An updated snapshot of my specific stock and mutual fund investments is shown below. The current situation is far from ideal - with an extremely high loan:value ratio (LVR) of almost 100% (pre-GFC I had been maintaining the overall LVR around 65% by buying additional investments as the value of my portfolio increased. That strategy was based on expected long-term ROI of 10%+ and occasional bear market dips of 10%-25%). Unfortunately I had to sell off some of the more liquid stocks to avoid margin calls in early 2009, and so the portfolio hasn't gained as much during the stock market rebound as it lost on the way down.
Also, the portfolio now includes a large amount of illiquid holdings such as ING Private Equity, the Ord Minnett Hedge Funds (now mostly invested in bonds and fixed interest), and the Macquarie 'Select Opportunities' Fund (also now mostly invested in cash, with current NAV about 15% below the capital protected amount that should be paid out in 2014). Altogether around $162,000 of the $500,000 invested has limited upside potential, while I'm stuck paying about 8%+ interest on the investment loan balance! As these investments reach the maturity dates I'll cash them out and be able to reinvest the funds (or, more likely, reduce the outstanding loan balances).
The portfolio no longer includes my 'investments' in managed agribusiness funds (Timbercorp Pine Forest, Rewards Teak and Rewards Sandlewood projects) which all went out of business.
Overall, my worst investments have been in 'managed' funds, with 'tax effective' agribusiness schemes performing the worst (~100% loss), ING private equity losing around 50% of it's value since launch/rights issue (although it may recover a bit), Macquarie equinox down about 15% (but should pay out the capital protected amount on the 30 May 2014), and the Ord Minnett 'Hedge' Funds currently frozen until maturity (OMIP 220 matures 30 Jun 2015, OMIP 320 matures 30 Dec 2016, and OMIP SL matures 30 Jun 2017) - but at least they locked in some profit via the 'rising guarantee' mechanism prior to the GFC.
1. Gearing (or investing using 'other peoples money') is great when things work out as expected, but the downside risk can be extremely painful. Unfortunately, with margin loans you can be forced to liquidate investments at the worst possibly time - IE. selling out at the bottom, rather than being able to invest when the market is down. In hindsight, I should have avoided borrowing more against the rising value of my portfolio as the bull market matured, and should have taken profits and paid off loans when the market had done well and upside potential was less obvious (eg. in 2007)
2. So-called 'expert' managers are better at protecting their fees than they are at managing portfolio risk. If you can't pick the best stock investments yourself, what makes you think you're an expert at picking the best managers? Most under perform the market, after taking fees into account. And some are real shonks (but can write a great looking prospectus).
3. The 'fine print' is often so voluminous and incomprehensible that you don't really understand the risks involved. For example, I had expected hedge funds would have returns uncorrelated with the stock market, and would be able to make profits during a severe bear market by shorting stocks and indexes. In reality, hedge funds tracked the market down, and ended up being frozen due to the capital guarantee requirements. I had also expected the risks in agribusiness investments were mainly crop yields and lower than expected prices when the timber matured (and the exorbitant up-front management fees and investment advisor commissions). In reality, it turned out that when the management company went broke, the investors ended up 'owning' trees on land that had the leases terminated - so immature trees had to be sold off at fire-sale prices by the management company liquidator, rather than being able to be retained by the investors until maturity.
4. Be very wary of tax considerations affecting your decision making. I decided not to sell off some of my portfolio in 2007 due to potential capital gains tax liability (and the potential impact of the extra 'income' on family tax benefits). Instead I tried to be 'smart' and protect my portfolio from a possible bear market by buying Index put options in March 2007. Eventually those options expired (Dec 2007) just before the market crashed, and my lack of experience trading options meant I didn't have put options in place during 2008.
5. In theory, investing in a dozen high-risk, high-return investments should work out OK, as sufficient diversification will reduce the overall risk. In reality, the risk-premium was insufficient and the diversification proved to be illusory (the investments negative returns turned out to be highly correlated during a global recession).
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