In my life I have heard inspiring stories of people who have managed to get through very acute financial problems, with debts that would scare anyone. People who today are on their way to building a solid heritage for their future.
But I have also heard many horror stories: people who lost everything because of a bad investment decision and by putting money in instruments that they did not understand or know how to handle. Some more serious than others but all related to ignorance of the instrument in which they had put their money and what the risks were.
Carlos, for example, invested all his money in an investment fund that his father-in-law told him about, who boasted the high profits. He investigated a web page and saw that, indeed, he had given very attractive returns, so he opened his account, filled out the questionnaires and put in his money. Suddenly, he opened his account statement and saw that his balance was 30% less than what he had invested. He got scared, took everything out and already wanted to sue the fund operator for having “lost” his money.
He never realized that he had invested in a fund that invests in stocks and just after he invested the falls began due to fears of the Covid pandemic. But he did sign a contract, an investor profile and the fund’s information prospectus and the order to buy it, even though a diversified portfolio was recommended. Despite all this, Carlos had no idea where he was putting his money.
But there are worse cases, for example people who are attracted by the promise of huge profits and invest all their money in highly speculative instruments, such as Forex or binary options that operate in a highly leveraged way.
The problem is that these investments carry a very high risk, more than betting on roulette in a casino (if we win we can double our money instantly; but we can also lose everything in a single spin).
Leverage is essentially investing with money that is not ours. For example, if it is 100x, it means that if we put 1,000 dollars we will be participating in a 100,000 operation (the other 99,000 are not ours). If things go our way, we can easily double or triple those 1,000 $ (minus the costs of leverage). Otherwise, we can lose even more than we invested, because this loan requires a guarantee or collateral that we could also lose in an extreme case. Purists will tell us that there are always protection mechanisms, but precisely for that reason it is essential to understand what we are putting our money into and what risks we are taking.
Finally, the worst of worlds: investing in pyramid schemes that are clearly a fraud, also attracted by the large profits that increase exponentially as more people are invited. Companies that “pay” you into your account several thousand pesos for each individual who enters. Until everything falls like a house of cards, because those winnings do not really exist and were, literally, paper.
Why does that happen? There are many reasons, but one of the main ones is how attractive the promise of large profits quickly and easily is to the human mind. In any investment, you never have to “hunt” for performance. First you have to take risk into account, control it through diversification and then yes, try to maximize your potential return.