Let’s face it, we are all susceptible in varying degrees to greed and not wanting to “miss out” on the next big investment idea. For example, I have met several people who get tempted by the promised 7-8% annual return and want to put a significant portion of their investable assets into illiquid mortage pools.
The problem? You can lose all your money. This is evidenced by the case of Fortress Financial, the one-time largest arranger of syndicated mortgages in Canada.
The other often ignored problem is taxation. Since these mortgage pools pay out interest income, they will attract the highest marginal tax rate for non-registered and corporately owned accounts. Always remember that the only important dollar is an after-tax dollar.
The solution? There can still be a place for mortgage pools in a portfolio. There are mortgage pools that trade on stock exchanges and are completely liquid. Also, as with anything do not put all your eggs in one basket and ensure that you are properly diversified. Finally, be sure to structure your accounts so that interest bearing investments are held in registered accounts.
As Warren Buffet’s partner Charlie Munger says, “avoiding stupidity is easier than seeking brilliance”. In this case the “stupidity” is lack of diversification and greed.