Just because something is in a book doesn't make it valid
I was sorry to read in a recent Herald about two recently convicted scam artists who ran financial advisory firms.
My story is a bit similar to some of the victims', and could have been the same had I just stood back from the sideline and done nothing.
When I retired in 2000, on the advice of a CPA and trust lawyers, I invested with various funds in three big fund managers. Except for one small amount of $3000, all were invested in "conservative" property and similar funds.
Over a three-year period they initially paid about 5-6 per cent a year, then in the last year paid losses of about 7 to 10 per cent or more on the capital invested, so I decided I could do a lot better myself and removed the funds. These so-called New Zealand financial stalwarts were helping themselves to 1.5 per cent to 2 per cent in management fees when they were making huge losses!
I left 10 per cent in cash (a bank savings account), 10 per cent in bank deposits, 20 per cent invested through a broker in a bank and Fonterra fixed bonds paying 7-8.5 per cent net, and the balance in shares in large New Zealand and Australian companies.
The shares were traded regularly between about 20 different companies, and in 2009-10 showed an 8 per cent return, then a 4 per cent loss in the following year.
I decided I could do better, so I then read up on options via the internet and invested $3000 in US options/shares, which produced a 50 per cent profit over six months then a 40 per cent loss over the next six months. I decided I could do better again, so I got library books and bought books (some via internet sites such as Amazon.com), and have now in the past three weeks made about $5000 or a return of 160 per cent over three weeks, or over 2000 per cent a year.
I am not suggesting that this would suit everyone. Obviously I have the time and inclination to do this research, and perhaps the brain power. But just look back at how I have turned around my finances in just over one year. I am pleased I gave the fund managers the heave ho! What do you think?
I think, "yikes!" Your recent returns are amazing. More amazing than you seem to realise. Too amazing.
Your 2000 per cent per year is way short of the mark. You forgot about compounding, which applies as long as you don't take money out of the investment and therefore keep earning returns on returns.
When I tried to calculate your compounded annual return, the numbers got so big I thought I must have done something wrong. So I asked a mathematical friend. He says that if you made 160 per cent every three weeks, and kept reinvesting all the money, $1000 would grow to almost $15.6 million in a year - an annual return of 1,559,000 per cent. Over five years, it would grow to $921 billion billion. Yes, there are meant to be two "billions". Over 10 years it's 848,000 billion trillion trillion. "Good investment," comments my friend.
He says he once asked a mate how much he made panning for gold. "He said that in the previous week he had found $3500 worth. Great return, implying by your reader's logic an annual income of $182,000. But when I asked him more details, it turned out that in the six months previous to that he had found nothing - an annual income of $7000." Your situation must be similar, or else you'll be owning everything in the world before too many years pass.
I thought of writing to ask what you are investing in, but frankly I don't think I want to tell other readers for fear some might try to follow you.
Just because something is published in a book doesn't make it valid. There's lots of junk in books. Any investment that brings you 160 per cent over three weeks must be hugely risky. And you, of all people - who have seen volatile returns in property funds, shares and options - should have realised that by now. If you haven't already been through the downside, I suggest you get out now. You're playing with fire.
Some comments about your earlier experiences:
If your CPA and lawyers told you property funds are conservative, they either don't know what they're talking about or they are looking after their interests, not yours. Depending on the properties and how much they are geared, property funds range from somewhat risky to very risky - as your experience shows.
Investment advice from CPAs and lawyers is sometimes excellent, but sometimes terrible. These days, unless they are also authorised financial advisers, or AFAs, they are no longer allowed to give financial advice, and a good thing, too. Knowing about accounting or the law does not make you an expert on investing.
I don't think regular share trading is a good idea. Research shows that even most professionals don't get it right often enough to make up for the brokerage and other expenses. Better to choose a wide range of shares - different sized companies, different industries - and just hold them.
But that may not be the main reason behind your volatile share returns. Shares are simply like that. You need to expect to make losses some years, and hang in there for 10 years or more.
Options! Now there's a trap for young or not-so-young players. As you discovered, you can win big and lose big.
I suggest you take yourself off to visit an AFA. See the Info on Advisers page on www.maryholm.com for some thoughts on how to pick an adviser whose interests will be aligned with yours, and a list of potential advisers.
If you don't like that idea, I recommend sticking with bank deposits for money you need in the next couple of years: high-quality bonds for the middle term; and shares, share funds, or property for money you need in 10 or 12 years or more. And don't move that long-term money when markets fall. They will rise again in time.
I was staying at a holiday home last weekend and of course it's stocked with books and magazines that are somewhat dated. In a National Geographic were the details of gold prices starting from 1718 until 2009. The prices were expressed in US$ in the year 2008. In summary, here is how gold went in those many years: 1718, US$1300 per ounce; 2008, US$900 per ounce.
So from 1718 until 2008 the graph shows a steady decline in gold prices over that rather long time. There were also a few blips both up and down such as:
American Revolution, US$500 to US$1000 per ounce.
American Civil War, US$800 to US$1400 per ounce.
World War I, US$400 to US$500 per ounce.
World War II, US$400 to US$500 per ounce.
1980 US went off the gold standard US$1800.
It can be seen gold is not the type of investment for anyone in good times or bad. The trick of the game is to time the blips - which is an impossible task. The present price looks very similar to the 1980 price and that blip lasted only a few months.
Buy gold - not for me!
Nor me. Don't you just love the literature in baches. It seems that you struck gold - or perhaps un-gold. It's no accident that the periods with blips were wars. That's when people panic and rush into gold, pushing up the price to unsustainable levels. Overall, though, your numbers - which, by being in 2008 dollars are adjusted for inflation - tell a cautionary tale. Thanks for sharing it.
Time to buy?
I would like to comment on your reply two weeks ago about buying houses and price bubbles.
I bought a couple of rental properties in the late 90s and they tanked a bit but started going up with the boom in the early 2000s. By 2003 nearly everyone I spoke to was talking about rental property. This made me very uncomfortable and by 2005 I had quit both properties, feeling utterly convinced it couldn't go on. But it did, for two years. If I had been thinking of buying in 2005 and had held off I would have been kicking myself, even when everything went bad later. The point is, we just don't know what's next. Parts of Auckland are fetching prices that are unbelievable to me. But there are a lot of people who earn way more than me who are fighting each other for the best houses. Despite the GFC, executive salaries keep going up and so do their houses and the ones near them.
If I was looking to buy now, I would. If you survive the experience it will probably make your fortune. I think the greater risk is to miss out on all that house ownership can bring and possibly condemn yourself to never owning one.
For those who didn't see the Q&A, a reader asked if now was a good time to buy a first home. I said that generally it's best to buy when it suits you. However, if there seems to be a housing bubble - with rapidly rising prices, many people bidding at auctions, and houses selling fast - it might be better to wait a while.
I understand why you challenge that. Nobody knows whether prices will later drop in the bubbly suburbs of Auckland. While prices are unlikely to keep rising fast for long, they could plateau for a period rather than fall. In the end, you take a risk either way. If you buy into such a market, prices might fall lots and you'll wish you had waited. If you don't buy, prices might keep rising and you'll wish you had bought.
Perhaps the best solution is to buy if you want to but promise yourself you will keep hold of the property - or only trade it for a similar property - for at least 10 or 15 years, regardless of what prices do in the meantime. After a decade or so, the property is highly likely to be worth more than you paid originally. Whether it's heaps more or just a bit more - because of a slump in the meantime - might not matter too much.
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm. com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a daytime phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.By Mary Holm Email Mary