Trust is at the core of business and investment, and in many instances a handshake or a shared understanding is enough. Every once in a while something shakes those beliefs and it not only severely affects people’s lives but also weakens the foundations on which commerce is based.
The other day someone asked me, “Who can you trust with your investments?” Sadly, the answer increasingly seems to be no one. And yet you do have to place your trust in institutions and individuals – the hard part is choosing which ones. I was shocked when David Ross emerged from what was no doubt his own personal hell to confirm he had inflicted disaster on hundreds of mostly older people – many he would have called friends. The financial security of people who trusted his figures has been ruined by what appears to be a Ponzi scheme he created.
Unfortunately, the people who invested all or most of their wealth with him ignored two fundamental rules of investment:
1. If it seems too good to be true, it almost certainly is.
2. Don’t put all your eggs in one basket. It is not rocket science. Go with your gut instinct and use common sense.
It’s no wonder so many Kiwis put their money into real estate. They can touch it and see it and get daily pleasure if their main investment is their own home. They can lavish care on it and make improvements through their own hard work that should, in turn, be reflected in an increase in value. So our DIY culture has resulted in a nation of property investors. Putting all your money into your home won’t provide you with an income in old age – unless you cash up and downsize. Curiously, many highly educated people don’t have the confidence or skill to choose alternatives to property, leaving any surplus cash in the bank. They simply do not trust equities, funds or other investments because they don’t feel they can control them.
But remember rule No 2 about eggs and baskets? As I’ve said before, just because property – including commercial or house rentals – has always been a reasonably good bet doesn’t mean it will continue to be. Just think about the risks around leaky or earthquake-prone buildings. So, if you accept you need to diversify, who can you trust? KiwiSaver should form part of everyone’s savings regime; the funds are closely scrutinised and audited, and so are among the safest option. Having said that, there are still no absolute guarantees – and they are unlikely to produce exceptional returns (remember Rule No 1).
You can choose varying risk options (the low-risk ones are mostly fixed-interest investments). A general rule is to go for a bigger ratio of higher-risk investments when you are younger, because even if some take a bath, they will have time to recover. At any age, there’s nothing wrong with putting some money in higher-risk investments – just not all of it. Recognise their risk level and take profits when they present themselves. Remember it ain’t a profit until the investment is sold and the money is in the bank.
The trickiest part is which people to trust – Ross’s many investors trusted him. But the outcome would not have been so dire if investors hadn’t been tempted to chase the attractive returns offered. They thought they were diversifying with a spread of investments – but it was through one channel. In a different way, people thought spreading their risk around several finance companies was diversification.
Even if you like someone or have known them a long time, don’t blur the boundaries between money and friendship. Sure, invest with people you know and like, but operate on a business-like footing: require independent checks or audits, and spread your risk around different types of investments, entities and people. You ultimately must trust people, but you can’t just assume everything will be fine. Investing involves doing your homework and managing your risks.
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