investment portfolio

When you’re investing your hard earned cash, the first and most important consideration is to not lose it!

This doesn’t mean that you won’t experience ups and downs in the value of a portfolio, that is part and parcel of investing in assets whose value is only certain at the time of sale (eg, shares or a property). When I talk about not losing your capital I’m talking about avoiding the investments that are nearly certain to cost you money. These are normally some combination of:

  1. Promises that are too good to be true; and
  2. Risky assets dressed up to look like they are the same as or close to a safe asset.

A good financial planner can help you avoid these two wealth traps. You might be able to identify them yourself, the clues are usually available in publicly available disclosure documents. But if you’re not sure where to look then the money spent on financial advice could save you from significant loss of capital.

I have a very good example of wealth trap #2 which I will share with you. I won’t name this fund, but there are a few reasons I’m worried about it.

1. They are advertising directly at investors seeking information about cash and term deposits

The fund in question has purchased search keywords that mean people who are looking for highly secure assets such as cash and term deposits, will see advertisements for their fund.

2. They make inappropriate comparisons of fund returns

All of the marketing material for this fund shows how their returns compare to the Reserve Bank of Australia (RBA) cash rate. It’s a completely inappropriate comparison to make. The RBA cash rate is the rate that banks lend to each other in the overnight money market, and is highly influenced by the rate that the RBA will lend to them at – it is a measure of highly secure investments.

The assets that this fund holds are not the same as very short term bank deposits. They’re comparing apples and oranges (and their apples might be rotten!)

3. The underlying assets are poorly explained

The marketing suggests that the fund invests in Australian home loans. An inexperienced investor could easily take that to mean it is just like their own home mortgage, secured by a residential property, possibly with a significant equity buffer between the property value and the loan owing. Certainly the main marketing material such as the web site and the glossy pages of the disclosure statements emphasize the very basic message.

But if you jump into a combination of disclosure documents, you’ll find that what the fund holds are Residential Mortgage Backed Securities (RMBS). Importantly, these securities have different ‘tranches’ which come with different levels of return and risk. These are not invalid investments but they have a much greater level of complexity than suggested until you dig a little deeper.

In summary – I am not saying that the fund in question is a bad investment, I’m just saying that it’s not as straightforward as it appears. Some investors could mistake it for being like a term deposit with a reputable bank, when it’s not really like that at all.

So quite simply, if you don’t have the time, desire, or background to evaluate an investment properly for yourself, consider seeking advice on which investments are a good match for your needs. The most important first step in selecting the right investment is eliminating the wrong one!