KEY POINTS:
Kiwi investors can't be blamed for thoughts of impending doom. First of all they lost millions in finance company collapses, then it was the turn of investors who'd bought packaged property investments such as those offered by Blue Chip, which have plummeted instead of making the easy wealth
promised.
Now it's "structured investments", which are so complex that many financial professionals admit privately that they don't fully understand them.
Where is the next disaster waiting in the wings, or the products that are going to cause people heartache?
For the past few years I've had numerous conversations with financial planners and other professionals warning about each and every one of these financial catastrophes in advance of them happening.
So I asked: What's next?
The answer is that the financial crisis we find ourselves in is likely to have repercussions on virtually every investment we hold.
However, there are investments that are likely to bring grief to numbers of people who invest in them, and they include:
* Negative-geared properties. These properties, where the costs are more than the rent and the loss subsidised by generous tax breaks, may not be a bad idea when property values are rising. When they're going sideways or down and the medium-term outlook isn't good, why would you do them?
Yet type the words "invest in property" in Google and there are companies still selling the dream that property is about to appreciate in value in the near future.
The very first words in Catalyst2's description of its service are: "New Zealand property is significantly undervalued." Plenty of others come up with reasons to buy new off-the-plan property, none of which even mention that developers need to sell off-the-plan property to mugs to get loans to build the projects.
It also should be added that many salespeople masquerade as financial or investment "advisers" when they are really only interested in selling whatever earns them commission. That's especially so with property sales.
* Capital-guaranteed products. The word "guaranteed" must be one of the most misused terms in investment, sometimes not worth the paper it's written on.
Just look at the "guaranteed" rents offered to Blue Chip investors. Many of them haven't seen a cent of rent in months.
What many investors don't understand about the word "guaranteed" is that they pay for their own guarantee. Those selling the product aren't doing it out of the goodness of their hearts.
In the equities markets and also with debt securities, many managed fund-type investments offer guarantees. What they guarantee is that you'll get your capital back at the end of a fixed period of time.
But even if you get your capital back, you've still lost money because inflation means that capital buys less than it used to. Why not put the money in the bank?
The main exception to the rule is government guarantees. One example of this is the guaranteed rent offered to investors who lease their properties to Housing New Zealand.
But this doesn't guarantee the capital value of the property, just the rent.
* Property. It's not homeowners who really have to worry about property prices falling, nor long-term serious investors who have been in the property market for longer than the latest boom.
It's those so-called mum and dad investors who were "sold" properties by "advisers" in new-build property in the past couple of years who really need to worry.
If the properties were already loss-making when bought and they drop in value, it could get to the point where the bank calls in the mortgage. More than one Blue Chip investor at a recent public meeting had seen a $100,000 drop in the capital value of the property they'd bought - hard to stomach any time, but worse if they ended up at a mortgagee sale.
On Wednesday, when I spoke to Stephen Parr, a Tauranga-based financial planner from Harmer Parr, he'd just spotted an advertisement in a local newspaper for property company Richmastery: "Now is the time to buy property ... invest with the full-time support of experts." Pull the other one.
* Hedge funds and derivative-backed investments. Don't get me wrong: these can be fantastic products to ride out tricky markets - such as we're in now. But some of the financial advisers I spoke to this week admitted they didn't fully understand how they worked. That's exactly what happened with structured debt products such as Macquarie Fortress notes, which have come in for some very bad publicity over the past few weeks.
When it comes to hedge funds and fund investments reliant on derivatives trading, they are usually described in terms of "alternative asset categories", says Jordi Garcia, financial planner at New Zealand Financial Planning.
They may not be bad, says Garcia, but financial planners have a fiduciary duty to avoid putting clients' money in products they don't fully understand.
Many of the investments invented in the past 15 years to squeeze greater returns are often very complex indeed.
Another commentator adds that the various layers of management and packaging in these products make them expensive, like the apple that has been cellophane-wrapped and packaged in a fancy box. It costs more.
* Capitalising or cash-flow loans. These mortgages involve rolling a set portion of each month's mortgage payment into the mortgage - which increases the debt. The advantage is that your outgoings can be matched to your income from rent, with any shortfalls added to the mortgage. Great if the property is going up in value.
Yet at the very time they become flavour of the month, property values head south. The last thing an investor wants to do is compound their debt.
* Reverse-equity mortgages. On the surface, these are another one of those "no-brainer" investments.
They are available to older people who have equity locked up in their home, but no other liquid investments, and involve taking out a mortgage against your home where the interest payments are rolled up and deducted only when you die, or move on.
In many cases the loans are small, $10,000 or $20,000.
But if you live another 20 years the interest on that - which is often more than 11 per cent a year - can eat up large chunks of capital in your home, leaving you with little or no equity to hand on to future generations or pay for a move into a retirement home.
These loans are relatively new and we haven't had time for Kiwis to appreciate the full impact of them. In the UK they have come in for bad press when borrowers realised how expensive they are.
The Australian Securities and Investments Commission (ASIC) found that some borrowers failed to understand them and, worse, children encouraged their older parents to take out reverse mortgages to make the money available to them.
Ultimately, a well-diversified fund based on a good understanding of your risk profile, financial objectives and priorities, that doesn't put too many eggs in one basket and has well-chosen investments, can ride most volatility - providing the investor has a long-term view.
