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.
This post was featured in the Carnival of Wealth, Eyes On the Dollar, Canadian Budget Binder, thank you!
My Financial Independence Journey says
I lost money in the recession as well. I’m not upset about it. For me, falling on my face has been a strong motivator to learn a lot more about investing.
I’m not a fan of risky investments, but I keep my portfolio pretty diversified across a variety of stocks, that way if one of them tanks, I won’t wind up losing too much money.
Pauline P says
If you do your own investments, the good thing is you can only blame yourself, not the fund manager or the building company for a house. Like you I am pretty detached from it all, because other things went great at the same time so on average it was a great period.
John S @ Frugal Rules says
I had no idea that you could invest in something like buying a hotel room. Though, I guess it makes sense doing that in the UK with all of the travelers they get there from all over the world.
The only real losses I have had have come from the stock market…some bad and some not so bad. However, I have learned #5 numerous times from either our business or investing. Something can only really be counted once we have the money in our hands.
Pauline P says
I have seen that investment offered a lot for luxury hotels in Asia or Eastern Europe, every room is a homeowner and they nominate a managing company to administrate the rooms and negotiate package deals with travel agents. But being in the UK it sounded less prone to go wrong. Which it still did but at least we are getting our money back.
Brian says
I have made some very speculative investments that haven’t worked out, but then again they were only for $1K or so. In general I tend to stick with what I know. I guess the “riskiest” investment I have right now is the $40K loan to my sister and her husband for the car wash they just purchased. Of course her husband knows more about that business than any person really should and they are cash flowing already, so I am not to worried about getting my money back.
Pauline P says
cool, a car wash! Do you have a plan if things go wrong? The money would be written off or would they have to pay you back for the next 20 years once they go back to being employed?
Brian says
Good question… We do have a very official contract written up that includes all the clauses related to repayment (or lack there of) include loan forgiveness if I decided to go that route. The good news, is my sister is still working as a lawyer so she is making plenty of money to cover things if this operation were to fail and her husband needed to find work.
Pauline P says
Looks like you got it covered then. My mum often lends me money and we have nothing written but even if I couldn’t pay her in time I would then take any job to repay her asap and avoid any family drama.
Matt Becker says
Really awesome post. If you’re really investing, you cannot possibly avoid losing money. It’s part just part of the risk you have to take in order to get return. I like all the background checking you advocate for, especially having a lawyer check over things. People often scrimp on relatively small costs like that up front only to get burned big time for it at the end. Doing proper due diligence is always a worthy investment.
Pauline P says
Yes, it is like skipping a $500 home inspection before buying a $500,000 house. Plain crazy.
Greg@ClubThrifty says
You certainly have guts Pauline! I think the best thing you did was to let it go. Whenever you lose money on a deal, you really have to move on to the next deal. You learn from it, which you did, but if you dwell on it the memory is going to cause you to make bad decisions in other deals. Great tips!
Pauline P says
Well I wouldn’t have invested without that strong money back guarantee from a well known insurance company. Losing a potential return, or even a few years of inflation is one thing, losing $30K just like that would have been quite painful.
Michelle says
We haven’t really invested too too much, but recently we have invested in a side hustle of W’s that will be expensive. Hoping that it pays off!
Pauline P says
I hope so, good luck!
William @ Drop Dead Money says
You invested according to your taste and style, and you did it with good protection. For a losing investment you will have done pretty well!
About the recession: Almost everyone loses money in a recession. Almost. But you don’t necessarily need to.
As any Drop Dead Money follower knows, you can make money in a recession. The key is understanding the four distinct phases of each economic cycle.
We more than tripled our net worth in the last recession. So many people asked me how we did it I ended up compiling the lessons on the site (http://bit.ly/12PHefV). It’s free, but you have to sign up.
Pauline P says
I like the saying “when other cry, you should buy”. Guatemala is still in a recession and having a bit of cash allowed us to grab some real bargains. A NW multiplied by three is quite the achievement, I am impressed!
DC @ Young Adult Money says
I really like your tip, “Until the money is in your pocket, do not count on it.” This is something I live by. I don’t feel like something is a “done deal” until the money is in my bank account.
I haven’t really had any major investments go wrong, so I unfortunately (or fortunately?) do not have anything to share in that respect. I’m sure over the next decade or two I will have something go wrong haha.
Pauline P says
I hope not, but even on a house you can have a myriad of unexpected problems. When one of my tenants died for example, I didn’t see it coming and it led to a year without rent, thankfully covered by insurance this time again.
Budget and the Beach says
I think that’s why I’m so hesitant when it comes to investing. I don’t have a business head (I’m right-brained ALL they way), and I’m risk averse and don’t have that money lose!
Pauline P says
With no money to lose the best bet would be investing in a place you would be sure to live for the next decade or more, even with real estate you can have negative equity but if the mortgage is about the price of your rent, you would be spending the same and able to wait for prices to come back up again.
Shannon @ The Heavy Purse says
Another interesting investment, Pauline. You never fail to surprise me. Lots of great tips, but #1 is my favorite. Nobody ever wants to lose money but if you’re going to invest, you will at some point lose money. Hopefully you ultimately gain more than you lose, but you do have to prepared that you might lose it all. Scary proposition but good guideline. And I absolutely agree – it’s not “your” money until it’s your hands.
Pauline P says
It was good looking on paper, sadly the reality was different. Even when you invest in funds and your overall is a profit, some stocks are losing and other are wining. Rarely do things go 100% as planed.
Grayson @ Debt RoundUp says
Those are quality lessons learned Pauline. The biggest is only invest money you can afford to lose. That is the only way to keep yourself afloat if your investment doesn’t work out.
Dennis says
Glad you could overcome the loss and learn a lesson Pauline, love your attitude!
Investing in a yet-to-be-built real estate is always a risk. And just as you state in your point #5, one should not ever count on that money: set and forget until it pays you or gets lost forever.
Great post!
Nick @ ayoungpro.com says
Those a wonderful tips Pauline. I’m glad you are going to be able to get your money back!
Kyle @ Debt Free Diaries says
When you’re investing, you’re bound to lose money here and there. The truly savvy investors learn how to manage their risk so they lose less. Sounds like you’re informed enough to understand the risk behind the investments you’re making. Any plans for what you will be doing with that extra 30k?
Pauline P says
I am thinking about bringing the money over to Guatemala to invest on my 90 acres land development, although the pound is pretty weak so I may keep the money there and pay off my UK mortgage instead.
Free Money Minute says
Point number 1 is very important, never invest what you cannot afford to lose. If you can afford to lose it, then it is probably worth the risk.
Savvy Financial Latina says
One of the reasons we want to keep our lifestyle expenses low, is so we can have money to invest, so those investments can support us in the future.
Mrs. Pop @ Planting Our Pennies says
Nice, glad you got your principal back. That’s not a horrible worst case scenario. =)
There were a couple hotel/condos that got bit pretty badly in Miami during the recession as well. But last I believe they did end up being completed, just a couple years later than originally projected.
Pauline P says
I guess some day, there will be a hotel on that spot, but it could take 10 years and I wouldn’t want to wait with more uncertainty. The building insurance made it a “great” bad investment.
Savvy Scot says
Thanks for sharing… My post today is on something very similar…. 🙂
Canadianbudgetbinder says
I guess that’s the way life goes when you invest. We have to get over it, just like I have to get over my loss by not moving my money when the exchange rate was much better than what it is. There is no point crying over it because you can’t change what’s happened, you can only move forward. Smart words to share Pauline. Cheers
Pauline P says
the exchange rate is something I stay hung up on all the time. Now I try to let it go, if you need the money today, you need to change the money today, and yes the exchange rate can be better tomorrow but you’ll only get bitter if you check.
Digital Personal Finance says
Invest what you can afford to lose – great advice. Too many people ignore this way of thinking, and pay the price for it when their investments don’t pan out.
The basic math behind losses means it’s hard to recover. Start with $1,000 and lose 20%, and you’ll have $800. To get back to even, you have to gain back 25%. This is why it’s imperative to acknowledge that losses can and do happen, and one should be careful to invest money that they’re able to lose if it comes to that.
Pauline P says
good point, it is harder to go back to the initial amount of money. I am back to $30K, with 4 years of inflation on top…
Untemplater says
Bummer. Well I’m glad you’re going to get your capital back, that’s good news. We all make investment mistakes and learning from them is sometimes the best we can do. It’s good you didn’t have all your eggs in one basket.
Pauline P says
yes, getting the capital is not too bad, and I was ready for the risk. I am less annoyed than for unexpected smaller amounts!
Chris @ Stumble Forward says
This almost sounds like what I dealt with several years ago when I bought a timeshare. The place I bought it from told me I would be able to sell it and get more for it because it was property but when I ended figuring out (way to late) what that earning a profit on a timeshare was near impossible. In fact I couldn’t even give the thing away. In the end I ended up only getting around 10% what I originally paid for it.
Pauline P says
timeshares are usually a huge risk, losing 90% is tough! That’s why I recommend doing due diligence with an independent source.
Richard Thompson says
That is unfortunate you had to wait so long to get the money back, a lot of people don’t understand that this can be the ultimate waiting game. Investing takes patience and diligence like you said. I admire your attitude towards the whole thing, while you said that you had other investments that pulled through, the potential loss of 30k is enough to perturb anyone. Great advice, and thanks for sharing!
Pauline P says
Well I knew I would eventually get at least the principle back. Thankfully I didn’t need it before, you have to consider this money lost until you get it back. Someday.
Lisbon Day Trips says
Wow, what a nice hotel it is, nice location & good view
Jaime says
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