Investment hasn’t had a good image recently. It started with the Northern Rock disaster back in 2007, where small investors in what should’ve been a rock-solid business saw their shares go down to the very hard place of zero. Northern Rock was only the beginning, followed in the subsequent year by the collapse or near-collapse of some of the UK’s and the world’s biggest banks, and their subsequent rescue with billions of pounds of taxpayers’ money. The media can characterise anything to do with finance – the City of London and New York’s Wall Street especially – as greedy, self-serving and even a threat to the planet. And yes, a lot of that’s true. Investment bankers have paid themselves bonuses to equal the earnings of football internationals and Hollywood stars. Since the banks started collapsing, scandal after scandal has ensued, with bankers accused of rigging just about anything they can get their hands on, including interest and currency exchange rates. Many global banks have been fined sums hitting billions. Somehow, unlike footballers or actors, they manage to pick up huge wage packets for failure, or unbelievable ‘severance packages’ should they actually be forced to quit. After all, hardly anyone else, and certainly not their bosses or their shareholders, has a clue what all their esoteric investments are about.

      And when serious professional investors fell for Bernie Madoff’s $50 billion investment scam, you seriously had to wonder what it was all about. Madoff ran what seemed to be a very successful fund, although it turned out to be a Ponzi scheme. Named after 1920s swindler Charles Ponzi, these plans offer very high returns that they can only give to investors by using new money coming in to pay out anyone who wants to withdraw. When the new money stops or is slowing, the whole house of cards collapses. The scheme invests in nothing – other than the promoter’s secret bank accounts.

      We’ve yet to come up with anything to replace the financial system we have at the moment, but the great crash should teach us some lessons. Firstly, never, ever take even the supposedly biggest and brightest investment brains on trust. Secondly, although no one will again fall for the mess of offering complex financial instruments and dodgy mortgages to people who had no hope of ever repaying, other financial bubbles will occur in the future. There’ll even be those who claim to have learned from the mistakes and who come up with an even better way of packaging these home loans.

      So when it comes to your hard-earned money, never sleepwalk your way to ruin. As the old saying goes, ‘if it looks too good to be true then it almost certainly is’. No safe route exists to a quick buck; highly paid City types eventually run out of luck; guarantees given by the seemingly most august banks can turn out to be worthless; and you can’t even rely on governments to always back their promises.

      Look out for the warning signs. Shareholders in Northern Rock, Bradford & Bingley, Halifax Bank of Scotland and Royal Bank of Scotland had plenty of chances to get out with something before the shares went down to zero (in the case of the first two banks) or down to pennies (with the second two), before government-sponsored rescues. Warnings were spread over a number of months.

      So why did so many private investors ignore the signs? For some, their holding was so small that selling would have cost more than it was worth. But most had an irrational hope that things would get better and go back to ‘normality’ where prices keep rising. If the global financial crisis that started in 2008 has taught people anything, it’s that ‘normality’ includes disastrous crises as well as good opportunities.

      ✔ Cash

      ✔ Property

      ✔ Bonds

      ✔ Shares

      ✔ Alternatives