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Get-rich quick schemes - be very wary!

Peter Switzer
25 May 2015

By Peter Switzer

With the stock market’s S&P/ASX 200 index unable to beat the 6000-level, at the moment some investors are getting a little frustrated. Some novices in the world of wealth building have been asking me about TV-advertised courses that show you how to trade the dollar, stocks and even property.

One viewer actually asked me to help her and her husband after they took advice from a TV investment ‘expert’. They’ve been left in a real pickle putting a property in the their self-managed super fund and the value of the property has gone south.

A few weeks ago, a 2GB listener came to me after her bank financial planner wanted to raise his fee. She thought she was being charged around $2,500. When we investigated the products she’d been put into, we found her actual fee was closer to $8,000!

There are many things aspirational wealth builders should ask. I reckon anyone working with an adviser (or so-called expert) has to ask: ‘What total amount am I paying to work with you?’

Many advisers are absolutely straight with their clients. Some play a deceptive game.

Another group I worry about are those who ask me about these “I will teach you how to…” ads you hear on TV and radio.

Some will be fair dinkum. Others make promises they really can’t keep. If I had the magic bullet that gave me the easy way to make money, risk-free, why would I need to try to sell my expertise? I’d just borrow, trade and watch the money roll in.

Some courses simply promise to show you how to trade foreign currencies or stocks.  They could be OK but they do make out that their method will make your future life really easy.

I know foreign exchange executives at top investment banks and they can get it wrong, even after years of building up a great reputation. They don’t even try to go it alone and trade for themselves.

These get-rich courses will teach you stuff but the biggest lesson has to be this: they won’t make getting rich easy or fast. To the viewer who asked me about these courses, I offered this opinion: “If you, say, invested 90% of your funds soundly and for the long-term and you wanted to have some fun and speculation with your remaining 10%, knowing you could lose it, then that might be OK if you can tolerate losses. I am wary of big claims about investing success, though you could learn some important lessons along the way.”

This chart below shows how you can get rich slowly. This is the lesson I want everyone to understand:

It’s my favourite chart and shows what happens to $10,000 between 1970 and the end of April this year Despite six big sell-offs or crashes, that $10,000 grew into $761,040 by simply reinvesting the dividends and pocketing the capital gain on the shares.

Your goal has to be to put together a portfolio of shares that will be as good as the index (such as the S&P/ASX 200 index) or you buy an ETF that matches the index.

Over time, there will be ups and downs but the index prevails. History shows there are two to three bad years out of 10. Generally a good portfolio will return about 10% a year over a decade. And by the way, 5% of that 10% will come from dividends.

Some wily investors collect great 20-40 dividend stocks and while the capital value of the shares will go up and down with the market, (as you can see in the above chart), the overall value of the investment grows nicely over time.

Super funds work off the same principle. While the investor who turned $10,000 into $761,040 was 100% exposed to stocks, super fund managers are more conservative. The 30-40% of their funds in bonds, term deposits, etc. brings down the returns to about 7% on average. That said, some funds do better than that.

Some people might not have time on their side, which leaves them exposed to get-rich schemes. To these people I say, don’t fall for something that seems too good to be true. As the old saying goes: “If something seems too good to be true, it probably is.”

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