As you may know by now, I enjoy high risk/reward investments as part of my investing strategies. Being young, healthy, and with a sought-after degree in business, I can still go back to work if the plan was all too risky, but so far, things have been going quite well. Except for that investment.
I won’t go into specifics, it was a hotel development in the UK, and the idea was to buy a hotel room, then either resell for a profit once the hotel starts to operate or keep it and enjoy a fully managed rental income. It all looked promising, the location was good, attracting both business and leisure travelers, and the developer had been successful with a similar hotel previously. I put down just over $30,000 as a deposit.
Then after a year, the construction still hadn’t started, and the company went into administration, one of many victims of the global crisis. Administrators did damage control but did not keep building the project. It took another couple of years for the administrators to start the liquidation process, thus activating the refund clause from the investors’ insurance. Until then, the insurance couldn’t do anything, because the company was still operating.
I just talked to the insurance company and they said I will get the $30,000 back within a month. But not the contractual return. My net worth has been multiplied by 2.5 since I bought that hotel room, so I could have turned those $30,000 into $75000, or at least paid my old 7% investing loan back and got a 7% return. Just with inflation, I lost money. I chose to take the risk and do not regret it, otherwise my net worth may not have more than doubled in under 4 years with similar risky moves, and I am still grateful that the full capital is being returned.
Those are the lessons I learned.
1. Only invest money you can afford to lose. I was not worried about the outcome of this situation because I had other sources of income, some cash savings, and was ready to write off the investment if need be. If you are on the stock market, make sure you could live without that money, the same goes for most investments once you get to medium levels of risk.
2. Have your contract checked by a lawyer. If you invest in real estate or other alternative investments, spend an extra few hundreds to have all legal affairs checked by a lawyer. If things go wrong you will not regret it. The sellers will always tell you that everything is going to be fine and that there are safety nets but you need to study those in details.
3. Make a background check on the firm. In the UK, any financial company has to be regulated by the FSA. If not, you may not be able to claim your money back if they disappear into thin air.
4. Make sure the guarantees are legit. A company has to be backed by a high street insurance company, not by its sister company, or both company could go bankrupt and you may never see your money again. In my case, it was one of the biggest insurance companies of the country so I felt safe.
5. Until the money is in your pocket, do not count on it. When I update my net worth every month, I do not add the potential return to that investment. Until I really get it, do I get a bump of net worth with the returns. Do not plan on spending, saving, or investing that money elsewhere until you have it in your hand. Even a stock can lose half of its value overnight. Be cautious, and consider the returns lost money until they really happen.
6. Follow up closely. If the company does not give you news every month or when they say they will, ask them for an update or go on site to check (I am thinking if you buy a house on plans for example) and make sure they are on time.
7. Have the contract state all the what-ifs clearly. In this case, the company said that default would be covered by the insurance company. But it did not state how long we would have to wait, or what if the project was delayed but not abandoned, so really going bankrupt was a good thing or they could have kept the money for years and “postponed” their opening.
8. Don’t get bitter. You wanted to play, and you lost. That’s life, get over it. I would be annoyed if I had no news from the company, if they were delaying things on purpose, but they have always been transparent and efficient, their project was not viable, and it happens. Learn your lessons, get back on the horse, and keep going.
9. Stay diversified. Invest in real estate, stocks, fund your retirement account, get shares in your best friend’s startup, whatever you are comfortable with. And make sure you have not all your eggs in the same basket. Even relatively safe investments can go wrong. Big banks go bankrupts, houses burn, you never know, so better have a plan B, C, and then some.
10. Look for advice everywhere. There are investing forums, the Citizen Advice Bureau, the Financial Ombudsman, and many other organizations that can help you with knowing your rights and give you advice on financial products. A quick search can save you a lot of trouble.