It’s been a tough week.
Not on the markets, but in my private life.
Last weekend, a family friend (in their late 60s) contacted me, pleading for help.
‘We are going to lose everything. Is there anything you can do?’
‘What do you mean, everything?’
‘Everything…the house, the lot.’
Their son was a successful businessman. He needed capital to expand his growing business. The bank had offered finance but the rate was too high, so he offered mum and dad a ‘win-win deal’.
Their son promised to pay them 7% on the ‘dead’ money sitting in their bank account. Compared to bank deposit rates, the promised higher return was like the apple Adam couldn’t resist.
For a couple of years, all went to plan. The additional income afforded our family friends a better lifestyle.
The son’s retail-related business began to flounder. He needed an injection of capital to tide him over until things ‘settled down’. Not wanting to see the business fail, and to protect their original investment, the parents borrowed against their home.
I know and you know this is just plain dumb, but, when it comes to money and family, the head tends to play second fiddle to the heart.
The additional funding appeared to steady the ship for a year or so.
Anyway, you can see where this is going.
The business went belly up. Receivers appointed.
Our friends had ‘invested’ over $1 million (cash and home equity) into the failed enterprise.
Long story short, after sitting in on meetings with solicitors, accountants, banks and receivers, there was nothing I or anyone else could do. They’re going to lose everything…including the relationship with their son.
The receiver’s post-mortem has shown the son was actually robbing Peter to pay Paul. Hiding the extent of the problems from his parents. It’s a financial and emotional mess.
The fruits of a lifetime of work have been lost in the space of a few short years. The family is shattered.
When it comes to my advice, the three Cs apply: Conservative. Cautious. Cynical.
And for good measure, you can throw in a B…for ‘boring’.
For this I make no apologies. Over the past 30 years in this business, I’ve seen too much. Most of it is bullsh*t dressed up as ‘opportunity’.
Don’t get me wrong — I’m not averse to the thrill of making a dollar. It’s just that I need to know what the cost of the ride might be…the risk versus the reward. Logic dictates that low-risk, high-reward opportunities are very much the exception rather than the rule.
An extra few percent reward versus the risk of losing your lifesavings…no further research required. Case closed.
It’s the old ‘an ounce of prevention is better than a pound of cure’ approach.
In our friend’s case, no amount of cure is going to remedy their terminal loss of capital. If they’d talked to me before deciding to invest in their son’s business, then we could have applied an ounce of prevention…on the proviso they’d take the prescribed advice.
The heartache, anxiety and betrayal they’re experiencing now could have so easily been avoided.
Today, I’d like to share with you a chapter from my book, How Much Bull Can Investors Bear?
If I could turn back time, this is the one chapter I would insist our friends read.
Hopefully, this can be your ounce of prevention.
Guiding principles to keeping it simple
‘Life is really simple, but we insist on making it complicated.’
Having money is a life changer. Depending on how you handle it, those changes can be either good or bad.
What you find out when you accumulate capital is that the world of money is vastly different to the world of no money.
There are plenty of traps for the unwary.
For instance, a market fall of 50% doesn’t matter so much if you have $10,000 invested. A loss of $5,000 is not life-altering.
Whereas, if you have $5 million invested, losing $2.5 million could significantly alter a lot of plans.
Many a dream lifestyle has been shattered by a significant loss of capital.
There are so many traps out there that it’s impossible to give you a definitive list of things to be wary of.
To keep it simple, here’s a checklist to guide you:
- If it sounds too good to be true…it usually is. Promises of higher returns always come with hidden risks. These risks can destroy your capital. Whenever you are tempted to reach for that extra return, remember you are placing at risk maybe half or more of the amount you are investing. Any offer outside the security of a bank deposit comes with risk…the trick is identifying what that risk is. If you can’t, then do not invest.
- Are you looking to invest in the latest hot thing — property, shares, gold, mortgage fund, or whatever? If what you are considering investing in has captured the public’s imagination, then don’t do it. You will be following the herd over a cliff. Invest in unloved, out of fashion assets — the ones your trend-following friends would label you crazy for even considering. Buy shares after a massive crash. Buy property when interest rates are high and ‘doom and gloom’ is in the air. Investing against the trend is not easy but, in due course, it invariably turns out to be an astute decision.
- Keep an eye on fees. How many fingers are in your investment pie? The more people that are taking a slice here and there, the less of the pie you receive. Learn how to minimise tax legitimately. Be very mindful that managed funds, investment administration services and financial planners all eat from your pie. As already stated, the preferred option is to invest in low cost Index Exchange Traded Funds (ETFs) and, where possible, do your own administration — track performance and collect tax statements (it’s not that hard).
- Listen to your gut. If someone cannot explain to you (within a few minutes and in plain English) the investment concept and the fees, risks, and management style, or if they use jargon to impress or confuse you — run away.
- High risk does not equal high return. So often people are told the trade-off is low risk/low return and high risk/high return. Rubbish. High risk can mean no return and loss of capital. Just because you elect to take a high risk does not mean you will be rewarded for it.
- If ever you hear that something is ‘a once-in-a-lifetime opportunity’, put those running shoes on again. My standard reply is: You are saying that me, my children and their children will never ever again be presented with an opportunity to make money ever again?’ This slogan is a marketing gimmick. The real once-in-a-lifetime opportunity never announces itself. For instance, buying shares in 1933, after the Great Depression had wiped nearly 90% off the market, was a genuine once-in-a-lifetime opportunity to buy quality assets at a huge discount. But no one was spruiking this news. The real opportunities are not the ones some incentive-based salesperson tells you about.
- Never bet the family home on an investment. I’ve seen retired people advised to borrow against their home and then lose the lot in a market downturn. If someone tells you to use your home as collateral for a loan, do not do it. The investment may work for a while, but losing your home in your seventies is soul destroying. I’ve seen it first hand — people crying in my office asking me what they can do. The short answer is: It’s too late.
- Who is advising you and what is their motive? I’ll repeat again: When it comes to the horse race of life, self-interest will always win by a nose. What is their self-interest and does it align with yours…or is there a conflict? If you cannot satisfactorily reconcile that they’re working in your best interest, do not proceed.
- Control your emotions. Do not react out of fear or greed. This is impulsive and primal decision making. Go away and think about what you are considering doing. Apply rational thought to the process. If you have gotten yourself into a situation where fear or greed is driving you, you have ignored the previous eight points on this checklist.
- Maintain an interest in what the global economy and markets are doing. You do not have to become an investment guru, just be informed so you can make considered decisions. As a rule of thumb, you should also invest more in the areas you understand.
- Never be afraid to take a profit. No one ever went broke selling at a profit. Yes, you will pay capital gains tax, but that is only a percentage of the gain. Markets can take back not only all your gains, but your capital as well. Do not be greedy.
- Every single investment has risk. Find out what it is and see if you can accept the risk. If you cannot identify the risk, then this is the riskiest investment of all, and you should definitely not do it.
Make sure your estate planning is current. Your Will should reflect your intentions; these intentions should be conveyed to your family in advance so as to avoid a family dispute after you have gone. You should also have an Enduring Power Of Attorney to ensure your affairs can be managed in the event you are unable to act on your own behalf. Failure to have adequate estate planning in place means the government is forced to intervene in the management of your financial affairs.
Creating, retaining and advancing wealth is a process that involves discipline, patience, a commitment to continuing education, and an application of sound risk management techniques.
I’ve seen plenty of people create, inherit or win wealth, but then lose it all because they fail to follow one or more of the retention checklist rules.
You need to avoid becoming one of them.
If you are fortunate enough to accumulate wealth, people may call you a lucky bastard. But management and judgement, not luck, will determine what happens to your capital.
When it comes to investing, the motto of ‘think a lot and act a little’ is well worth remembering.
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