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Why Money and Golf Are Not Always a Hole in One

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You never know where your next business deal will strike. But what I do know is they say that a lot of business is conducted on the golf course.

While golfers are enjoying nice weather, the pastoral scene, and hopefully some great golf shots, conversations might run from sports, family, business, politics or, as was the case in my situation, the world of investments.

My client, Steve (not his real name), called me last Monday after a weekend golf outing.

“A golf buddy of mine was telling me about this investment that pays a 10% return and how I should get in on it. What do you think?” Steve said hopefully.

“Wow, a 10% return is pretty darn good. Did your friend explain the investment? Did he tell you how it is able to pay 10% when the banks are paying such meager returns?” I responded.

“No, he didn’t explain it, but he gave me the name of his broker. Maybe we should investigate it?” he implored.

“Before moving forward, it would be interesting to know how this investment is doing it. I mean, if you can get, say, under 2.5% on a one- year CD and some company is paying 10%, I’d like to understand the amount of risk the money is exposed to using their investment.”

“Risk? He told me it’s really safe.” Steve said.

“I’m not doubting your friend, but let’s look at it from a logical perspective. If a bank is paying 2.5% for a one-year, insured CD and another entity is paying 10% for the use of your money, then logically it has at least four time as much risk. I mean, why would anyone pay more than the market rate of interest unless they had to? It is safe to say that no one is giving away money for no reason and if the issuer is paying such high returns, it is because that is the amount the market set for motivating investment. If you were borrowing money, wouldn’t you pay the least amount you could?”

“Yeah, of course. But my friend is really successful. He wouldn’t……” he stopped in mid-sentence realizing that his perception of his friend’s acumen or level of success was unclear, causing him to re-think his own money motives.

Related: The Money Imprint: 7 Financial Conversations to Have With Your Child

He tried another tact. “Maybe he doesn’t realize how much risk he is taking on?”

“Or maybe, if he has buckets of money, he doesn’t care if he loses?” I asked.

“Nah, he does not like losing!” Steve said emphatically.

I began to take him down another line of thinking.

“Let’s focus on you for a minute. You have explained what you and Barbara (not his wife’s real name) really care about. You’ve both described in great detail how you want your life in retirement to go and you’ve both explained how much risk you feel comfortable taking. Currently, you have sufficient liquidity in case of an emergency, you have no debt, your investments are aligned with how much risk is appropriate to achieving your goals, you max out your retirement plan and you have a pretty good balance between pension and non-qualified investments. You have proper insurance for your needs and your estate planning documents say what you want them to say. Would you say I’ve left anything out?”

“No, you’re right on target.”

“So, by investing in something that brings you a greater return, you are subjecting yourself to greater risk. If you want to take some free cash and take a chance, it’s up to you of course and you know I will never say ‘I told you so’ if it goes south. I guess the point is, upside vs. downside.”

“Please explain.” Steve said.

“Let’s say you take a substantial part of your wealth and put it into this 10% investment. If it works perfectly, how will it impact your life? Will it allow you to do something that you really care about? Will it change your life substantially for the better? On the other hand, if it goes south, how will it impact your life and your security. See where I’m going?”

“Absolutely!” he said.

“Ok, allow me to make one other point. Let’s say you just take a little bit of money, an amount that wouldn’t impact your overall success. If the investment goes south, zero impact on your life. If it does exactly as expected, the impact is also zero. Well, almost zero — you get the bragging rights of earning 10% while everyone else is earning 2.5%. Does that make sense?”

Steve laughed. “Yeah, I get it. We definitely wouldn’t risk a lot of money on it. After all, we can do practically anything we want under our current plan. We certainly wouldn’t want to risk that at any price. We wouldn’t give up our peace of mind for extra return. We wouldn’t sleep at night.”

“Yeah,” I said. ”If you don’t get a good night’s sleep, you might miss your tee time!”

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