Dear Quentin,
I am a budding futures/options trader with my own sole proprietorship investment business. Looking ahead to 2022, I accepted a large cash injection of $500,000 from friends and family under the guise of a promise I made to issue a 10% return on their money. This promise was made via a signed promissory note, and the return was less than the annual return he had been experiencing years before.
And then 2022 happened. It was an extremely bad year for the markets, and the worst I had seen since I had been actively trading. Needless to say, I was unable to keep my promise and am not in a place where I have funds left over to pay those friends and family. This has severely fractured some of the relationships I value most and has put my friends and family in a very stressful situation.
I still plan to make financial restitution to everyone, but have since had to rebuild my finances almost from scratch. The question I have is twofold: What is the best way to mend and repair relationships with friends and family, and to what extent could you face punitive legal action? Your advice is greatly appreciated.
investor and friend
Dear investor,
This is a time to tell the truth, admit your mistakes, eat a lot of humble pie, and tell your friends that you’ll put together a payment plan to pay them off in full.
Notes are typically used for real estate, auto, college, and/or personal loans. Investing in the markets is a long-term bet. Timing the market is a fool’s game. The decade-long bull market instilled a false sense of confidence in millions of small investors and meme stock aficionados, as it has learned at a cost. You’re not the only one licking your wounds after a brutal year, but you obviously have tough events ahead of you.
They willingly gave their money for you to invest. But there are a number of laws that govern the securities industry, and you also took the extra step of signing a promissory note, which leaves you open to legal action. So, effectively, they were lending you money at a 10% rate of return. As a result, they can file a lawsuit against you, report you to a debt collection agency, or even claim any assets you may have put up as collateral against these loans.
A promissory note, as the name suggests, is a legally binding promise to pay a debt. This is a good time to take a closer look at the notes you signed to make sure they are executable. Most promissory notes have terms that ensure their validity. They must be considered fair to both parties, be signed by both parties, and state the exact amount of money borrowed, as well as the interest rate, frequency of payments, and loan term.
““The decade-long bull market instilled a false sense of confidence in millions of small investors and stock meme aficionados.””
Rules for promissory notes vary by state. Seek the help of a lawyer before taking any action and before making any other promises that you cannot keep. You are vulnerable, but so are they. In other words, they will want their money back, and putting a plan in place to pay them back, even in small increments in the hope that they will increase, could help deter them from taking legal action against you, at least for now.
Stock market returns are highly unpredictable and you should expect wild fluctuations from time to time, according to a recent report from management consulting firm McKinsey. Since around 1800, stocks have consistently returned an average of 6.5% to 7% per year after inflation, according to an analysis by McKinsey economists. Furthermore, their analysis concluded that market returns over the last 25 years are within that historical range.
However, there are yearly exceptions. The S&P 500 SPX,
it fell in 2000, 2001 and 2002, 2008 and 2022. McKinsey’s lesson for investors: “Don’t be sidetracked by short-term stock movements, which tend to make a lot of headlines. Reasonable and largely stable returns (as measured by low stock price volatility over 10-year periods) will encourage more people to invest in the stock market. That, in turn, will provide capital for further growth and broader wealth creation.”
Let this be a warning. Don’t make promises of a guaranteed return, whether you’re borrowing money from strangers or from friends and family.
Iyou You can email The Moneyist with any coronavirus-related financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell at Twitter.
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