The public's trust in the financial service industry has been severely dented as a result of the ravages of the global financial crisis and the greed of sections of the financial services industry. Australia is doing much better, economically, than other developed countries. But 2009 has been a year where investors were reminded, to their great cost, of just how risky markets can be.

Sydney Morning Herald - 9th Dec 2009 - JOHN COLLETT

The public's trust in the financial service industry has been severely dented as a result of the ravages of the global financial crisis and the greed of sections of the financial services industry. Australia is doing much better, economically, than other developed countries. But 2009 has been a year where investors were reminded, to their great cost, of just how risky markets can be.

It was not just markets that were responsible for the worst investment returns in 70 years. It was the way that financial products were packaged up and on-sold to small investors. While the executives who dreamt up the products were richly rewarded, investors were left holding billions of dollars of losses.

The GFC has re-enforced some basic rules of investing that were pushed aside when financial markets were booming.

Here is the list of the 10 biggest things that the global financial crisis should have reminded investors about investing and dealing with the financial services providers.

1. There is no substitute for cash. Debentures are not cash, mortgage trusts are not cash and neither are most cash management trusts, strictly speaking, cash. Superannuation investment options called "cash plus" or "cash enhanced" are also not likely to be cash and there is always the risk of losing part of your capital.

2. Simplicity should be favoured over complexity. Avoid too-clever-by-half investments. You may not understand how they work and neither do most of the people selling them. Structured investments may or may not involve some sort of borrowing but you can be sure they have layers of fees. Complexity always works in favour of the providers.

3. Nothing's guaranteed. Avoid capital-guaranteed products as they are hardly ever worth the cost of the capital guarantee. The guarantee may have complex trigger points and the guarantee will only be valid if the investment is held until maturity. They invest in some risky markets and the providers need to offer the guarantee to get small investors to invest in them.

4. Don't invest for tax. Investing for a tax reason is almost always the wrong reason for investing - ask those who have lost money in the failed "tax effective" agricultural schemes. The one exception is superannuation - it is very tax affective and well regulated.

5. Be ruthless on costs. Some providers have developed fee-gouging into an art form. Favour simple products, where the costs are easily understood before you invest. Keep the costs as low as possible. The costs may be given as a small percentage of assets but they compound over time.

6. Don't put all of your eggs in the one basket. Higher promised return always equals higher risk of losing your money. The only way to offset those risks is to diversify across assets.

7. Put yourself in the driver's seat. In any relationship with a financial services provider the investor should have the upper hand. Pay fees rather than commissions to advisers.

8. Always ask for a discount. Advertised rates are just that. Don't be afraid to ask your mortgage lender for a better deal. That is especially so when it comes to selling your house. Real estate agents will discount their fees more than you think.

9. Prefer listed investments to non-listed investments. Listed markets can fall very quickly but at least it is more transparent than an unlisted investment, which may only be valued once a year and where your capital may be locked away if there are problems.

10. Don't be a guinea pig. Australia is a testing ground for all sorts of investment products. Risky investments that are not allowed to be sold to small investors in the US or Britain can be sold here. Look for a good track record in all market conditions from a provider that's likely to be around for the long term. Stick to the tried and proven. Leave the smart products to the smarties who can afford to lose their money.