How much thought do you give to losses when you enter into an investment? Not much, I would guess. We leave that to our advisers.
As an industry, financial service firms don’t typically like to focus on risks or potential losses. Neither do many investors.
But actually, losses are part and parcel of investment. One person loses, somebody else gains. That’s the way it works.
As if to prove my point, the papers are full of stories about investment losses (as this was originally written in August 2017, the stories are from them with a link to the current troubles of so-called fallen fund star, Neil Woodford).
A narrow focus or buy the market approach?
The Business Posts reported that the liquidator of Custom House Capital (I have written about CHC before), was denied permission by the High Court to recoup fees from investor funds because there were insufficient company funds. Investors in the funds administered by CHC are still waiting for whatever money is left to be shared out six years after the company failed.
Brendan Investment Pan European Property (BIPEP), a property investment firm of which Eddie Hobbs was a non-Executive Director, is also in liquidation. The Sunday Business Post reported that the liquidator is investigating how the fund ended up investing in sub-prime property in Detroit when its original investor prospectus indicated that it would be investing solely in Europe. The company says there is no money left to pay back its 700 investors, many of which are located in and around me in Naas town.
It is also reported that AIB will make provision for shareholders to gift shares in the bank to charity at no cost. This would be an option for shares that are worth too little to sell; 55,000 AIB shareholders received less than 50c by way of dividends in the recent pay out.
Is there anything we can learn from these stories that would help us avoid future losses?
Well, the entities in question all offered single-security type investments.
CHC bought commercial property in various European cities with investor money, bolstered by bank borrowing.
If you invested a large proportion of your available funds with CHC, your money was heavily exposed to the property crash and usually linked to one particular project. If that project fails, you lose much or all of your investment.
Brendan Investments also purchased property – both commercial and residential. This time the markets were Germany and the US, but again, both were badly hit when the property bubble burst.
AIB is a single entity. Regardless of the bank’s exposure to the property crash (yes, that again), to invest a large proportion of your available money in any one entity is to put an unwise amount of trust in one board of directors.
Do you see a pattern here?
You can minimise losses by spreading your investment across many asset classes, many entities and many markets.
Global diversification, in other words.
This way, you are not depending on the decisions of one single board, nor are you exposed to the risks of failure in one asset class or in one or two markets. (Read one of my most popular blogs about the subject from March 2016 here).
Before you invest, ask lots of questions. Investment losses affect you, your spouse and your children.