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The Fastest Way to Lose All Your Wealth is...

Nov 15, 2021

The Fastest Way to Lose All Your Wealth is

Have you ever attended a seminar on how to lose your wealth?

Neither have I. That's because most financial advisors and experts focus on how to build wealth, not lose it.

And for good reason. Building wealth requires hard work, patience and a whole lot of luck.

You would have to have more than one source of income, the knowledge and discipline to invest wisely and be lucky enough to not get caught up in a downturn.

And anyway, does anyone really need to be told how to lose money?

Most people are careful with their money. They also tend to save whatever they can. But more often than not people slip.

They don't just lose their savings; they lose everything they own to the point of bankruptcy.

So how does one find themselves in such a situation?

#1 Spend all, save none

For starters, they spend all their money on extravagant useless purchases without saving any.

Take, for example, Hollywood actor Nicholas Cage.

The actor at one point had US$150 m in funds but was soon bankrupt because he could not keep it together financially.

He spent all his money on frivolous purchases such as a US$150,000 pet octopus and shrunken pygmy heads. He even bought a dinosaur skull worth a quarter of a million dollars!

While this may initially seem fun, being financially irresponsible has consequences.

If you don't have any savings, you will be financially unprepared to deal with any unexpected emergencies that occur.

Debt will also almost become inevitable for you. Consumer debt usually carries a very high-interest rate depending on the type of credit you use to make the purchase.

Another major consequence will be that you will have to work until the day you die. Who wants to do that?

That sounds absolutely terrible.

#2 Invest all your money in penny stocks

While the name sounds enticing, you could lose most of your money if you used penny stocks as a method to get rich quick.

These stocks have very low liquidity. The companies that issue them are often new and unproven.

While the low cost is tempting, these stocks could cause you to lose it all if you put too much money in them without assessing fundamentals.

Don't believe me?

Investors lost a ton of money in debt ridden HDIL, after the real estate firm's two directors were arrested in connection to the PMC Bank scam in 2019.

The directors were accused of loan default and properties worth Rs 35 bn were frozen by the EOW (Economic Offences Wing).

PMC bank officials had created 44 hidden accounts with fake credentials to help HDIL. Loans given to HDIL later turned into NPAs (non-performing assets), leading to its bankruptcy and PMC's exposure to hundreds of millions.

While the promoters did go to jail for their crime, the stock never recovered. In 2018, the company's stock was trading slightly below Rs 50. At the end of 2019, the stock was trading a little above Rs 1.

Those investors that had invested money hoping that it would go up lost huge sums of money.

#3 Invest in the latest meme stock

Investors who invested in meme stocks in the beginning of 2021 also suffered the same fate in the last year.

What are meme stocks? They are stocks that have gained a cult-like following online and on social media platforms.

In January 2021, an online community called the WallStreetBets on social media platform Reddit encouraged people to buy the stocks of GameStop and AMC Entertainment.

As a result, a large number of small retail investors pumped up the price of these stocks to astronomical highs.

This led to a 1500% increase in the value of GameStop, a company in declining financial health with an outdated business model. This happened in just 14 days!

It was one of the largest increases in the history of the stock market.

But what goes up, must come down.

Over the following week, the stock plummeted, trading at a little over US$50 per share just a week after reaching an all-time stratospheric high.

Many investors made a lot of money in a short amount of time. But a lot of them lost money as well.

If this isn't the fastest way to lose all your wealth, then what is?

Fortunately, in India, the penetration of retail investors is still not high enough to have this kind of power. However, stocks like ITC, IRCTC, and Zomato have already gained a cult-like following on social media.

As the number of retail investors go up, this situation could become a reality in the near future.

#4 Put all your money in cryptocurrencies

Speaking of monumental gains and volatility, how can one forget the exciting world of cryptos?

If you're seeking a path to riches, you might have definitely considered investing in at least one or two cryptocurrencies over the last year.

I know I have. After all, who doesn't want to get in on the next big thing?

The bitcoin boom of 2017 still looms large in the eyes of many retail investors and last year's rally has only increased the hype of the speculative asset.

However, crypto markets are extremely volatile and wild price swings are extremely common. This market is rife with shoddy practices, unethical activity and outright scams.

In November 2020, the police arrested computer science graduate Srikrishna in Bengaluru for selling drugs procured from the dark web.

On interrogation, the police found that Srikrishna had hacked into some bitcoin exchanges. One of them was Bitfinex. Around 120,000 bitcoins worth about US$72 m at the time, were stolen from Bitfinex in August 2016.

This kind of news is pretty common in the crypto world. So, if you buy in, be ready to lose the money you invest.

#5 Gamble your wealth away

Bet on which you can afford to lose.

While this holds true for cryptocurrencies, it's what people have been telling each other about gambling since years.

The age-old vice has pushed many a people towards bankruptcy as they spent all their money, attempting and usually failing, to win back their losses.

It's one of the oldest and fastest ways to lose your wealth. You could lose everything overnight just on one wager.

Nowadays, it's easier than ever to gamble because the internet makes betting accessible to anyone.

You can also just about bet on anything.

You may get lucky and win a large sum, but unfortunately, many people dig themselves into a hole and then keep digging deeper.

#6 Fall for an investment scam

Any talk of investors losing wealth would be incomplete without the mention of fraudulent investment schemes.

These usually promise high returns over a short duration and have been popular since time immemorial. They are also a sure-shot way of losing all your wealth.

Millions of people have fallen prey to such scams all over the world including India.

Recently, the market regulator fined Yes Bank Rs 250 m for selling its AT1 bonds as 'Super FDs'.

When the bank went under, the customers were shocked to discover that AT1 bondholders were carrying the same risk as shareholders and were all wiped out.

The regulator takes this as 'mis selling' but it's clear that fraud would be a better term. The fact that AT1s were disguised as fixed deposits makes it as good or bad as any investment scam.

There are various kinds of investment scams. Yet, most scams share the same characteristics that could be 'red flags' for investors.

Some of these are high investment returns with little or no risk, overly consistent returns, and unregistered companies with unlicensed sellers. They could also have secretive or complex strategies and issues with paperwork.

#7 Go all in on tips you get at a dinner party or from unsolicited sources

Which stock should I buy right now? What do you think is the next multibagger?

As the stock market has seen a phenomenal rally in the last eighteen months, these kinds of questions have become commonplace.

People are also happy to dish out advice, whether or not they have the expertise to do so. Anyone and everyone seem to have a view on the next hot investment opportunity.

While one usually takes this advice with a pinch of salt, sometimes it's too tempting to resist taking advice from people for whom it has paid off.

Especially, when it's a family member recommending a winning stock or a friend telling you about the gains he made from the latest cryptocurrency.

However, the same cannot be said for tips that come from WhatsApp groups, or SMS from unknown international numbers.

Yet, a lot of people fall for them, especially in the older age bracket, only to be disappointed later.

Conclusion

Though the idea of amassing crazy wealth overnight is obviously appealing, the reality is that the odds are heavily stacked against anyone trying to get rich quick.

Instead of actively trying to find the next hot investment opportunity, you're better off if you slowly and steadily build your portfolio.

Of course, all investing involves some amount of risk but if you do proper research and diversify your investments, you don't have to worry that you'll lose all your money with one bad decision.

For those still wanting to trade the next viral stock or invest in the latest cryptocurrency, invest only with money you can afford to lose.

Also, if an acquaintance claims to have a fool proof idea for how to get rich quick, don't feel pressured to jump on the bandwagon.

Instead, use your own common sense and experience and make sure to ask tough questions. This will allow you to make better financial decisions.

Ayesha Shetty

Ayesha Shetty is a financial writer with the StockSelect team at Equitymaster. An engineer by qualification, she uses her analytical skills to decode the latest developments in financial markets. This reflects in her well-researched and insightful articles. When she is not busy separating financial fact from fiction, she can be found reading about new trends in technology and international politics.

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