Friends aren't always the experts

When Sam was 30, he started planning to buy a house. He decided to buy in about four years time when he had a decent deposit. He already had $20,000 in a savings account, and with four more years of saving and interest he could easily increase that to around $40,000 a decent deposit for the kind of house he wanted.

His friend Harry got wind of his plan and told him about this good deal he had invested in, that locked up your money for four years but gave a return of 15% a year.

The deal involved Sam lending his $20,000 to a company which was developing luxury apartments on the Auckland waterfront. Sam would be one of a large syndicate of investors. They would get the money back when 80% of the apartments were sold and they'd have 3rd mortgage security after a bank and the developer's own investment company. Harry knew a bit about property and said the project was a winner. People would be scrambling to buy the apartments and the interest rate was unbeatable.

Now it's four years later and the developer has sold only 60% of the apartments. The bank loan has been repaid but there is no money to repay Sam and the rest of the syndicate. They are forced to accept an arrangement to defer repayment for at least two years and maybe longer. Interest payments are stopped.

Sam's plans to buy his own home are in tatters. He is told by a lawyer acting for the syndicate that he will be lucky to get back more than $10,000 of his $20,000. He is however pleased that the savings of $8,000 that he has made over the four years have grown to nearly $8,700 and are safe and sound in a bank deposit currently earning 6% interest.

Sam has learnt the hard way the truth of the old saying the higher the return, the higher the risk. He has also learnt that it's safer to talk to Harry about rugby, not money.