No risk without reward

Phil Kitchin at Stuff reports:

A Wellington couple lost $1.3 million after their financial adviser exhorted them to pour money into a start-up business he claimed couldn’t fail – but did.

Any claim a business can’t fail should be laughed at, especially a start up.

The couple, who were close to retirement, were persuaded to invest the money to recoup another $1.5 million they had already lost in failed finance companies.

So they wanted a 100% return on investment, and thought it was guaranteed? Do they believe in the Easter Bunny also?

I’ve made a huge return on buying into Xero at the IPO. But I knew it was a start-up and might fail. Hence I only invested the amount of money I could afford to lose.

McPhail also recommended recouping their losses by investing more heavily in a start-up, Zeroshift – an opportunity he said was unlikely to be replicated “in our lifetime”. His “worst estimate” was that they would at least triple their money.

If McPhail did say that, then they could have a case. Was this in writing?

McPhail told the Sunday Star-Times he had “every sympathy” for his former clients and regretted the losses they suffered – but rejected an attempt to blame him for the losses.

The couple knew Zeroshift was a start-up company which offered big investor profits if successful, but success was not guaranteed.

He said he had cautioned against buying more shares at one stage because of Zeroshift’s lack of liquidity and uncertainty about when it would be publicly listed.

This is a he said, she said type case. But regardless of what McPhail may have said, it is unwise to invest a huge proportion of your wealth in just one company – especially a start-up. The higher the possible return, the higher the risk.