DON’T be a Dick Smith when it comes to investment risk.

The collapse of the well-known electronics store chain last week stunned the financial community, and also many angry customers who paid for gift cards and lay-by deposits only to be told they are now worthless.

It’s a little unfair to drag Dick Smith’s name through the turmoil considering the wealthy entrepreneur sold his electronics stores to Woolworths in 1982 for $25 million, and was quoted last week saying he never invested in sharemarket companies such as Dick Smith and Woolworths because they were “too risky for me”.

Woolworths sold the Dick Smith business in 2012 to private equity group Anchorage Capital in 2012 for $94 million, and Anchorage then sold it to the share market through a float in 2013 worth $520 million — more than five times what it paid the previous year.

Today it’s in receivership, which means shareholders can expect to get zero money back because they’re unsecured creditors and rank behind the banks.

The most positive things to take from this debacle are some valuable lessons about investing. Here are a few:

1. BEWARE OF PRIVATE EQUITY SHARE FLOATS

Good luck to Anchorage Capital the next time it tries to float a retail business on the stock exchange. Once bitten, twice shy investors will run for the hills, you’d imagine.

Other private equity floats have lost shareholders money — such as Myer and Collins Foods — but not as spectacularly as Dick Smith.

2. DO YOUR HOMEWORK

In recent days several experts have been described how accounting manoeuvres at Anchorage pumped up the value of the Dick Smith business before its sharemarket float. Hindsight is wonderful, but where were these experts two years ago warning buyers to beware?

Some respected stock pickers rated Dick Smith a “buy” in recent months, so there are always going to be holes in any research, but spending some time understanding an asset and its history is still worthwhile.

3. DIVERSIFY YOUR ASSETS

Holding a wide range of investments is the best way to reduce overall risk. An investment in just one share is a gamble, not matter how successful the company, but putting your money into many smooths out the good and bad ones.

Invest beyond the sharemarket into property, fixed interest, infrastructure and alternatives to diversify even further.

4. BE READY TO DESERT A SINKING SHIP

The writing was on the wall for Dick Smith in December but many true believer shareholders — already upset at losing lots of money — held on while hoping for a turnaround.

Successful investors are not afraid to cut their losses if a company’s outlook changes, and put their money elsewhere.

5. DON’T GIVE UP

Exiting the sharemarket altogether might seem like a good idea to a stunned shareholder, but remember that for every Dick Smith there are big winners — such as Blackmores, Bellamy’s Australia and Domino’s Pizza Enterprises, which have generated 1000 per cent returns in recent years.

Long-term investors see losses as a lesson for the future, and a rough patch like the market experienced last week as an opportunity to buy.