6 Effective and Proven Ways to Lose Your Money

Burn, Money, Burn

Introduction

  • People make a lot of financial errors but some are ultra dangerous.
  • Remember: You can lose all your money.
  • In the worst cases you can lose more than the initial amount was.
  • Frauds exist at least for 2,000 years.
  • Even so, criminals always find new victims, losers. Don’t be one of them.

People are chasing often the best investments, but make fatal errors in other areas. Many of us never admit: “I lost my money”, we are ashamed and conceal what we have done. But knowing the worst investments can be important to avoid losses and finding adequate assets. Read this list.

1. Lost More than I Had with Margin Call

Perhaps the most dangerous investments are leveraged products with the possibility of a margin call. Like currency (foreign exchange or FX), commodity or stock market futures, options selling, CFD-s. With these, you can bet on the price of a currency, commodity product, stock or value of a stock index. Leverage means the value of your investment will change by a multiplier. For example, let’s suppose your leverage is tenfold. If the price of the underlying product moves five percent, the value of your investment may increase or fall by 50 percent.

But not only the price moves are very strong in this industry. The most dangerous part is, you can lose more than you invested. The prices sometimes move too quickly and too strong in the wrong direction. Sometimes you can’t liquidate (terminate, close) your investment position fast enough. So, your money puffer will be consumed entirely. In this case, you receive the “margin call”. You have to pay your loss, even if it is bigger than your initial funds. You need to replenish your deposit, refill the money you paid earlier to cover your losses. In extreme cases, like a fast stock market crash, you can get into heavy debt and lose all your fortune. Even your house or your car.

Chart: The way to 800 index points from 4,900 (approximately). The Nasdaq 100 technology stocks index in 2000-2003
Chart: The way to 800 index points from 4,900 (approximately). The Nasdaq 100 technology stocks index in 2000-2003. (Source: Tradingview.com.)

By some types of these high-risk trades, the vast majority of investors lose all their money. Some statistics claim 70-80 percent of them lose. Other sources claim even 90-95 percent is possible. (See the references below.) This all happens also in normal cases when the brokerage firm or other service provider is completely honest and plain with you. But there are also a lot of bad, fraudulent actors in the market. Most of them can be recognized by “get-rich-quick” offers.

Fraud. Beware of get-rich-quick investment schemes that promise significant returns with minimal risk through forex trading. The SEC and CFTC have brought actions alleging fraud in cases involving forex investment programs. (Source: The US authority SEC)

2. Lost All with Ponzi Schemes

Ponzi schemes are special frauds based on any fake investment which doesn’t exist in reality. These are only empty promises. You give your money to unknown people who take it and disappear soon. A very effective and simple way to lose all your money.

The history of scams is very fun and educative. Wikipedia has a list of Ponzi schemes that begins in the 1830s. But there were other cases in ancient times. In 193 A.D., for example, some soldiers sold the entire Roman Empire – the right to be Caesar – in an auction. They monetized something that wasn’t theirs, that is, of course, a fraud. But nobody accepted the new “emperor” who paid the most – the “investor” lost all his money.

Pyramid schemes are also effective money burners. Here the fraudsters are using the money of new investors to pay the people who invested earlier. But it can be any other fraud where the perpetrator sells something that does not exist. Or accepts money that he knows he doesn’t want to give back at all.

3. Fatal Lending to Relatives and Friends

By some surveys, approximately 50 percent of people who lent money to family members or close friends, had problems. They couldn’t recover the loan or only a part of it. The deal also often damaged their human relationships with the borrowers. That phenomenon can have many reasons.

Some people are asking relatives or friends for money only if their credit score is bad. They can’t get a loan from other creditors, many times for a good reason. In other cases, people don’t want to pressure their beloved. Or, they don’t even make the proper documents, contract or a formal promissory note. A similar case is if you co-sign a loan for someone. You shouldn’t take responsibility for their debt. Unless you are sure you have all the funds to pay it back if necessary.

4. Don’t Enter the Deadly Debt Spiral

Picture: Avalanche warning sign
Picture: Avalanche warning sign, Wikipedia

If you take out a huge loan and you can’t pay it back, you may also lose all your assets. The value of the loan grows with newer and newer interests. If you take new credits to pay the old ones, the rates get usually higher than the original was. Especially by expensive loan types, such as consumer credits or credit card lines.

The compound interest is our friend if we save money, but converts in our enemy in case of debts. It grows our liabilities in the form of an avalanche. (Read this about the Dark Side of Compound Interests.) So you can lose much more than the initial loan amount was.

5. Buying High
and Selling Low

Financial bubbles and crashes seem to reappear from time to time. British South Sea Company bubble (1720), Dotkom-madness (2000), Bitcoin-hype (2017), Dutch Tulip Mania (1637), 19th-century railroad fever and much-much more. Also, many other small bubbles of our times exist. For example, lithium-shares, cannabis-companies or high-valuation technology startups without any profit. There is always some hype people are buying. Stock markets offer an excellent way to lose all or a big part of your money.

Did you hear on the television or radio that stock market prices are in all-time highs? All friends are getting rich, only you stayed out? Hurry, buy some stocks, then. Some months or a couple of years later, the market collapses, a crash may have halved the prices. Panic, sell everything, realize your losses! You’ve already wasted approximately half of your money with minimal or zero effort. (See my warning about “Passive income.”.) You can complain you lost your money on the stock exchange. Blame Wall Street, banks, capitalists, the governments or whomever you wish. Keep up the good work!

Conclusions?

  • Don’t confuse historical returns (the facts of the past) with your wishes or expectations (the uncertain future.)
  • Avoid financial bubbles where you can easily lose your money.
  • Millions of people can’t get millionaires at the same time – don’t follow the herd.

6. Don’t Gamble! (With Real Money)

The house always wins – that is the first law of all gambling types. In the first place because the organizers build a system by which they always win in the long term. Certainly, they don’t want to go bankrupt. In the short term, you can win, of course. But the more you play, the closer your average income will be to a decent negative percentage. That is the house edge, the profit of the company. (Modern online games may have a lower house edge, but other risks can surge.)

As I was younger I couldn’t believe that. I spent a whole Saturday gambling and gambling with toy money. Spinning the roulette wheel. I lost everything before the sun went down. Don’t let the commercials and fake success stories fool you. Mostly the game organizer and the taxing state get rich with your money, not you. Another problem is that most of the winners sooner or later lose all, sometimes even end in debt. Most people don’t know how to deal with huge wealth and waste it all. But we’ll come back to that in another post.

A Lottery Is a Taxation Upon All the Fools (Source)

More Important Readings for You About Your Money

References, Interesting Readings for You:

(Photos if not indicated otherwise: Pixabay.com)

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research, or consult your advisors before making any investment or financial or legal decisions.

11 thoughts on “6 Effective and Proven Ways to Lose Your Money

    1. Governments and central banks can inflate their debts. Politicians often change every 4-5 years, the problem affects future generations. But state debt can increase economic growth, so the governments mostly have a good excuse.
      If the central banks can’t push up economic growth anymore (with low interest rates and money printing), the governments will try it. Monetary policy will be very likely replaced by fiscal policy, resulting in even more debt. (fiscal policy=>government spending and incomes, taxation)

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