by Neil Jenman
READING TIME: APX 5.5 minutes
The saddest stories I see are retirees who lose their savings – sometimes their homes. Lured by above average returns, unsuspecting folk sink too much money into companies that sink.
These days, more people borrow money than save money, which is why, when the Reserve Bank cuts rates, the media hails it as good news. “You’ve never had it so good,” is the modern mantra about the lowest interest rates in memory.
But good news for most is bad news for some.
Consider the retirees, (almost four million Australians are now aged 65-plus), who depend on income from savings. Many have seen their incomes plummet during the years of plummeting interest rates. For these people, low interest rates are a disaster.
And so, understandably, they look elsewhere to increase their income. In doing so, thousands of them lose everything.
Many years ago, I was so concerned at the number of mature-aged people losing money in companies with oh-so-very-secure sounding names, that I did some private research. I chose the ‘money’ section in newspapers and cut-out advertisements for all companies with secure-sounding names that were offering investors a higher-than-average return. In two weeks, I found about nineteen. In many cases, I asked for a prospectus. The fine print was frightening.
And then, I waited. Time has a habit of revealing the truth.
Five years went by – and I checked the ‘health’ of those 19 companies.
Of all those companies with safe sounding names targeting investors with offers of high interest rates, how many still existed? Brace yourself – none. Not one. Websites no longer existed, and phone numbers were “disconnected”. They were all gone. And gone too, I am sure, were tens of millions of dollars in retirees’ savings.
It’s a tragedy. Shame and despair hits people hard. “How could we have been so stupid?” they wail privately. Yes, so embarrassed are those who lose money in these high-offering yet safe-sounding companies, so frightened are they of being labelled “greedy” or “stupid”, they rarely tell anyone, especially families.
One of the most traumatic nights of my life was when I visited a couple in their late 70s on Sydney’s Northern Beaches. They had lost their entire savings, around eight hundred thousand dollars in one of these companies that looked so safe. I soon discovered that they were about to take their lives. I stayed with them until two in the morning. Arriving home, I fell into my wife’s arms saying, “I am not trained in suicide prevention.”
Last week, I saw an ad on Facebook. It was another of “those companies” with all the symptoms of suspicion – a safe name, a smiling couple on a brochure, a huge interest rate (in this case, 12.5%!) and a clear inference of security. I felt sick.
The most important question that investors – of all ages and in all types of investing – must ask is what I call the ‘7-Word-Safety-Question’: “What is the worst that can happen?”
Well, I looked at their prospectus and there it was, buried amongst the feel-good headlines and the heart-rending photographs, the following warning: “risks can include significant losses”. Oh sure, it said that “The company intended” to prevent these losses. “Intended”!! And what if they don’t? What happens to investors’ savings? What’s the worst case? YOU LOSE YOUR MONEY!
Now, seriously, if it won’t bother you to lose whatever money you invest in these safe-sounding companies – and if you think I am being an “alarmist”, then go ahead, invest. But I can tell you this: There is no way I would invest in any of these companies, no matter how much “spare cash” I had. There is no way I would want my friends or family to invest with them either. I like to sleep well at night, obeying my favourite rule of investing: SAFETY.
Wasn’t it Warren Buffet, reportedly the world’s best investor, who once said, “There are two essential rules when investing. The first rule is DON’T LOSE MONEY and the second rule is always remember the first rule.”
Finally, back to the Facebook ad. It allowed me to ‘like’ and to ‘comment’. I couldn’t resist, so I wrote the following and posted it under their “sponsored message” (which is what ads are often called these days):
“Many years ago, I researched apx 19 companies that were promoting ‘great interest rates with security’. Of those 19 companies, how many were still around 5 years later? Wait for it – none! They’d all collapsed, closed or just disappeared. I’d be VERY CAREFUL investing in any company that promotes such an interest rate. I mean, seriously, if they need funds, why not borrow from banks at less than 5%? Why pay 12.5%? Oh, that’s right: the banks won’t touch them. So, what message does that give to you? Are you as wealthy as a bank? I repeat: BE CAREFUL.”
My comments were deleted.
Here are my two final comments: These companies offering high interest rates are not secure despite their names which create an impression of security, they are HIGH-RISK. And my final comment is this: It is better to have 2.5 per cent and keep your savings than to have 12.5 per cent and lose your savings.
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