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 Financial Happenings Blog 
Monday, March 31 2008

The biggest story in financial markets today is the collapse of Opes Prime, a broking house with more than 1,000 clients.

Opes Prime was a 'prime broking house'.  In short this meant that it was more aggressive than a retail broker, with a focus on stock lending and borrowing to invest.

Unfortunately for the clients of Opes, their stocks actually secured some of the overall loans that Opes used.  So, with the collapse of Opes, their portfolios were put in the hands of the banks (ANZ and Merril Lynch) to sell shares to be repaid.  The clients were effectively unsecured creditors in the whole process - and now wait to see what money they will recover.

All this brings to a head the importance of being careful when you borrow to invest.  It is a risky strategy - sure it is great when asset prices are heading north.  However, when they head south it can get very ugly.  You might end up like the Opes clients - forced sellers of assets in a downward market.  This is not a pretty situation at all!

At the end of the day the simple, steady approach is pretty bulletproof.  Spend less than you earn.  Invest regularly in growth assets.  Keep short term cash needs in a cash account.  Be well diversified.  Keep costs low.

Regards,

Scott

Posted by: Scott Francis AT 12:50 am   |  Permalink   |  Email
 
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