Mums and dads biggest losers

Published in Sunday Times, October 2007 by Denice Rice

A lack of investor education could see thousands of West Australians lose their houses and/or retirement savings in what market watchers now see as an almost inevitable global market adjustment.

With a record number of novice investors moving into the share market using the equity in their homes and their retirement savings, hundreds of thousands of mum and dad'' investors are likely to be the biggest losers in any major shakedown in the Australian economy.

Even Treasurer Peter Costello warned on Friday of the "tsunami-like'' economic effects in Australia of almost-certain changes in the Chinese economy. 

That will set off a huge tsunami that will go through world financial markets,'' he said.

Record growth in WA's property market, cheap interest, a booming economy, soaring share prices and a burgeoning number of self-managed superannuation funds mean more West Australians than ever have equity in their homes and their retirement nest eggs invested in the stock market.

WA general manager of the Australian Institute of Chartered Accountants Con Abbott said there was no doubt that a significant market correction would affect considerably more individual investors than it did 20 years ago because of the "exponential growth'' in the number of Australians investing in the share market.

"The number of average Australians in the share market 20 years ago was modest compared with today,'' he said.

Murdoch University taxation expert Rex Marshall said there had been a significant trend were people had used the equity in their homes to invest in the stock market.

"In the past, the equity people had in their homes was seen as sacred, but more and more Australians are borrowing against that equity to invest in the share market,'' he said.

Interest on such investment loans was tax deductible.

Unprecedented growth in self-managed superannuation funds in Australia, at the rate of 2000 a month, has also given more Australians than before direct investment access to their retirement assets.

David Schildkraut, an independent CPA specialising in superannuation funds and retirement investment, said that individuals in SMSFs had, on average, more funds than those in public sector or corporate funds, but in his experience were generally not equipped to handle their investments.

"SMSFs have on average a balance of $250,000 per member, compared with around $40,000 per member for public sector funds,'' he said.

"My experience is that many SMSF members and trustees are ill-prepared due to lack of knowledge and proper advice and assistance, or are simply not suited to self-managed super,'' he said.

Mr Abbott said that in his experience, when the market went ``pear shaped'' those with the least experience were usually left ``holding the baby''.

"Those who don't understand the fundamentals of investment markets and investment products are the ones who get caught,'' he said.

"Every time there's an investment scheme that goes bad, the people we see on TV who've lost are inexperienced investors who've taken their super savings and just dropped them all into it with no understanding of the risk.''

Wealth Within chief analyst Dale Gillham said that fear and greed, rather than market fundamentals, tended to guide uneducated investors.

"Decisions based on fear stem from the concern of not wanting to lose money, while decisions based on greed result from a desire to make money now,'' he said.

"In a volatile market, these emotions can be amplified, particularly when the investor lacks the knowledge and understanding required to manage the investment.

"Historically, it has been proven that people with the right education are more successful and achieve better returns than those with little or no knowledge.

"Everyday investors should educate themselves on how to properly invest, rather than solely rely on the advice of brokers and advisers.

"Advisers have a role, but I always recommend investors question the advice and under no circumstances should they rely on only one person's opinion.''

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