Mixed Up Money: Could you lose everything in investing?

 

Mixed up money is a series of friends’ financial questions. I am not a CFP by training so I do not recommend an investment, do not sell products, and am not affiliated with any of the financial tools providers. The names have been changed for anonymity.

Life happens even when you do things "right". Today, I found out that Drew lost 95% of her savings in her 30s.

Two years ago Drew told me that she is investing in a simple plan for 10% returns. She took out cheap loans in the oil-rich country where she works and invested in bonds with a well-known insurance company in her home country. She did her due diligence, the company is established, and they were not promoting a quick-rich level kind of scheme. The return they promise is only 10%.

It sounds like a decent way to invest, the interest rate in her country is 5-6% and they are going on massive growth so 10% is not unattainable. The only alarm is the returns is promoted guaranteed by the agent instead of projected. The risk-averse part of me asked her to withdraw and reduce the holding to 30% max of her wealth. She needed a hassle-free plan and it doesn't sound like a scam at all. So she continued with all her funds.

Fast forward today, out of a sudden, the company is "raided" by the government for suspected fraud, goes into a spiral of news and court cases, and all her money is freeze by the government for 6 months and on-going.

First, there were some signs, 10% is not exceptional, but it's too high for guaranteed bonds in this region.

Second, a company that's running clean, good margin businesses rarely would raise funds from retailers bond market. The venture capitals and investment bankers will snap it up in no time.

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Even when an investment is sound, you probably should not put everything in one basket. Diversify is more than just a term. We do not know what governance is in place and how policy changes with time.

Diversify runs both ways, the underlying asset and the platform you are investing in. Underlying assets is the allocation, the index fund, the bonds, the equity. The platform is the company that is actually holding your money. Fintech like StashAway, Rakuten, Binance, e-Toro (sorry guys, I love you cos I am investing inside) can turn out to be the fraud of our lifetime.

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She's a strong girl but a financial reset is never easy journey.