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Investing for high returns? Watch out
Investing for high returns? Watch out!
How safe will your money be?
In the past 6 years, ASIC estimates that at least 6,000 Australians have lost around $500 million of their life savings chasing high returns. The biggest danger sign is an investment that promises a better return than you can get anywhere else.
What is a high return? If the scheme promises you 1.5-2% or more per year better than the average return for the type of asset in which you invest, please be extremely careful. In our experience your money may not be safe.
Read how to to calculate rates of return and our tips on working out what you've been offered.
Investing means taking a risk that you may lose some money. But you will usually be much safer if you invest in real estate you have inspected, shares in solid companies traded on the stock exchange or investments managed by licensed, reputable investment managers. There are many honest professionals who can advise you.
Investors often lose a lot of money by going into schemes they know nothing about because they trusted the salesperson. If you are borrowing money to invest, you are taking an even bigger gamble. You can easily end up owing much more money than you first invested. You could lose your home or all your life savings.
If you are offered a guarantee that your money will be safe from loss, get the guarantee in writing and have it checked by a solicitor.
What is the expected annual return?
We bet you have been promised a high return. High returns mean a high risk that you will lose some or all of your money.
What is the promise of high returns based on? The salesperson may say that other investors have made a lot of money. Is this really true? Do you know any of these people and have you spoken with them?
Have these lucky investors actually got all their profits safely in their own bank account, or do they just have a piece of paper promising them their money at some time in the future? If it's only promised, they don't have it. It's still stuck in the scheme. Even if a few of them have banked their profits that is still not proof that the scheme is right for you.
Some salespeople will show you past years' or months' returns and project them forward into the future. This can be misleading, for example 'the number of men dressing up as women in Sydney has doubled in the last two years, so by the year 2005 every man in Sydney will be dressing as a woman'. That is a projection you may not believe.
You do not want projections. You need a reasonable forecast based on solid evidence that can be checked out. You should have the scheme details in writing, preferably in a prospectus or product disclosure statement. If you do not have anything in writing, this is another big danger sign.
You also need details of how often returns will be paid to you, whether there will be a steady flow of income or a lump sum at the end of the investment.
Are all your eggs in one basket?
Is this your only investment or your biggest investment (except for your home)? If all your money is going into this scheme you will be taking a really big risk compared with someone who has a variety of other safer investments.
What is the reputation of the salesperson and the scheme manager?
How much do you really know about the scheme's salesperson? If all they do is sell this type of product, they're unlikely to have a balanced view of your financial needs.
Find out what commission the salesperson is getting. They may be getting high commissions for selling you this scheme. For example a commission of $5,000 for a $100,000 investment is 5% - this is high for most managed investments.
If you feel pressured not to ask questions because you might upset them, you are probably being subject to pressure sales tactics. Don't fall into this trap.
Is the salesperson licensed or authorised to represent someone who does have licence? Ask for written proof. If they don't have any, don't deal with them. They may be honest and competent but you have very few options open to you if something goes wrong.
Who is going to manage your investment and what do you know about them? Do they have years of experience and professional qualifications behind them, and have you seen proof of their claims? Again are they licensed? Ask for written proof.
You can search our professional and authorised representative registers to check if someone is licensed or authorised to give advice. Alternatively, you can do this search through our Infoline on 1300 300 630.
What will your expenses be?
What are all the fees and charges you will have to pay for this investment? Ask about entry, exit and management fees. Get this in writing. Honest people won't mind writing these things down for you.
Can you get your money back if you need it?
You may need the money unexpectedly, so you need to know if you can get it back. Are there any fees, charges or penalties for getting out early? Will you have to try to find someone else to take your investment off your hands? If you do, there may be no guarantee that you will get all of your money back.
What contact will you have with the people who got your money?
You may want to contact the people managing your investment to discuss how things are going or to ask questions. You will need to find out how you can do this. Are you happy with those arrangements?
What information will you get about your investment?
You should be kept informed about all important developments affecting your investment. You have a right to know whether the investment is performing as expected, whether anything has happened to change its security or value. You need to know how you'll be getting these sort of reports and how often.
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Product disclosure statements
FIDO Website: Printed 03/22/2010
