A debt Storm

The public examinations into the collapse of Storm Financial, which are being conducted in the Federal Court in Brisbane, have heard countless tails of woe from investors who lost everything when the company went down earlier this year.

Yesterday Debra and Kevin Lock revealed they were left with a $2.3 million mortgage after their investments crashed earlier this year. After following Storm’s advice to borrow heavily via margin loans to turbo-charge their returns, the couple ended up with a $5.4 million margin loan by October last year

Debra Lock told the Court that even as markets plunged she had been consistently told to “hang in there because in 12 months time we’ll look back and say we dodged a bullet”.

As galling as it is to say it, this is actually one thing the Storm advisers got right.

As today’s super returns data shows, investors who did hang in there have actually dodged a bullet, with most portfolios now firmly in recovery mode and headed for positive territory.

Indeed, the global financial crisis has really emphasised the need for investors to take a long-term view and not to panic when things turn really ugly. The advice from Storm advisers to “hang in there” would have been the same as the advice from financial planners around Australia.

But unfortunately for the Storm victims, they never got a chance to ride out the crisis – by following the company’s advice to borrow, borrow and borrow some more, Storm clients never stood a chance of surviving the rapid plunge in equity markets we saw at the end of 2008 and in early 2009.

The lesson here is clear – excessive debt is always dangerous, even when markets are flying and returns are high. Let’s hope it’s a lesson that stays with companies and individuals for years to come.