Like many investors out there, you have decided to ‘start out in alternative investments’. You understand your risk tolerance and you have your objectives in place – if not, you obviously didn’t read the last section, please do!
Now it's time to work through how to get started. As we have mentioned more than a dozen times in this book, it is vital that you get advice first. Speaking to an expert in alternative investments is key to your success, when starting out in the world of alternative investments.
You may think that investing in a managed fund is the best path for you, or maybe a piece of artwork. But which fund? Which piece of artwork? Why?
This is where the experts come into action. They can provide you with factual data on the performance of their funds, of their investments, of what your money ‘could have looked like’ had you invested with them 1, 3, 5, 10 years ago. Often this is very compelling, but always remember, that past performance is not an accurate predictor of future returns!
It must be noted though, that in the wake of the Royal Commission into the Financial Services Sector, new laws require a financial adviser to recommend an investment strategy that best suits the client so the expert should be able to speak about more than just their own strategy or an MDA, but a range of financial products to best identify what will suit your particular needs.
As an investor that is new to alternative investments, it is often easy to get caught up in how well funds have performed, but you need to ask why? What market conditions lead to this?
Although you might feel like a ‘dummy’ before you put your hard-earned money into a fund, you need to understand everything about how it works, you have every right to ask why, what, when, where and how as many times as you need until you feel comfortable.
Should you be investing in a fund or a scheme, there will always be a prospectus or information memorandum for you to review. Take it to your financial planner and/or accountant and ask them to review it, again ask as many questions as you can.
The key is not being caught up in all the ‘smoke and mirrors’ that sometimes-unscrupulous fund operators have. For example, from a sleepy little town in Northern New South Wales, Kingscliff came Gold Sky, voted the #1 fund in a prestigious Hong Kong awards for fund innovations.
The fund claimed to use ‘big data’, ‘social media’ and ‘quantitative analysis’ to deliver returns well beyond market averages. Backed by big named sports stars, and holding lavish events with industries heavyweights such as Mark Bouris guest speaking, everything looked like gold for this little fund.
Then, it all came crashing down as the SEC and ASIC started peeling back the layers of the onion, looking into the director, his fund’s management experience and of course the company balance sheet and realised it was nothing but a Ponzi scheme, leaving investors over $12 million out of pocket.
By definition, the “key elements of Ponzi scheme are as follows: (1) using new investor funds to pay prior investors; (2) representing that the investor returns are generated from a purported business venture; and (3) employing artificial devices to disguise the lack of economic substance or defer the recognition of economic loss”.
In short, where money is involved, unfortunately, there are in many cases a large number of unscrupulous operators, doing a lot of things that are not only bad business but also illegal.
Before you step into investing, be sure to get independent advice from more than one person including your accountant, your financial advisor, and your lawyer. But if you don’t have any of those, maybe consider looking into getting one, as you want to make sure you are always protected.