How to avoid getting ripped off

Mat Carron has had a long battle over the ING frozen funds debacle. Photo / Richard Robinson

Two years after coming close to losing his life savings, Mat Carron says if there is one piece of advice he has for others it's that they should "play it safe unless you are prepared to take a risk with your money".

The 46-year-old quantity surveyor was one of the 16,000 people caught up in the ING frozen funds debacle which put more than half a billion dollars at risk after its investments were hit by the global financial crisis.

While most will receive the majority of their money back after two separate settlement payouts, it has been a long battle for Carron and others who feared they would never see their savings again.

The Aucklander first invested in the ING Regular Income Fund in 2005 after his ANZ account manager suggested he see one of the bank's financial advisers about some money he had in a term deposit.

"I was talking to my bank account manager and two of them suggested I talk to the advisory service. They were saying I could do much better."

Carron had put the lump sum of money in the bank after separating from his wife and selling the family home. He had the money invested in a term deposit in anticipation of buying another house in the future.

He won't say how much money it was but says it was substantial. "It was my savings."

The only products Carron says were strongly promoted to him were the ING Diversified Yield Fund and the Regular Income Funds. He took the investment documents home to think about it but admits he didn't really read them.

"I really took the advice of the financial adviser. I thought, the ANZ, ING, these are major financial institutions. They have your money - there's a lot of inbuilt trust."

He was attracted to the investment because it offered a slightly better return than a term deposit yet he could get his money out on just a month's notice.

He invested all his money and then added more each month.

"I was trying to build it up. Buying a house in Auckland isn't a cheap exercise."

But in March 2008, when ING decided to stop people taking their money out and the value of the funds began falling, he became worried.

"I wrote and asked what was going to happen? I was told it was a glitch in the network. I got told it [the value] would come back up."

But as the value kept falling Carron got more and more worried and he began questioning his adviser more frequently. More than two years later, Carron says the experience has taught him some valuable lessons and if he knew then what he knows now, he would have done things quite differently.

"I would make sure anything I invested in was capital-backed and would see who was behind it. I would definitely look into the investment a lot more."

There is also no way he would have put all his money into any one thing if it involved the risk of losing it.

Carron has lost his trust in his bank and says it's hard to know where to turn for advice, even if he had any money to invest in the future.

Bank deposits are one of the lowest-risk forms of investment but often savers with a large sum are asked by their bank if they would be interested in doing something else with their money.

Banking Ombudsman Deborah Battel says there is nothing wrong with any institution drawing attention to other options but savers need to analyse it based on their own situation.

"You've got to sit back and think. What kind of reward and what kind of risk are you prepared to take?"

Scott St John, head of investment bank and broking firm First NZ Capital, says: "Pay attention to your money, even if it is just in the bank you might not be getting the best deal you could get. Make sure you are getting what you deserve."

St John says one of the problems with the collapse of the finance company sector was that people didn't really understand the risks they were taking with their money.

"The finance company disaster had many dimensions but one of them was that people misread the risk they were taking. For each level of risk taken above Government bonds, there needs to be an increase in reward. Taking on property development risk for another 2 or 3 per cent extra interest could be described as lunacy."

Alan Best, the New Zealand Shareholders Association's man in charge of investor education, says diversification is the key if investors want to avoid losing their shirts.

"The big danger is that investors who are starting out will put all their eggs into one basket [be it fund manager, finance company, or blue chip share], burn their fingers and not try again."

Diversification isn't just about choosing a range of shares but spreading your risk by considering a mix of cash investments such as bank deposits, fixed-interest investments like Government and corporate bonds, and those considered to be higher risk like shares and property.

The proportions you allocate to each should be linked to how much risk you are prepared to take.

There are calculators on websites like the Retirement Commission's www.sorted.co.nz site that can help investors figure out how much risk they would be prepared to take.

Rebecca Thomas, chief executive of fund manager Mint Asset Management, says a golden rule retail investors should stick to is if they can't understand the investment, avoid it.

She says new investors should stay away from specific industries such as start-up companies or unproven technologies or management.

Many managers have been around in New Zealand for a while and may have had previous business failures that can be identified.

For example, many of those involved in the recent finance company collapses had also been involved in businesses in the past that hadn't gone well.

She says one of the hardest things for investors to recognise is when to get out of an investment when it is going wrong - the first bit of bad news can often be the best time to get out.

Bad news also tends to come in threes, she says.

Thomas says retail investors need to speak up when they have a question and not be afraid to ask for more information.

Investing safely

Questions you should ask before investing
* What sort of investment is this?
* Who is involved in providing it to me?
* How much do I pay?
* What are the charges?
* What returns will I get?
* What are my risks?
* How do I cash in my investment?
* Who do I contact to inquire about my investment?
* Is there anyone I can complain to if I have problems with the investment?
* What other information can I get about this investment?

10 top tips to avoid losing your shirt
1. Diversify - don't put all your eggs in one basket.
2. Don't invest in something you don't understand.
3. If it looks too good to be true it probably is.
4. Do your homework, research it.
5. Look at the track record of the people involved.
6. Understand what risks you are taking to get the rewards.
6. Get advice from someone you trust.
8. Don't be afraid to ask questions.
9. Past performance is not necessarily a guide to the future.
10. Review it - don't just invest and forget.

Source: Securities Commission