Keep it sim­ple when it’s your money

Daily Mercury - - NEWS | YOUR MONEY -

There’s no short­age of as­sets – many of which are straight­for­ward – to in­vest in.

IF YOU look at some of the world’s most suc­cess­ful com­pa­nies it’s pretty clear they typ­i­cally pro­vide prod­ucts or ser­vices that are straight­for­ward, func­tional and con­cep­tu­ally easy to grasp. And that’s ex­actly what you should look for in an in­vest­ment.

Ex­pe­ri­ence has taught me that in life and in­vest­ing, the sim­ple things are often the best.

Take Coca-Cola, a sim­ple soft drink found world­wide. Or Ap­ple’s prod­ucts, very so­phis­ti­cated bits of gear but fan­tas­ti­cally user-friendly.

Closer to home we have com­pa­nies such as CSL, Wool­worths and BHP that are es­tab­lished busi­nesses with prod­ucts easy to un­der­stand.

At the other end of the spec­trum, I reg­u­larly re­ceive mar­ket­ing ma­te­rial invit­ing me or my clients to hand over our hard-earned cash for some scheme or other that is so com­plex or ob­scure no rea­son­able per­son could be ex­pected to un­der­stand it.

And that’s when my alarm bells start ring­ing.

Try­ing to ex­plain what you’ve sunk your money into may make for im­pres­sive din­ner party con­ver­sa­tion, but it’s never a good sign if you have to make a se­ri­ous ef­fort just to fig­ure out the ba­sics of how you make money from it.

De­spite this, I still see very com­plex “in­vest­ments” be­ing heav­ily mar­keted to or­di­nary in­vestors. I’m think­ing of Bit­coin, for­eign cur­rency trad­ing, con­tracts for dif­fer­ence and other types of de­riv­a­tive trad­ing, just to name a few.

Sim­ply be­cause some­thing is com­plex doesn’t mean it is good. If you come across an in­vest­ment that seems im­pres­sive purely be­cause it’s com­pli­cated, try this lit­mus test: have a go at ex­plain­ing how it works to some­one else.

If they don’t know what you’re talk­ing about, then chances are you don’t ei­ther and I sug­gest you pass it up.

Af­ter all, with about 2000 listed Aus­tralian com­pa­nies, just as many man­aged funds, and un­told num­bers of in­vest­ment prop­er­ties on of­fer, there’s no short­age of as­sets – many of which are straight­for­ward – to in­vest in.

It makes a sen­si­ble rule of thumb, “if you don’t un­der­stand it, don’t buy it”.

If you strug­gle to un­der­stand how an in­vest­ment works, it’s a fair bet you have al­most no chance of know­ing what could go wrong and how you could lose money.

Keep it sim­ple and it’s harder to go wrong.

Paul Clitheroe is a found­ing di­rec­tor of fi­nan­cial plan­ning firm ipac, chair­man of the Aus­tralian Gov­ern­ment Fi­nan­cial Lit­er­acy Board and chief com­men­ta­tor for Money Mag­a­zine.

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