By John Leighton
In today's economy it is commonplace to hear spurts of despair as people feel the pressure of the Global Financial Crisis, but it is also completely avoidable.
Many people are investing and then stressing, instead of using investments to enhance their financial portfolio through leveraged activity that increases their freedom and in theory should decrease their stress.
Most investments involve some degree of lending and all too often I see clients enquiring about lending for investments that are completely unsuited to them.
The most common example I see is extremely time poor executives investing in property, stock or derivative strategies that require a degree of diligence that becomes completely unmanageable when combined with the day to day demands of their careers. Consequently they make hasty decisions or fail to act when required and lose significant proportions of their portfolios.
Then I've met with people who've taken out highly leveraged margin facilities with little awareness of all the risks when their investments turn against the trends and how quickly their portfolio can turn to dust in their sleep.
And we've all heard stories around family get togethers of friends who've lost wads of money in unique property deals – from sexy resort properties to two tier marketing schemes to guaranteed rental returns.
Inevitably people tend to get caught up in the potential returns of an investment and forget to assess how to deal with the downside risk. And more often than not the problem stems from their failure to understand the essence of what they are investing in and whether managing such a strategy would suit their personality, their lifestyle and their risk profile.
However this could and is unnecessary and completely avoidable.
If people actually considered an investment from the point of whether they have the right equity, time, experience, tenacity or knowledge to learn and manage the investment, then most investors will find themselves thriving towards their dreams.
On top of this in many cases a poorly structured finance facility adds to a person's problems because they're unable to gain access to more equity or exit earlier than expected incurring prohibitive costs and penalties.
In most cases it's just time that they need to buy for the situation to remedy itself and well structured lending facilities will do this provided allowances have been made when the loan was first established.
How often have you heard the saying that: 'nothing will teach you more about wealth creation than experiencing a loss'?
What should be said is: 'nothing will teach you more than limiting a loss'.
It is more important that the loss be sustainable otherwise you may very well take away a lesson you were never intended to learn.
Sadly though, that's what happens all too often as most people never recover from a loss that wipes out most or all of their life's savings. They never learn how to invest wisely and how to manage the correct investment and they never learn when to gear up, when to gear down, when to take losses, when to take profits, how to buy time and when to get out.
Experiencing a loss through an investment foul causes a person's confidence to be shot to shreds so severely that they may never attempt investing again of any type, all because they were not given the right advice and information.
The road to financial freedom is filled with many lessons to learn so knowing what type of investment suits you and your personality and having the right lending structure in place, will not only save you a great deal of heartache, it will enhance your life the way investing is intended to.
John Leighton JP is managing director and founder of Leighton Financial Group and a full member of the Mortgage and Finance Association of Australia (MFAA). www.leighton.com.au
