A lot of investments sound great on the surface, but the more you dig the more you find out about that investment that could derail your investment.
Complex investments are the epitome of this type of behaviour. They are often wrapped in a very simple and attractive message such as “guaranteed 8% returns”.
Who wouldn’t like a guaranteed return of 8%?
Or maybe our uncle Bob mentions how Air NZ is a great buying opportunity now. Or perhaps how Tesla stock price only goes up.
All we hear about is the upside and it sounds fantastic.
So we jump right in and buy. We want to get amongst those sweet, sweet returns.
But the key to any investment is knowing how it loses money, not how it makes money.
It is one thing to build wealth, but it is just as important, if not more so, to learn to protect your wealth.
For example, Many New Zealanders have heard the narrative that house prices in this country only ever go up. So we buy, buy and buy no matter how ridiculously unaffordable a house is. We don’t want to miss out on the party. And this has worked out great for many. But the more we tell ourselves this narrative, the more blindsided we will be when house prices drop. We will be shell shocked and it will be totally unexpected. We won’t be prepared for it – mentally or financially.
Knowing that house prices can drop by a substantial margin is a long way to preparing for the eventuality. Plan for the worst and hope for the best is a good way to go about things.
If you don’t know how an investment can lose money, then you probably shouldn’t be invested in that asset as it means you don’t understand it well enough. The result being that you won’t be prepared for any of the negative eventualities, thereby losing money you weren’t prepared to lose.
This can result in financial ruin for some people. For others, it can result in an unwillingness to ever invest again. The results of being unprepared for all financial eventualities can be catastrophic.
If you find an investment that is complex or has many layers then that is a warning sign that you need to look very deep before deciding on this investment. They are adept at hiding the negatives and accentuating the positives. There is no such thing as a guaranteed 8% return.
The old adage is if something sounds too good to be true it probably is.
You don’t need to know all the ways that stocks can lose money. There are still ways that are being discovered now! The key is to know that historically they have gone down in value by 60% before and that it can on occasion take up to 15 years to recover from your losses.
Bonds are often sold as safe investments, but knowing that they can lose money in an environment of rising interest rates can help prepare you. Or knowing that companies can fail and not repay their debts.
Likewise, knowing that even cash can lose money thanks to inflation.
So, if you don’t know how your bonds, cash, stocks, property, bitcoin, or some other complex investment can lose money, then your job is to learn. Preparation is one of the best forms of risk management you can make.
If you need an investment plan or recommendations , then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here