THE MYTH OF GUARANTEED RETURNS

When I got married about a year ago, my parents and in-laws gave us a nice sum of money to live on for several years and suggested that we invest it. I heard about a promising real estate project offering 18% interest, with wealthy, reliable backers giving their personal guarantee, and I invested the money into that project. For the first few months, the interest paid my rent. Then a problem arose, and for the past three months, I haven’t received any interest payments. I requested that my capital be returned, but so far, I haven’t received any money back.

I recently heard about another project that pays only 16% interest, but will give me a lien on the property. When I get my capital back, I hope to invest in this project. 

In the meantime, I need money to pay my rent. Should I borrow money to invest in this second project, since I have a solid guarantee to borrow against? And at what point should I approach the guarantors of the first project?

Your situation is reminiscent of Chazal’s saying: “If someone ate garlic [and is suffering from bad breath], should he eat more garlic?” (Shabbos 31b).

You were burned once with an investment that sounded, and was, too good to be true. Why would you take a chance of getting burned again?

As a rule, be wary of any investment that offers returns higher than those paid by the bank. (Government bonds are the notable exception; they pay more than the bank, but are generally considered a safe investment.)

Phrases like “guaranteed returns” and “no risk” dupe novice investors into believing that they can invest their money and, voila, their financial worries will be over. At Mesila, we see the devastating results of this naiveté time and time again.

Although we do not know the details of these projects, we can safely assume that any investments promising such high returns are too risky. Anyone looking for investment capital would prefer to borrow at bank lending rates than at 16-18%. If that’s what they’re offering, it means that no bank was willing to sink money into the project. Is your tolerance for risk greater than the bank’s? If you do not have money to pay your rent — clearly it is not.

In our opinion, it would be unconscionable for anyone to borrow money to invest in such a risky enterprise. The lien you were offered does not guarantee anything, either; if it was enough of a loan guarantee, the bank would have been willing to take it as collateral, and there would be no need for private investors like yourself.

Do not let the lien offer blind you into risking more capital, especially borrowed money. If you lose the capital — and with such high risk, there is a good chance that you will — how will you repay the loan? 

The money you invested in the first project cannot be counted on, and certainly not borrowed against. While we certainly hope you will get your money back, it may take years of wrangling and legal action before you see a penny of it. 

In answer to your second question, we recommend that you approach the guarantors of the first project immediately, before they are inundated with demands from other creditors. The fact that these guarantors were once wealthy and reliable is no assurance that they will be able to bear the financial backlash of a failed real estate proposition. 

Risking capital for the promise of high returns is not only unwise; it’s problematic from a Torah perspective as well.

Yaakov Avinu went back to retrieve some small jugs, the Midrash tells us, because tzaddikim value their money. This is not because they ascribe importance to material acquisition, explains the sefer Be’er Yosef, but because they understand that everything they own is a gift from Hashem. And if Hashem gives a person something, he has an obligation to take care of it and use it properly. Putting money into risky investments shows a disregard for the hashgachah pratis that decreed that the money should be theirs.

In your case, the capital you invested, and now wish to reinvest, is the hard-earned money given to you by your loving parents. Hakaras hatov would dictate that you should be exceedingly careful not to squander this money.

When you do get back your capital, we urge you to seek the advice of a licensed financial adviser before investing it again.