Pathway to poverty via bad investing

A CHINESE teacher has received both an expensive investing lesson and a financial haircut: her portfolio has dropped a whopping 32 per cent, amid the carnage of the Chinese stock meltdown.

An investor reacts at a Chinese stock exchange corporation.

MS WANG is a young teacher from the Chinese city of Nanjing, who is currently licking her wounds.

In an interview with TheWall Street Journal she explained that she decided to open her first stock trading account a few weeks ago “on the advice of my hairdresser”.

Yet as Confucius says, “two weeks is a long time in the Chinese stockmarket”.

Since then the teacher has received both an expensive investing lesson and a financial haircut: her portfolio has dropped a whopping 32 per cent, amid the carnage of the Chinese stock meltdown.

“My hairdresser said it was a bull market and I needed to get in”, said Wang glumly, who admitted she doesn’t follow the sharemarket closely, and is unsure of what to do next.

Yet let’s not get too smug. After all, deep down, we’ve all got a bit of Ms Wang in us, don’t we?

So given we’re all prone to going a little yum cha with our money, let’s look at the best ways to ruin yourself financially.

THE BAREFOOT INVESTOR’S TOP 10 WAYS TO RUIN YOURSELF FINANCIALLY

1. Let your bank teach you about money

IT can start at any age. The Commonwealth Bank’s Dollarmites program teaches kids to stick their long-term savings into a low-interest bank account, which teaches them first hand about the ravages of inflation.

Then when they’re legal, Commbank will give them a bonus lesson on compound interest, via the credit card they send them.

All you need to do is make the minimum repayments on a $5000 balance, and it’ll take them 33 years, and $17,181 to pay it off.

Wham! That’s a great lesson in compound interest baby!

 

2. Spend more time on your footy tips than your super

SPEND the last 20 minutes of your work week pouring over your footy tips, and you could beat your workmates and scoop the $500 first prize (or maybe the meat tray for runner up).

Or you could spend half an hour choosing a good, low-cost, high-growth super fund, which could potentially boost your nest egg by $250,000 when you retire. Go Demons!

 

3. Demand your investment fees expressed in percentages, thank you very much

DOUBLE up on OMO when it’s 20 per cent off at Coles, but don’t bother about single-digit percentage savings when it’s your investments. Case in point: a widow who earns $42,000 a year called me to talk about her financial adviser’s plan to invest her husband’s $900,000 life insurance payout.

Widow: “He’s charging me 3.3 per cent upfront, and 1.65 per cent ongoing each year”.

Barefoot: “What do you think?”

Widow: “What do you think?”

Barefoot: “Well, lets look at it in dollar terms. He’s charging you $29,700 — up front — for his advice. Plus an additional $14,850 every year … before you even make a cent.

“If you lose, he still gets paid. If you make money, he’ll take more, because he’s slicing off a percentage of your assets.”

 

4. Don’t think too much

INSTEAD, make absolute, definitive statements like: “I’ll never be able to afford retirement.”

Be sure not to investigate how much you’ll actually need. Don’t bother finding out about simple ways to boost your super, or slash your tax bill. Instead, just wait until you’re 65, and tell people, “you know, retirement … it just sort of snuck up on me.”

 

5. Don’t ask dumb questions

IT’S always better to be ignorant than embarrass yourself.  So don’t be “that guy”. You know, the one who asks dumb questions like: “What are the risks and rewards here?

How did you come up with your price? What alternatives do I have? And my personal favourite: “I’m sorry, but I just don’t understand. Explain it to me again, this time imagine I’m a golden retriever.”

 

6. Only invest in things that come with a glossy brochure

BE on the look out for anything super complicated that has been engineered by a bunch of bankers, and delivered by a smiling financial planner.

Grab the glossy brochure and play dull-dust bingo by underlining the following terms: structured products, hybrid notes, capital protected, annuities, limited recourse loans, equity-like returns, mezzanine financing, and CFDs. Bonus points for anything that encourages you to take on a lot of debt to boost the returns (see point 10).

 

7. Be supremely confident about things you know very little about

THE quickest way to get up to speed is to subscribe to a bunch of investment newsletters that constantly preach doom and gloom.

Buy gold and silver, stock up your bunker and wait for economic Armageddon to hit. Remember, there’s a huge difference between someone who predicted the crash of 2008, and someone who has been warning of crashes since 1988.

 

8. Pay very close attention to newspaper headlines, and act accordingly

IF it bleeds, it leads — so the bigger the financial news story, the more of your portfolio you should sell (even though it’s too late because it’s already happened), whereas good financial news is usually buried down the back of the bulletin.

 

9. Keep your money totally separate from your partner. In fact, don’t even talk about it

SHE won’t understand anyway. Best leave it for the lawyers to work out later.

 

10. Keep up with the Zhangs

WHEN the market is running hot, go all in.

Case in point: A Chinese investor called Mr Zhang thought he was doing pretty well after he’d borrowed heavily, and doubled his money on the Chinese stock market last year.

That was until he went to a dinner party arranged by his stockbroker, and found out that several people had made 10 to 20 times their initial investments, because they’d borrowed even more than him.

In an interview last month he told The Wall Street Journal that he’d quit his stable job, taken out more loans, and begun a new career as a full-time investor ... right at the wrong time.

Tread Your Own Path!

Originally published as Pathway to poverty via bad investing