IS ANY INVESTMENT REALLY SAFE?

When I was quite young, having worked in my first job after leaving school, I accumulated a few hundred dollars. At that time in Australia, where I grew up, the only savings bank for the ordinary citizen was the government owned, Commonwealth Bank. This presented a dilemma for me. What was I to do with my $200?

The old way

The Commonwealth Bank only paid 3.25% interest per annum and they only paid interest on the monthly balance at the end of the month. Hence if you made a large withdrawal during the month, the interest that was credited to your account was on the balance as at the end of the month. We felt this was unfair as sometimes the withdrawal was made on the last day of the month but, as they used to say, 'rules are rules'.

My family, being savers for the most part, usually had some money to invest and so we looked at the various options to receive a higher return. Our main choice were debentures which were offered most commonly by the various finance companies, many of whom were subsidiaries of the major trading banks. While these were not guaranteed by the banks, they were generally considered to be quite safe. Over time, the banks then started issuing unsecured notes and these generally offered at least 1% over the debenture rate. Then the British finance houses entered the Australian financial market and some of these offered an even higher rate.

Finance “companies” spring up

Some bright lawyer and accountant realized that if a business incorporated, then the directors were shielded from personal liability if the company went 'belly up'. Before this happened, most of the businesses were usually family concerns or partnerships where the proprietors assumed full responsibility for the debts and obligations of the business. Gradually, many businesses went the way of the private company and of course, the owners could now describe themselves as 'company directors'. This seemingly gave prestige to the finance company operators even though some had a paid up capital of only a few dollars. Some of these companies had only a nominal paid up capital and yet strangely, the banks seemed happy to lend these new entities money.

Some of these new companies went directly to the market and offered glossy prospectus and high returns to attract the foolish investors. Sadly, I was one such ignorant and stupid investor who fell for the sales pitch of one of these companies. I was enticed by the promise of a high investment return and fell for the bait. I lost my $200 when the company went into liquidation.

High returns do not come without high risk

I never cease to be amazed that, in the 21^st century, investors are still fooled by the promise of higher than market returns from their investments and place all their savings in these suspect investment companies. I was fortunate in that I learned the lesson early.

Over the years, I have to admit, I have tried many forms of investment and the outcomes have not always been positive. In this essay, I will outline my experiences and give my opinions on the safety of various investments. You can then compare the conclusions I make with your own experiences and hopefully, we will discover what are the safe investments.

I began investing in company debentures. These instruments usually provided a charge over the unsecured assets of the company and ranked ahead of unsecured creditors and shareholders. Essentially they were as secure as the bank promoting them. Unsecured notes ranked equally with other unsecured creditors but before shareholders so again, their security depended on the stability of the financial company issuing them. As the financial security being offered was somewhat less, these notes paid a higher coupon. Again, the security was dependent on the financial stability of the issuing company.

I then turned my attention to stocks and shares. Unfortunately, except for one or two share purchases, I was caught up in the Australian nickel boom of the late 1960's, and bought some highly speculative stocks which turned out to be very poor investments indeed. This experience turned me off stocks and shares for a long time and my next investments were in real estate.

Over time, I owned in excess of twelve properties , including the family home. Were these good investments? I would say from my experience, no! I owned established homes for rental, land which I built on, and land which I later sold without developing.

However, as I look at the current market turmoil, I'm again looking affectionately at the “bricks and mortar” security of real estate – OK, from a return perspective, these investments may not have equaled stocks and shares, but in the current environment I would rather own real estate, than shares or units in a real estate fund.

Real Estate – the safest investment?

In my opinion, real estate is the safest form of investment. In boom times the return can be spectacular, but this is not always the case. I never really made much money out of real estate. I owned several houses for over twenty years and the returns were very ordinary to say the least. I built one house and owned it for nine years. It cost, including land, just over $154 000. I expected to sell it immediately after it was built but I could not. As I could not afford the repayments, I was forced to rent it out. Some nine years later, I sold the property for $242 000 – I'm not going to calculate the annual return for you – it still gets me a bit teary! In the two years after I sold, the house resold for almost double the amount.

Real Estate – fantastic if don't sell at the wrong time!!!

I believe the cliché, position, position, position is not completely correct as far as real estate is concerned. I believe the rule is more correctly, position, position and timing. Not always can we determine the timing when we have to sell.

Rental properties can take quite a lot of time in managing them and I, along with other owners I know, had just got tired of the week to week running of the properties even though I had them managed by a very good real estate agent. I think real estate is best owned by young people and it can be used as a means of compulsory saving. Is it safe? The answer has to be yes, but there can be major problems and costs with tenants and market cycles may mean that the price obtained is less than what was expected.

I have also invested in gold bullion. Is this safe? Yes, but there are price fluctuations and gold pays no interest and there are costs in storing it. Do I recommend it? No. Unless a large amount is invested, I do not think it is worth the bother and even then, it is possible to lose money if the price cycle becomes adverse.

In conclusion, from my experience, real estate is the most secure investment. Termites may destroy the building, but the land remains. It is possible to lose (or gain) from rezoning and compulsory acquisition by governments may not provide proper compensation as has happened to two friends of mine. Vacant land incurs holding costs and does not provide an income.

Shares are somewhat secure and provide a better return but this is related to the risk. Techniques can be implemented to minimize the risks and if a sensible strategy is employed, this may not be a problem. Severe downturns in the market cannot always be predicted and they may be long and severe.

What about money in the bank? In recent times governments in many countries have had to guarantee bank deposits so this gives some indication that they are not totally secure. In times of high inflation, there is no capital growth with bank investments and this can produce a loss of spending power over time.

Right now, the prudent course of action appears to be to panic and pull all of your money out of funds and stocks and shares – at least that is what the 'herd' is doing. Sorry, to tell you this, but the clever money is already cash and invested getting a nice interest rate return guaranteed by most of the governments of the world.

If you'd made a fortune, selling the wrong type of 'real estate' to the investors of the world, you'd have sold out and invested all of your money in cash by now – wouldn't you? Or maybe as markets fall you'll buy 'real' real estate from those poor individuals who find themselves financially stressed as a result of the abuses of the last few years.