Ever thought “I wish I didn’t do that”.
Investors tend to focus on the upside, the profit, and the benefits of investing and rarely take a close look into the downside or the losses, which could occur.
Many years ago, I was reviewing a client’s portfolio when they told me they wanted to invest in a privately owned company. For me, this immediately raised a red flag. Privately owned means small and illiquid, this increases risk. On further discussions, I was advised that the investment would receive interest of 20% per month. No, that is not a typo. This sort of return is not a red flag, it is a giant blinking red light, which reads DANGER.
After further discussions, I was able to obtain some information about the company its workings, cash flow and business model as well as the owners and their experience.
Based on what I knew about the company and the information the client supplied it was clear that this company was about to fail.
My advice was not to invest.
A couple of weeks later the client advised me that they had invested $250,000 into this company against my recommendation. They were initially going to invest $1 million. 6-months later, the company went bust. The media reports confirmed my fears. The company was trading insolvent for around 12-months. The company left a trail of financial disaster.
My client lost their $250,000.
My advice saved the client $750,000.
Investors generally focus on the money that their adviser makes them and rarely focus on the money that their adviser saves them.
Creating wealth is not just about making money; it is also about not losing money.
As a rule of thumb, if an adviser tells you not to invest and forgoes commission because of that advice, best you listen.