Two Ways To Invest Your Money
Imagine an investment offering returns “Above market rates at no risk”. Why would we take this risky plunge? Would you invest? Even though most of us know that high returns mean high risk, most people would invest their money. The main reason that this occurs is that people fail to understand the risk involved in their investment.
People built a dreams on the promise of high returns, which sound clear and definite. They underestimate the chances of risks actually happening and their terrible effects; because ‘risks’ sound vague and uncertain. They are never fully realized until they eventuate. By then it’s to late to do anything about it.
If risks happen, they can turn dreams into nightmares, as these true stories show.
Unlimited risk
About twenty years ago, some wealthy people sought high returns from writing insurance policies in the reputable London market. To invest, they had to promise to pay all valid claims, and give an unlimited guarantee for every cent they owned. At first, all went well, but then unexpected court judgements against insurers sent their claims skyrocketing. Many investors lost a fortune.
Leveraged risk
The 1990s Wattle investment fraud promised investors 50% per year. By paying some people this return from money other investors put in, the scheme gained credibility. Retired people, health workers and even police invested. Many raised the money to invest by borrowing on their homes. When Wattle collapsed, these borrowers suddenly faced debts they’ll spend their lives trying to pay off.
Risk of losing capital
Between 1999 and mid 2001, unlicensed overseas share dealers phoned many people out of the blue, offering shares in overseas companies. The dealers claimed these shares would soon be massively profitable. Most of the shares proved utterly worthless. Many people lost all their savings in these boiler room operations.
Risk of poor returns
In the 1990s, mortgage schemes operated by solicitors and finance brokers offered returns above the market. Many retired people invested. Incompetence, misleading information and occasional fraud lost a lot of money in risky property developments. Retirees were left without any income and had to wait months, even years, to get any of their money back.
How To Protect Yourself
- Make sure you really know the risks and can handle them if they actually happen.
- Always deal through businesses that are licensed to advise on or sell financial products.
- Always read the prospectus or product disclosure statement where the risks must be fully laid out
Do not risk your savings. When looking to place your money in a high return situation take into account these guidelines that all financial institutions should be following.
Key guidelines include that:
Advertisements using past performance information should include a five-year return figure (or the longest period available for newer funds);
Information about returns should be balanced with information about risks;
All past performance figures are up-to-date; and important information should not be buried in fine print.
Promoters should not give undue prominence to past performance information;
Promoters are encouraged to show performance compared to a benchmark or their peers;
Returns should be calculated after all on-going fees have been deducted; and ’simulated’ past performance figures should only be used in very limited cases
Two Ways To Invest Your Money For Interest:
- Direct lending (fixed interest products) – which include putting your money into interest earning deposit accounts with banks, building societies and credit unions and investing in finance company debentures, bank bills, Government and corporate bonds.
- Indirect lending – through managed funds such as cash management trusts, bond trusts, mortgage trusts and other managed funds that may invest in a wide range of loans. Investing indirectly through managed funds helps spread risk across a larger number of borrowers.
