There is an old saying that if something looks to good to be true then it usually is. Many people who have accumulated a nest egg become dissatisfied with the low return offered by banks and seek investments outside that offer much higher returns than what the bank can offer. Unfortunately, these people often end up losing their entire savings through inexperience and ignorance.
The share market abounds with stories of people who have made a fortune buying and selling shares. The stories you don’t hear about are the ones where people have lost a fortune by buying shares at the peak only to see them fall to just a few cents. Companies that may appear to be solid are no guarantee of solid investment.
A company can issue debentures, preference shares and ordinary shares. Should a company go bankrupt, then in most cases the tax department is paid first, secured creditors second and then down the line to shareholders. As you can imagine there is very little left to pay shareholders. If the company has to be wound up then the shareholder may only receive as little a one cent in the dollar. The stock market is one place to stay away from until some expertise is gained either by joining an investment club or by attending courses.
There are a host of companies that would have you invest in olive oil farms, emu farms, timber farms and so forth. The prospectus of these companies paints glowing pictures of success in their particular field with promise of high returns. Many of the companies fail because of some unforeseen circumstance and again the investor bears the loss. There is little likelihood of recovering any money because by the time these companies fail, they are usually heavily in debt. Investors should treat these investments with extreme caution.
Some entrepreneurs seek to attract investors to buy rental properties and build up a portfolio of several properties where all a person has to do is sit back and collect the rent. The sweetener is negative gearing with associated tax benefits. However, inexperience and lack of understanding can lead to financial disaster as the following example illustrates.
Two high school principals, husband and wife, purchased a block of six units which were fully tenanted. Being financially wise in their eyes, they sat down and on a annual basis added up the bank interest, rates, insurance, a margin for maintenance and return on their investment then split the total by six. This was going to be the rent. Unfortunately, the rent was much higher than what the tenants were paying at the time, so one-by-one the tenants moved out when their lease expired. Crestfallen, the husband and wife were forced to sell and made a substantial loss. The moral of the story is to cut your losses before you lose everything and stick to what you know. It is not a given thing that property will always go up in value. Many things affect the price of a property. The trick is to try an anticipate a potential loss and sell before the investment is near a total loss.
Investing is all about risk and return. Generally, the higher the risk, the higher possible returns on investment become. High risk also involves the potential to lose money. Inexperience, ignorance and greed will often lead to financial ruin. In the majority of cases the investor can do nothing to rescue any money invested in companies which fail or properties that fall in value below the purchase price.
“A fool and his money are soon parted.” Only a fool can expect to rescue the full amount when an investment goes wrong.