1st August 2007

Dear Investor,

Higher Returns equal Higher Risks

In this second Investment News in our series examining the three immutable rules of investing:
  1. never put all your eggs in one basket;
  2. a higher rate of return always equals higher risk; and
  3. getting rich slowly will never go out of fashion; don’t rush, and always ask questions.
we examine the second rule of investing, "higher returns equal higher risks!"

It's natural to look for the highest rate of return, but do you really know the risks involved? Could you really cope if all your money was lost? What you must always keep in mind is the higher the return, the higher the risk.

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 higher 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 investment promises you 1.5-2% or more per year better than the average return for the type of asset in which you invest, ASIC advises investors to be extremely careful.

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 investment schemes they know nothing about because they trusted a 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.

What is the expected annual 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 profit 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.

ASIC risk and return calculator

This ASIC approved calculator can help you compare the return offered by a proposed investment with the relevant sector of the overall market. Click on the below icon to open the calculator, then you can save it to your hard drive.


What the calculator does

Returns that are higher than the current going rate involve higher risks that you need to understand. The calculator offers simple, tailored messages relating to an investment proposal, based on advice ASIC has obtained from licensed actuaries.

It covers cash or fixed interest assets for income, property or shares for capital growth, or a balanced option of 30 per cent income and 70 per cent growth that is commonly used by super funds.

Effectively, the calculator can give you a feeling for what’s a reasonable rate of return and a reasonable time to hold various types of investments, thus enabling you to make better-informed investment choices. While the calculator is essentially a very convenient comparison tool, it's always wise to consider getting expert financial advice if you are unsure about the merits of a particular investment.

Even if you haven't used Excel before you will be able to use this calculator. There are instructions at the top of the calculator on what to do. The totals and results are calculated automatically. All the workings are password 'protected', so you can't easily mess it up. Even if you do, just download a fresh version.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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