How to avoid permanent loss of capital

IN THE last two months, I’ve had three client prospects come to me – all of whom suffered significant losses of between 40 and 70 per cent in last year’s challenging financial markets. Two of these portfolios were professionally managed. The third, which was self-directed and the worst performing one, had far too much risk. It suffered two margin calls in July and October, ending in a forced sale of investments at a significant loss. The other two portfolios were concentrated in the worst performing sectors of last year: technology and China.

Permanent loss of capital is the one outcome that investors must avoid at all costs. You want your money to grow, not disappear into the abyss.

Buying a China real estate developer bond at 102 per cent of face value and then selling it at 30 per cent locks in a permanent loss which is difficult to recover from. Buying funds after they’ve had a long stellar run and when everyone was recommending their track record, and then selling when they’ve suffered a big negative year similarly results in permanent loss.