The following is a true story and in no way is a solicitation or to be considered advice.
I had some Chianti. My client had a glass of Malbec. And another. He lamented his latest conversation with his wealth manager.
Long gold has made him 30% on 2% of his assets under management (c. £2.7m) and being short Chipotle has made him 25% on 2% (20% of a 10% equity allocation). 22.7% in cash. The rest spread across assets designed to confuse the tax man. So, he has about £6m in various structures so that he will not have to work after his 60th birthday.
Not so bad until the opportunity analysis comes back. He laments what he didn’t do. He asks me: ‘why don’t I take more risks’?
I laugh and explain:
Lending someone £10,000 for 10 years at a rate where they repay £200 per month (120 months in total) means you’ll get paid £24,000. Over ten years that is £2400 per year of income where £1000 repays the principal and £1400 pays the interest.
He can afford £90k. That’s 9 loans he can make that loosely fit this structure. Even if he ends up with 30 pence (after collection proceedings and fees) on the pound (including interest owed) that’s £64,800. A loss of £25,200 on a £90,000 investment over under 10 years. The upside, as compared to that downside is £216,000 (24k holistic returns over 9 loans). That’s you either make £216k or lose £25.2k. That’s 8.5:1. A ratio that should make you wonder something: if it is so good why don’t more people do it. Well, next time you have 10 minutes sit down and look at how much you’re paying in interest AND fees on mortgages, loans, credit cards etc. Then look at it from your lenders POV. The shock and awe will keep you awake.
Now is the time to accept the truth about money. Every decision we are making is like rust to our futures. Every penny we are paying above market for debts is like cancer to our pensions. For approximately every 1% more interest we are paying annually, we probably need to raise our pension contributions by 20%.
You know your salary. Your debts. How much you’re saving. How much you have in emergency funds. How much you have on cash. Etc. Etc. Etc.
Only you after the bold analysis knows the truth about money.
My client asked me what the numbers look like if he commits £900k to a similar loan scheme. I explained: that’s how every pound becomes £2.08. I welcomed him to hell:
‘Past performance is no guarantee for future results’.