What is too good to be true

Have you ever had someone pitch you on an 'investment' and it sounds a lot more like a lottery ticket? The thing is that we are hard wired to want crazy high returns - buy low sell high, if you'd only bought bitcoin when it was 10$ and then got out at the top of the craze.  How many shares of Facebook would you need when it was an IPO to never want money again!


Here's the thing while those crazy returns do exist you would have had to lose a LOT of money if you had invested in every single crazy thing over the years. Getting rich quickly tends to get someone else rich a lot faster than it gets you rich. Getting Rich slowly isn't as glamorous but much like the tortoise vs the hair it gets there in the end.

So how much is reasonable to get out of an investment?

3% - This is the price of inflation. Getting this amount of return should be ridiculously safe. If someone is trying to give you 3% for a business loan your getting the short end of that stick. CD's and other insured assets will spit out 3% returns

5% - Corporate Bonds or your mortgage payment. There should be something backing up these returns, you might not get all of the money back in catastrophic failure but a good chunk of it should have a backing. If someone is trying to get you to buy stock or do a private loan without collateral your money is best used in something safer.

7% - This is what the stock market returns on AVG after adjusting for inflation. Granted at the time of writing this we are in (or at the peak) of a rather long bull market. If your looking to get 7% returns from an individual stock think about an index fund instead. It is more diversified.

10% - This is what a good rental returns. (One bought for the right price, not your old home that you changed to a rental because you couldn't sell it) Note that your starting to have to put work into this and your on the hook for repairs.

15% - One time returns. IE When you front load a 401k you immediately get 12% -25% off on taxes as well as that years on avg 7% returns. Credit card sign on bonuses that people use for travel hacking also fall in this category. If your being promised consistent 15% returns there has to be a good amount of sweat equity on your part for it to pass the smell test. Especially if people are claiming that it's 'safe'.

20% - Ponzi Schemes or small Business - Realize that 20% returns is what Madoff was claiming for passive (and supposedly safe) investment. For you to get 20% returns consistently you would need to be working in the business adding value. As a passive investor these 20% returns are to high to be trusted.

20%+ Bitcoin and other speculative activity. You might think that art or real estate is only going to go up but... it just doesn't. In this your betting that someone will pay more than what you did for it.

While the stock market does return over 20% some years, it also drops by 20% some years and on average it rises. These returns are for 'guaranteed' consistent returns. Anything above 7% returns for you not lifting a finger and 10% for some work and risk are things that should be approached with much caution. If it was such a good deal the person pitching you the idea would have mortgaged their house, maxed out their credit cards, borrowed money to get in on those sweet sweet returns. If you think that sounds crazy, it is because it is crazy.