KEY POINTS:
Investing is a balance between greed and fear. Too much greed and you open yourself to falling for scams and rip-offs. Too much fear and you'll never put any money into investments that ultimately could be good for your long-term wealth.
It's the greed side of the equation
that I've been thinking about, with the news that some investors who bought properties through Blue Chip haven't been paid guaranteed rents.
They were persuaded by a well-oiled selling machine that offloaded thousands of newly built apartments and other properties to mostly first-time investors who were convinced that the equity in their homes could make them rich.
The investors who bought into the Blue Chip concept were often cold called by the company and visited by a salesperson cloaked as an investment adviser who used some pretty standard sales techniques to convince them to buy a property they hadn't even seen.
You'd think that with all the warnings in the media, investors would wise up to all the salesmen out there fishing for their money. But they don't. Some investors make it all too easy for them.
A week ago, I was asked what I thought of an investment in a Gold Coast apartment. The deal had all the hallmarks of high-pressure selling associated with it.
Why, for example, did this company need to be selling in New Zealand? If it was such a great investment, Australians would have snapped it up.
My comments about Australian property investments being subject to capital gains tax and stamp duty in Australia, and that rental yields being worse over the ditch than they are here, were swept aside by the husband, who countered them with the same arguments the salesman had peddled to him.
He clearly wanted to believe that buying an Australian property would be his financial salvation and lapped up everything the salesman had said: about prices already having risen on paper so they had to get in now; lots of Australian investors already on board; run by a family company and so on.
What this man and many other investors don't realise is that:
* Developers sell property "off the plan", not so investors can get rich off it, but in order to get finance to build the project in the first place.
* The companies that approach investors with wealth seminars, presentations and the like, and packaged property investments make money from selling that overpriced and overvalued property. They may have bought it "wholesale" from the developer, but you're buying it at full market value or more.
* Guaranteed rents are often built into the purchase price. So you pay over the odds for the property and the marketing company that sells it uses this extra to pay for the inflated rental prices you're receiving. The only exception, perhaps, is the guaranteed rents offered by Housing New Zealand.
* When the guarantee ends, rents often drop to a level where the property doesn't pay for itself any more.
Buyers of investments - and even products such as miracle face creams - says Paul Ballantine, senior lecturer in marketing at the University of Canterbury, are presented with a problem they didn't know they had. In the case of property, the "problem" is not enough money for retirement.
"Then they offer a way to solve that problem for you," says Ballantine.
Salespeople will pre-empt any rational questions with answers that on the surface make sense. What's more, says Ballantine, because there is a "guarantee", the potential investor decides they don't need to think about it because it must be safe. Some of those selling off-the-plan property need you to sign up without getting independent advice. Therefore they have a tame accountant and lawyer on hand, who back up the salesman's argument and allay any fears you may have.
This type of selling isn't just restricted to property and time shares.
People get suckered into having their life insurance policies changed all the time, so the salespeople can get another bite of commission.
Unfortunately, some find their health has changed in the meantime and the new policy may not cover them for pre-existing conditions.
When they make a claim, they're turned down, all so someone can get a few thousand dollars in commission.
From a behavioural finance perspective, says Mark Brighouse, president of the Chartered Financial Analyst Society of New Zealand, human beings are programmed to take risks. But combine that with a slick sales technique and our risk taking lets us down.
Some of the mistakes that come into play with investments, Brighouse says, are:
* Over-confidence.
* Framing - where the way that an investment is presented makes us think differently about it. It's the same argument as a doughnut being 75 per cent fat-free or 25 per cent fat.
* The herd instinct, where we do what our neighbours are doing without questioning it.
* Diana Clement is an Auckland-based personal finance and investment writer.
