Here's How You Survive: Don't Ever Risk Normal By Buying The Unlikely

The Age

Saturday February 25, 2006

MARCUS PADLEY

FOUND myself on the Derryn Hinch radio show this week, talking about the people who lost their money on the Westpoint mezzanine property investment schemes. Unbelievable that these products get sold to mums and dads.

There are an enormous number of financial products. Let me explain the essence of all of them:

? The basic game is to get you to borrow money.

? Lock you into as high an interest rate as possible.

? Get you to pay as much of the interest up front as possible.

? Leave you with the risk on the assets the money is invested in.

? If they do take responsibility for the performance of the assets, they will only take it on assets that they can hedge (shares) and you will pay for the cost of the hedge (options over the shares), giving them another opportunity to add a margin.

? All the costs will be rolled up in one fee that hides the interest rate and profit margins.

? The sales pitch will be that that's fantastic, because the fee is tax deductible.

Got asked for a second opinion on a product just the other day. Fancy brochure, fancy jargon. Despite having a Masters in Applied Finance, it still took a while to understand the bloody thing. The net effect was that they were asking you to pay a $19,000 fee in year one for a $100,000 stock portfolio. Doubly amusing, you borrowed the $19,000 fee as well. Triply amusing, you paid the $19,000 up front and paid interest on $119,000 for your $100,000 exposure. The product life was five years, presumably because by then they would have stopped laughing long enough to sell you another product.

You are almost certain to lose money in year one with this product and, if the sharemarket fell over, you would lose a lot more. It was a completely inappropriate product for the clients it was being pitched at (young football players). On top of that, there was no disclosure of commissions.

It left me wondering how this completely inappropriate product had made it this far. Because people buy it. But they surely can't understand it.

Inappropriate financial products are everywhere and they are well presented. So how do you survive?

Here are a few truths about buying financial products:

? Don't expect the law to protect you from your own stupidity.

? Take responsibility. Have your wits about you. Common sense will suffice. You are your only defence.

? Most dodgy products are flashing warning signals. If the salesman has travelled 100 kilometres to see you at 10.30pm, then something's wrong.

? Remember the golden rule: if it's any good, you wouldn't be offered it. If you get offered it, you don't want it.

? If you don't understand it, don't buy it. Complexity is camouflage.

? Don't put much in any one product.

? Be very careful about borrowing to invest. There aren't any asset classes that will reliably return you more than the cost of borrowing. There aren't any that will return it without a risk.

? Reward is always balanced by risk. You will be told about the rewards. If you can't see the risks, you don't understand.

? Don't be rushed. You don't "need" this one.

? Anyone selling you a return of 9.5 per cent-plus a year is either lying, or selling you a greater than average risk.

? Anyone earning a commission of more than 2 per cent is selling something you probably shouldn't buy.

? Your stupidity is directly proportional to how unrealistically rich you want to be. Only the financially ambitious (to use a polite expression) send money overseas.

As I've said before: "Normal (the wife, the kids, a beer, the routine, sport on the telly) is good." Don't ever risk it by buying into the unlikely.

Marcus Padley is a stockbroker and author of the daily sharemarket newsletter Marcus Today. For a free five-day trial, go to www.marcustoday.com.au

© 2006 The Age

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