2011 has been a tough year for investments.
Or perhaps it is more accurate to say that 2011 has been a tough year for the economies around the world and that has left investor confidence at a low ebb.
The saying that “if we don’t learn from history we are condemned to repeat it” is apt.
What did we learn from 2011 and which investments should we avoid in 2012?
It doesn’t do what it says on the tin
Imagine an investment product that offers “low risk and high returns”.
The glossy brochure lures you in with the promise of an investment return consistently higher than the interest you might earn on cash.
It talks about a return some 3-4% higher than you will get by leaving your hard earned cash in a bank or building society account, but at the same time reassures you that it is low risk.
You examine the underlying investments and see such things as Private Equity and Private Finance dominating the mix of assets.
You may further be reassured that the provider of the product has some clever and innovative techniques for marrying up the two conflicting ideas of low risk and high reward.
Confused? You should be!
But sadly many clients and quite a few advisers seem to have been taken in by this heady mix- think Arch Cru.
You read the material but it is really difficult to understand
If you don’t understand it, don’t buy it.
We have a simple philosophy at Informed Choice; if we don’t understand how the investment works then what right have we got to recommend it to our clients?
Some of the opaque products out there probably are not all bad but if I am not prepared to put my money into them then I am not going to suggest that you do.
The typical adviser defence that they did not have the resources to do the due diligence on such products is really no defence at all. No adviser should recommend to you a product they do not fully understand.
Cash
Cash is not an investment. It is savings.
Saving in a cash account in the long term is not the same as investing your money.
Sure, it makes sense to have some of your money (for an emergency fund, to pay known bills in a known time frame, to spend and to give away) as cash but don’t confuse interest earned on savings with capital growth and income available from investments.
That said if you are very cautious stick with cash – you will sleep better at night!
Leave alone rebuke
Stay well away from any investment that you do not intend to review in the future.
I can tell you with a great deal of confidence that it will go wrong.
If you don’t intend to review at least yearly, or pay an adviser to do that for you, don’t invest in the first place.
It is a bit rich for your blood
Only invest in a way that enables you to match your financial planning goals with the investment. Do not take more risk with your money than you need to.
Work out based on the term of the investment the amount of growth that you will need and that will determine the amount of risk you need to take to get the result you are looking for.
If the degree of risk that is required is to much for you then take less risk and work out how you are going to get by on less money – simple really.
Photo credit: Flickr/Horia Varlan
