By Annika Bradley and Richard Livingston 22 Mar 2016

The best ways to lose money (Women In The Black and The Retiree)

Annika Bradley and Richard Livingston help you hang on to your money by looking at the best ways to lose it.

Snapshot

  • Beware of the get-rich-quick property investment seminar
  • Margin lending is risky and you can lose money very quickly
  • Products that come with an ‘income guarantee’ often don't return your capital

This article was originally published at Women In The Black and The Retiree.

At the start of every year we see an endless supply of media articles telling us how to make money in the coming year. But as Warren Buffett says, the first rule of making money is to never lose money. His second rule is to never forget rule number one.  So how do you avoid blowing large chunks of your retirement savings?

Questions like this are often best answered by inverting the proposition. So as a guide to what not to do let’s ask the question ‘what’s the best way for an investor lose money?’

Money can be lost in either a single hit or eroded over time. Let’s think first about how best to blow a gigantic hole in your savings balance, or lose the lot.

Around ten years ago the best approach would have been the managed agricultural scheme. These schemes – often characterised by investors paying excessive upfront fees to buy expensive land, on which they’d plant unsuitable plantations based on inflated forecasts – were virtually guaranteed to lose you money. In many cases they cost participants everything they invested, or more.

Today, the closest equivalent would be attending a free get-rich-quick property investment seminar. These are the types of seminars are where expensive properties, with poor investment fundamentals, are sold to non-experts, often accompanied by so-called ‘advice’. The Australian Securities and Investments Commission (ASIC) is slowly catching up with these property spruikers so perhaps it won’t last, but for now property investment seminars remain the best bet for toasting your retirement nest egg.

Another way to burn a lot of money is by using margin lendingMargin lending is a special type of lending, usually used to fund share purchases. A margin loan requires you to maintain a certain level of loan to valuation ratio (LVR) or be faced with a margin call (where the lender gives you notice to repay some of the loan). If margin calls are not met, the lender is typically allowed to sell your shares to repay the loan. Margin loans are a lot riskier for the borrower than most other types of borrowing used in our day to day lives.. Preferably you’ll borrow lots against a small number of shares (even better if the companies all face similar risks). To demonstrate the potential of this money losing strategy consider a simple example: a ‘portfolio’ of CBA and NAB shares purchased on 23 March 2015.

Let’s say you contributed 40 per cent of the purchase price and borrowed the rest through a margin loan arrangement. By 24 August that year you would be sitting on a loss of over half of your original capital and by 11 Feb this year, you’d have lost more than two thirds (assuming you were able to meet your margin calls by posting more security).

Margin lendingMargin lending is a special type of lending, usually used to fund share purchases. A margin loan requires you to maintain a certain level of loan to valuation ratio (LVR) or be faced with a margin call (where the lender gives you notice to repay some of the loan). If margin calls are not met, the lender is typically allowed to sell your shares to repay the loan. Margin loans are a lot riskier for the borrower than most other types of borrowing used in our day to day lives. can burn your savings to a crisp, but it can sometimes work out spectacularly well. If you’d bought the same shares on 9 June last year, by the end of July you’d have made a quick-fire gain of almost 25 per cent. That makes margin lendingMargin lending is a special type of lending, usually used to fund share purchases. A margin loan requires you to maintain a certain level of loan to valuation ratio (LVR) or be faced with a margin call (where the lender gives you notice to repay some of the loan). If margin calls are not met, the lender is typically allowed to sell your shares to repay the loan. Margin loans are a lot riskier for the borrower than most other types of borrowing used in our day to day lives. more of a gamble, rather than a sure-fire money losing proposition like an agricultural scheme or dodgy property investment.

If you’re not in a rush in your loss-making efforts, another strategy is to invest in a product that includes the word ‘guaranteed’. A product that comes with an ‘income guarantee’ has a good chance of not returning your capital, while the label  ‘capital guarantee’ is a good indication the product won’t pay you much, or any, income.

A final suggestion in the quest to lose money is to answer an advertisement from a larger dealer group or the wealth management arm of a financial institution. It’s unlikely you will lose money quickly or in one hit (although it’s possible) but you can be confident they’ll channel you into an expensive administration platform, pitch you some over-priced, poorly performing in-house products, or have you take out an insurance policy that doesn’t suit your needs.

The list is endless but it’s worth stopping there and checking whether you’ve noticed the theme? The consistent thread linking all these loss-making strategies is that they’re among the most heavily marketed.

The lesson for those investors that aren’t actually looking to lose money is as follows: good investments are bought quietly, not sold loudly.

 

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