Assume every investment can fail you

I assume every investment I make can leave me with nothing. I don’t expect them to (in the case of cash and government bonds, I think it’s extremely unlikely) but I never bank on 100% guarantees.

When I buy individual shares, I assume the company can go bust, even if it is one of the largest companies in the world, such as with my investment in HSBC bank.

But it goes much further than that.

Here are just a few examples of how seemingly safe and widely-used financial products could actually damage your wealth:

ETF and ETC providers can get into trouble, putting ETF and ETC investments into jeopardy.

Banks who are not members of a country’s compensation scheme can go bust or suffer a bank run.

Investment companies can suffer or perpetuate fraud (right up to a Madoff-style Ponzi scheme).

Banks and other financial companies can fail, with knock-on effects for the investment products they backed.

Electronic brokers or nominee share accounts could get into difficulties or suffer some form of collapse that destroys a record of who owns what.

Safeguards against these or other failures can break or never be able to deliver.

Insurance schemes set up to compensate investors can run out of money.

Cash under the mattress can be stolen.

A government could appropriate the money in government-backed bank accounts, or default on repaying its own bonds.

Your country’s currency could be devalued, so that even though your nominal net worth is the same, its value is reduced relative to other currencies.

Your country could suffer an economic collapse, even if the rest of the world is doing fine.

The communists could take over and outlaw all private property.

Clearly some of these events are far more likely than others – all are very unlikely – and there are a few real Black Swans in there (good luck guarding against revolution!)

How then can we protect our wealth?

It is vital to appreciate the risks – however remote – to understand why everything from portfolio diversification and investing overseas to dividing your cash savings between different institutions is a sensible step in protecting your wealth.

I use a few different stock brokers, for instance, and have savings in several bank accounts.

However I know I am running risks. I only have a paper share certificate in one company (a non-listed one), with everything else held electronically with online brokers in nominee accounts.

If the electronic record system collapses for some reason, my share investments could be in peril.

I also hold ETFs, despite the seemingly academic risks of ETFs versus buying the underlying stocks.

Finally, I have very few physical assets. There is definitely a case for keeping a few gold coins or precious stones somewhere secure that you can access in a crisis.

Ultimately though, you have to be pragmatic and live in the real world.

Accept that every time you invest, you take a risk with your money. Do all you can to minimize it. And banish the word ‘guaranteed’ from your mind when investing.