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Investing for attractive returns could be an investor's worst mistake…

by , 23 May 2016
Investing for attractive returns could be an investor's worst mistake…
Recently I came across an article on MoneyWeb with the headline, “Preference share offering 14.5%”.

Preference shares returning 14.5%? I've only really seen a preference share offer investors around 10% and that's Grindrod, which is a solid proven company.

So I was sceptical when I read this headline and I immediately investigated how this investment was offering such a good yield.

The worst part is, I can't help but think that many first time investors could fall for these “attractive” returns and in the long-run lose out.

That's why before you put your money in any investment that's offering “attractive” returns, you need to identify two factors. But first I'm going to explain why I'm sceptical about the sustainability of this investment.

Here’s what’s wrong with this preference share investment…

The company is Ecsponent - a small-cap financial service provider listed on the JSE. Ecsponent has a market cap of just R185 million, but it’s offering investors double-digit returns every year.
The problem with this, the company has just recently started making profits again so there’s no way of telling if these returns are sustainable.
But what you can do when it comes to these “attractive” investments is to scrutinise the most important factors.
#1: Track-Record: Firstly a company MUST have a decent track-record of paying out its shareholders. With no track-record, you can’t be sure that you’ll continuously get your returns every year. 
Although Ecsponent has a recent track-record of positive profits, it made a R9 million loss in 2010. The point is you want to put your money in an investment that has been consistently profitable for over 5 years. This way, you’re likely to find a sustainable long-term investment.
Note: A company’s financials will tell you if it has a lot of debt or cash flow which is crucial to paying out shareholders.
#2: Risk: Ecsponent highlights this investment is high risk.
I don’t particularly like long-term investments that demonstrate high risk. Once again, sustainability of returns becomes a big issue.  That’s why if you’re investing for high risk, high reward, make sure it’s a short-term investment.
Even the experts are warning investors of Ecsponent preference share’s attractive returns. Founder of JustOneLap, Simon Brown says, “The five-year terms of the preference shares also mean that the company is essentially forced to manage itself to a short-term time horizon, and that may be problematic for investors looking for sustainable long term returns. “
 *********** The Sport Desk Reveals ***********
The Sports' Desk turns R1,000 into R5,160 for less than 10 minutes’ work

On the 2nd of April, we sent out an email and SMS saying, “Single Bet: Murray to win his next Tennis matches.” Bet 2 points.

This bet turned R1,000 into R1,600.

Later that day, we sent an email and SMS saying, “we will be backing Hingis/Mirza to win doubles in the Tennis match” Bet 2 points on Hingis/Mirza to win.

This bet turned R1,000 into R1,550.

The following week, we sent yet another email and SMS, saying, “Bet 3 points on Errani and Keys to win their next tennis matches.” Bet 3 points on Errani and Keys to win.

These are just a couple of examples, but you too can get in the action by clicking here now!

There are plenty of low-risk investments that generate good returns

If you’re looking for income over the medium term, rather pick an investment that has a consistent track record of long term profits and performance  or low risk investments like exchange-traded funds (ETFs) or good dividend paying stocks.
Here at MoneyMorning, we always recommend you invest wisely and safely. In a country riddled with rising interest rates, high inflation and low economic growth, now, more than ever, is crucial to protect your wealth.

Knowledge brings your wealth,

Joshua Benton,
Editor, Real Wealth

P.S. Remember if you don’t have the time to find these kinds of investments, then I urge you to consider the Real Wealth portfolio - this portfolio has consistently delivered 41% average return year on year for the last 6 years.  And I’ll show you a way to get started with as little as R500 a month. You can learn more here.

Investing for attractive returns could be an investor's worst mistake…
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