Paul's Insights: Investments should pass the pub test

An investment doesn't have to be complex to be good, and if you're about to tip money into something, make sure it passes the pub test.
By · 29 Apr 2019
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By · Chairman ·
29 Apr 2019
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Following an investigation by investment watchdog ASIC, Citigroup recently agreed to refund over $3 million to customers who’d copped losses on a type of investment called “structured products” between 2013 and 2017.

If you’re not familiar with them, structured products are a complex market-linked investment. The return is generally based on the performance of a particular group of shares, or share index, and in some cases, the investor’s capital is at risk.

If this sounds complicated, that’s because it is. Structured products have been likening to punting rather than investing, and a colleague of mine who has experience with these products, says they can be very convoluted, often making it challenging for ordinary investors to fully grasp how they work.

ASIC’s issue is that these products were sold to customers without proper advice. For the record, Citibank stopped selling structured products in early 2018, and it has pledged to contact customers who still have money tied up in these products, and give them a chance to bail out early without cost.

The main point however, is that when it comes to investing, the simple things are often the best.

There are plenty of guidelines we can – and should – follow as investors, like don’t try to time the market, and spread your money across different investments. But the simplest, and arguably most important, rule of thumb is to only put money into something you understand.

If you can’t easily explain to your partner or a mate how you could make – or lose – money on an investment, then you don’t understand it, and you’d have to be a mug to tip cash into it.

Unless you regard yourself as an experienced investor, you could be better off sticking with mainstream investments – cash, property and shares, or managed funds that invest in these, rather than something a little more exotic.

That’s not to say these three investment classes assets are failsafe, far from it. It’s just that they are generally a more proven way of generating wealth. And there is plenty of information available so you can compare returns over a period of time and make a reasonable investment decision.

There’s nothing flashy about the approach of “If you don’t understand it, don’t buy it” but it’s not a bad rule of thumb to follow.


Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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