Investment nightmare #1: Structured products
Kerry Nelson (pictured right), managing director of Nexus IFA
"I’ve got a lot of history with structured products because I hate them. I just avoid them completely. A lot of clients have been in the position where they invested too heavily and their capital has been wiped out."
"They haven’t understood the detail of the investment and neither have the advisers. They thought it was just a capital-protected guaranteed scheme and they would get these great double-digit returns."
"Over 10 years I’ve seen three periods where these investments have come out at a point in the market where we’re suffering a downturn and investors have been in negative territory. You had the effect of 2-for-1 gearing, which means you could have come out on the market downside and suffered massive losses."
"You can’t dictate when the investment will mature. You also don’t have any choice because you’re in a fixed-term investment. So it’s not like in an open-ended environment where you can defer making that decision."
"A lot of advisers don’t understand or know enough about the products they are offering to advise on them. You want the adviser to spell out the real nitty gritty of the downsides as well as the upsides. Everyone talked about structured products in such a positive way, but no-one really spelt out the risk. No matter what type of investment – even cash – there’s a risk."
Investment nightmare #2: The technology bubble
Ben Willis (pictured below left), head of research at Whitechurch
"The big one was during the technology bubble. When there’s an investment boom, people with access to all the early information get in first. The person who gets in last tends to be your man on the street.""Once it is broadly acknowledged that something is good to invest into, they all arrive and it becomes a bubble. Then there’s a reversion and they’re sitting on significant losses. Property was another one."
"My advice would be don’t follow the herd. You’ve got to do a bit of research, go on FE Trustnet often – there’s a lot of information that, in the past, you didn’t have access to. It takes a bit of time, but it is your money and you’ve got to be careful with it."
"Time and time again history has told us that it is the man in the street who gets his fingers burnt."
Investment nightmare #3: Buying high and selling low
Philippa Gee (pictured right), managing director of Philippa Gee Wealth Management
"A typical mistake investors make is when they experience a fall in the value of their holdings and they sell up. They don’t understand what they are getting into, aren’t comfortable with the risk and don’t appreciate that that is the time when you have to hold onto your investment, otherwise that’s the time when people make money out of you."
"This has happened to a lot of my clients before they got involved with me. They’ll use that as a key example of why they don’t want to invest in equities. Either they didn’t understand the products or they shouldn’t have been investing in them in the first place."
"My advice is to understand what level of risk you’re prepared to tolerate. There’s no point in going for the most attractive investment if it’s not right for you. You have to be able to sleep at night."
Investment nightmare #4: How risky can it be?
Annabel Brodie-Smith (pictured below left), communications director at the AIC
"I’ve just spoken to someone with an investment in an African private equity company with an environmental strand to it. She is going to get some income from it, so it wasn’t completely wiped out. She will probably get her money back – but she’s going to have to wait about five years.""She got the idea from an environmental newsletter, but clearly hadn’t considered how risky the nature of the investment was."
"A lot of people don’t understand what they’re investing in or the risk level involved. They need to thoroughly research their investments, think about what they want, are they looking for income, are they looking for capital, what have they got already in their portfolio."
"Once they’ve got all that, they need to look at the fund manager, look at the track-record, look at the companies it is investing in. Look at the past performance, look at the discrete performance so you can see how the manager has done in bull markets and bear markets. Look at the gearing levels."