How not to invest: the seven traps to avoid
OPINION: From inconveniences to nightmares, bad investments are available in every corner of New Zealand. Here’s how you can avoid handing your money over to people who turn dollars into cents.
1. Don’t put everything in one place
Fifteen years ago, thousands of people renewed heavy obligations with Hanover, BridgeCorp and South Canterbury Finance. At the time, they were trusted financial companies. And then they weren’t.
It’s easy to get complacent – by early 2007, $ 50,000 would turn into $ 54,000 effortlessly every six months. People also got caught with David Ross.
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But big comebacks quickly turned into bigger and bigger losses.
For these reasons, diversification is essential. Diversified investments mean your money is spread to cushion the ups and downs if something terrible happens.
2. Don’t go into rental real estate without understanding the economy and obligations
It’s a myth that you buy a rental, the price goes up 15% per year, and you earn around 100% on your real money, since leverage is usually high.
The reality is different. You have to find tenants (or pay someone else to manage them). You have to pay municipal rate bills, fix things, make sure your property meets Healthy Homes standards, and pay taxes.
People are unreliable, both agents and tenants, and you can get caught up in a problem you are not used to. Repairs are inevitable – a new roof or carpet replacement easily costs over $ 10,000.
Even at $ 600 per week for rent, those costs to pay now consume a lot of rent money. And you’ll have to pay the mortgage and spin all the other plates.
Unless you are committed to the property (i.e. understanding it and making it work) it can be a risky investment despite what the numbers say.
3. Never invest in things you don’t understand
It happens all the time. People go crazy for bright and promising things.
In 2012-14, Pacific Edge was all the rage – it went from 15 cents to $ 1.50 in about 18 months. It then fell to 10 cents before finding grace in late 2020 and 2021 (now above $ 1.20).
Problem is, people saw it as a gold rush in 2012 and bought it big. The company’s turnover was still developing 10 years ago – and still is today.
Bladder cancer treatments at the Pacific Edge center have the potential to be huge. But investing too early in a bullish rush and selling in a panic later locks in losses.
Let’s take another example: If everyone you know is subscribing to Netflix, it may resonate with you as something you want to invest in. On the other hand, if no one you know subscribes to Sky TV, and there is a lot of competition entering the market, you might be wondering if Sky TV is a good investment.
If you don’t understand the basics of the business and its customers, it’s hard to justify the investment.
4. Do not act on the FOMO
There was a lot of FOMO with crypto, MyFoodBag and BurgerFuel IPOs, and frenzied house buying just before the GFC. Anyone late to the party can find themselves losing a lot of money.
One thing is true: if an investment is fantastic, it will be there for years to come. Profitable investments generally do not follow a boom-bust-boom-bust-boom trajectory.
5. Never judge a book by its cover
Anyone can dress smart and sell a dream. However, cynics (and financially exhausted) may think that the best dressed people who sell investment products might be handling something unsavory. That doesn’t mean to trust those who wear scruffy shoes – the Loizos Michaels case proves it.
6. Don’t rush into the fine print
Brent Sheather, a financial advice provider and personal finance / investments writer, points out a good rule of thumb.
For investors who do not care to read and / or understand the information statements, the longer the information statement, the less attractive the investment / advisor.
7. Avoid trusting your loved ones
As the useful Mexican saying goes, “there is nothing more dangerous than a fool with initiative.”
Every now and then a family member will talk about a great investment. Sadly, many family fortunes have been lost when well-meaning (but weak) parents push people too scared to ruffle feathers and make a series of dire financial decisions that ruin the entire family’s finances and relationships.
Don’t fall for this rather common trap.
– Christopher Walsh is the founder of MoneyHub.co.nz.