a bit more closely – has everyone forgotten about this thing called INFLATION? Or how about TAXES?? I am not going to do a lot of fancy calculations here – you can all do that on your own time.
Product pays ZERO interest at the end of the 5-year holding period – you get back 100% of your initial investment – so according to the bank in question – no loss – therefore risk free. Absolute nonsense! If no interest – no taxes so they drop out of this equation. But inflation is still here! If we assume that inflation stays at the current low level of 1.9% and it stays there for the next 5 years, then (ignoring compounding), your money has lost at least 10% in purchasing power – that is a LOSS to the investor and worse, it is a loss which is NON-DEDUCTBLE!!
Same as number 1, but let’s throw in an average gain of 3% for each of the next 5 years. Lowest marginal tax bracket currently in BC is about 25%. So 3% gross equals about 2.25% net, after tax. If we again subtract inflation of 1.9%, then the client is left with a real, net, after-tax, after inflation rate of return of .35% – yes .35% – but at least in this possibility, the client hasn’t lost any $$ nor have they lost any purchasing power. If the investor is in a 35% marginal tax backet or higher, then we are back to Scenario ONE but with a smaller net loss of purchasing power.
But – that is a lot of buts! Please, don’t be fooled – there is NO SUCH THING as NO RISK INVESTING!