7 Ways to Lose Your Money

The idea of “getting rich slowly” may well be a fallacy. While slow and steady is a great method of accumulating wealth over long periods of time thanks to compounding interest and returns, the power of inflation — real inflation, not government-reported inflation, eats away at the value of your funds almost ensuring you will never “get rich” from steady investment in a diversified portfolio of stocks. You may retire with a few million dollars thirty years from now, but by the time you’re contemplating your southern migration, time has eroded the value of a dollar to a fraction of today’s purchasing power.

So what is one to do?

Annie Logue from MSN Money has the answers, offering seven ways to get rich a little faster than “slowly.” There is a small problem with her advice though; the seven pieces of advice that can help you get rich are the same seven causes of total financial ruin. The difference between using any of these ideas to get rich and allowing these ideas to lead to financial ruin is not necessarily level of skill, perseverance, or positive thinking.

Here are Annie’s seven ways to get rich, which I argue could just as easily — more easily — have the opposite of the desired effect.

1. Concentrate. Annie says: “Diversification is great because it reduces risk. But at some point, you might want to build on your nicely diversified core with a big chunk of risk concentrated in one sector.” Her source adds: “The investments that have the smallest volatility also have the smallest end returns.”

It shouldn’t be hard, especially recently, to realize that the total stock market index is quite volatile in itself. A concentration in one segment adds volatility and risk, which means both the financial rewards and the financial suffering will be amplified. Concentration is great for a small portion of your portfolio that you can afford to lose. That portion will probably be too small to make you rich in the event of a sector’s success.

Let’s not forget about those who were heavily concentrated in the technology sector which crashed at the beginning of this century. There were lost fortunes all around because those invested in these particular stocks valued their concentration and faith.

2. Leverage up. Annie says: “One quick way to increase your risk and your potential return (as well as your downside) is to borrow money for your investment, usually through a margin account at a brokerage firm… It’s true that leverage can generate a return on money you don’t have, but it generates an outsized risk as well.”

Leverage is one of the main reasons our economy not well right now. Highly leveraged real estate allowed more people to enter the marketplace as buyers and more buyers led to higher, unsustainable prices in many markets. Businesses use leverage to a great advantage most of the time, but businesses who do not manage this risk are in danger.

Buying stocks on margin is one of the riskiest endeavors available to a typical individual investor. If the stock performs well, you have nothing to worry about, unless your success leads you to continue the cycle of investing on margin. You’re almost guaranteed to fail at some point, and the failure can easily wipe out all your gains. The risk is much greater on the downside because a drop in the stock price can quickly result in a margin call, in which case all your debt will be due to the broker immediately.

3. Hunt for bargains. Annie says: “Phillips recommends that investors consider distressed securities, such as bonds issued by companies near bankruptcy or, right now, stocks in banks that have heavy real-estate exposure.” Are you interested in junk bonds? When the economy is in the trough of a cycle, like now, you often hear about looking for bargain-priced investments.

This technique is stacked against the individual amateur investor. One can find a bargain with information about a company not known by the market at large, but if the information is out there to be known, you’re better bet is that the people who move significant sums around the market already have that information. Maybe you can ride the wave.

4. Be above brands. Annie says: “Many investors feel safest with something they know. But just because you have never heard of something doesn’t make it a bad investment.” I agree wholeheartedly. Once you’ve heard about a new brand, unless you are an industry insider or specialist, chances are the brand has already experienced the kind of growth that would make someone rich in a short amount of time.

So how do you become an industry insider or specialist? Well, it’s not going to come from reading the junk email you receive touting this or that penny stock. “Invest in what you know” is Peter Lynch’s mantra. He’s the investment star from Fidelity. “The more you know…” is the motto for NBC’s public service announcements. A combination of the two may be the only way to make this suggestion work.

5. Explore emerging markets. Annie says: “It’s a big world out there, and much of it is growing faster than the United States. There will be risk in all these markets as their citizens feel their way into modern economies…” I think it’s a good idea for the modern investor to start thinking about investing around the world rather than domestic vs. international. Like it or not, the world is getting metaphorically smaller, and nations’ economies are increasingly affected by other nations outside their borders.

Emerging markets is great for diversification, but it’s not a way for the individual investor to get rich. There is more of a likelihood for getting rich through direct investment in a country that has the potential for growth by moving to the country, building land, and directly assisting their economy through local businesses. Investing in emerging markets from the comfort of your recliner is safer but ultimately less effective.

Once you move to the country in the emerging market you like, you run the risk of government seizure, rebellious uprisings, xenophobia, embargoes, stiff regulations, invasion or war, or political unrest. This is a dangerous move if you’re investing your life savings.

6. Consider commodities. Annie says: “In a world economy that is growing rapidly, demand for commodities — such as oil, cotton and corn — is bound to grow. As demand grows, prices of commodities are likely to rise. Individual investors can get exposure to growing global demand for commodities through commodity-based exchange-traded funds.”

Anytime someone claims that any particular type of investment will continue to rise, you should be skeptical. I agree that consumption across the world will continue to grow, but that’s a long term view that doesn’t match the article’s purpose of “getting rich quickly.”

7. Do your research. Annie says: “The more risk you want to take, the more work you’ll have to do… The advice of steel tycoon Andrew Carnegie was that it’s OK to put all your eggs in one basket, as long as you watch the basket pretty carefully.”

I still find it very unlikely that any research you uncover isn’t already known by people with much more money to move in the market. Are there are particular niches in the market that are not being researched right now by those who make research their living? I would find that very hard to believe. Unless you have non-public, insider knowledge — and if you had, it would be against SEC regulations for you to invest — someone has already made money on the findings of your research.

While it is certainly possible to get rich in quick fashion using some or all of the suggestions provided above, it seems unlikely and not worth the risk, particularly if you can’t hedge against your bets.

7 ways to get rich faster, Annie Logue, MSN Money, June 23, 2008