Back                Another day another property company collapse.

I imagine most of you have heard that we have had 3 major property development company collapses in the last 18 months. People (or punters as the popular press likes to call them) have lost close to a Billion dollars in the collapse of Westpoint, Fincorp and Australian Capital Reserve (ACR). All of these companies were involved in, or provided finance for, property development activities. In the case of Westpoint there have been allegations of fraud but in all instances these were highly risky investments. 

Like everyone else it saddens me to see people lose their money particularly those who have lost their life savings (I read of one person who lost $850,000). But having lost all of my investment in a failed mining company because of my own ineptitude I feel that I am highly qualified to offer my opinion regarding these types of situations.

Every time something like this happens (the first property related collapse happened in NSW in the 1840s so we have lots of experience) you get the usual outrage directed at the government, the relevant regulator and the company management. Next you get the 'who can I sue' brigade who are ably assisted by the lawyers (for a fee of course). It's probably just me but the sight of lawyers at creditors meetings always reminds me of crows standing around road kill.

Ultimately it's the responsibility of individual investors to avoid being caught in these sorts of collapses. I know that might sound harsh and if my parents or grandparents were involved I would be very angry but I would also ask the question why sink all your savings in high risk investments ?

I can understand the anger and the desire to protect people but we already have processes in place to inform people of the risks associated with investments. In fact the collapse of ACR came about because the company regulator (ASIC) refused to allow ACR to raise more money because they were concerned about the risks associated with ACR. Not that this may do the ASIC any good I read the other day that someone wants to sue them for causing the collapse. Hmmm if you don't act you get criticised, if you do some lawyer gets rich ... er I mean you get sued.

We can't have it both ways either we are adults and responsible for our actions or we agree that we are children and can't be trusted to think. The Government can't make you read the fine print that's your responsibility. The Government can't make you be more careful before you trust a financial planner or advisor that's your responsibility.

Ok so how do you avoid this type of situation. You will note I don't say how do you avoid making mistakes since this is impossible.

Don't put all your money in one investment. You have heard the saying about not placing all your eggs in one basket. Now it's usually ok to have only one savings account with a major bank. But even in this situation there is an element of risk its just that it is pretty small. For example if you had a bank account in Germany at the end of world war two I am not sure how safe your money would have been.

However other than that you should diversify your investments. Have a look at how your superannuation fund invests your money they have a portfolio. They will have money in shares, cash and maybe some property. The point is a failure of one investment will not result in the whole fund being wiped out. Following this one rule would have reduced the hardship suffered by the investors in the three failed property companies.

Don't believe people if they say 'your money is totally safe'. This is a bit like believing the president of your footy club when he says the board are totally behind the coach. You just know this is the kiss of death and the coach is about to get the chop.  I notice that the advertisements for the major banks don't consist of endless and sincere sounding messages about how safe your money is but that's what you get in the property investment company ads. If you have money in a company that advertises how safe your investment is then start looking very closely at the company.

For the record the only 'safe' investment is to pay off your mortgage as quickly as possible. The money you save on interest is money that goes straight into your pocket.

Find out how much the big banks are paying on cash deposits. This shows you what the return is for relatively low risk investments. Any return higher than this means there is higher risk. Any company that asks for your money has to use it in a way that brings them a higher return otherwise they go out of business. Simple as that. So if a company is offering you say 9% then they have to be loaning it out or investing it at a much higher rate and this means they are incurring a higher risk. If you see an ad like this ask yourself why are they offering me a 9% return when they could get money more cheaply from a bank ? There may be a legitimate reason why a company has approached the public but you should always ask the question.

Do your research. If you are going to invest then understand where the money is going and how it is going to be used. If you don't understand or agree with the company's investment approach then don't invest. I always like to know a bit about the company's past performance before I put in any money.

It also helps if you understand the industry in which the company operates. For example, property development is always a risky venture. That is not to say that people don't do it successfully or that money can't be made. But even the successful companies like Multiplex (Wembley Stadium) and Leighton Holdings (Spencer Street Station) have projects that go pear shaped. The difference is that they are structured in such a way that they can manage these situations.

If you are relying on a financial planner or advisor then make sure your advisor deserves your trust. Research the advisor's performance and don't let them make decisions that break the basic rules of investment. As an example if he or she advises you invest all your money with one company make them justify such an inherently risky approach. Always ask your advisor to explain clearly what can go wrong.

I could keep banging on for ages about this stuff but while following these rules won't guarantee that you don't lose money they should make it more difficult for you to stuff up. You would be amazed how much investment success comes from not stuffing up as much as other people.