We believe one of the key steps of investing is to keep the investment of your capital as simple as possible.
However, and make no mistake about it, there are still many salespeople out there who are determined to invent all types of ‘special’ investments that they can sell to you and make a lot of money out of.
Hindsight, of course, is a wonderful thing! Here is a recent comment from the Financial Services Authority (FSA) about one type of investment:
“Traded life policy investments are high risk products that should not be sold to the vast majority of retail investors in the UK”.
These have been heavily promoted by certain organisations over the last decade. The way they work is they invest in the life assurance policies of US citizens and receive insurance pay-outs on their deaths.
A huge problem here is that returns could disappear if the policyholder outlives expectations!
Clearly this is closer to gambling than investing, and yet it is amazing to see that this market in the UK has reached £1bn.
We strongly agree with the FSA here and hope that any new rules will clearly state which type of investments are suited for the general public and those which are most definitely not.
Similar news appeared in the Daily Mail:
“Cautious savers are being lured into gambling half-a-billion pounds every month on risky and complicated stock market investments promising returns of up to 10.5% pa.
More than £1.3billion was poured into complex investments, which were sold by High Street banks, building societies and financial advisers in the first two months of the year.
These investments often sport solid-sounding names such as Fixed Term Capital Secure Investment or Capital Protected Fund, and promise returns linked to any rise in the stock market.
However, if the investment fails to hit its target, you usually don’t get any returns. In some cases, you can start to lose money. And only a few of these types of investments are protected by the financial services safety net if the bank goes bust.
More than £53billion is tied up in these types of investment, which are known as structured products.
If recent average industry growth continues, it could reach an estimated £58 billion!”
On a related note, we recently read comments from a well known financial planner on the Financial Services Compensation Scheme.
This is a fund that all advisory firms have to pay into, and amounts to tens of millions of pounds a year. The aim is to be able to use this fund to compensate investors for failed investment schemes.
The point he makes is that although he has to pay a lot of money into this fund, when you look at the types of funds that have failed, he has not recommended any of them. It would of course be fairer if the ‘polluter paid’, but we won’t hold our breath…
Key Considerations:
The key point with any form of investment scheme is that you, as the investor, should understand in detail how it works. One way of testing this is to see if you are able to explain how the scheme works to your partner, spouse or close friend. If you can’t, then it may not be right for you.
Of course, assuming you do understand where your money is being invested and how the investment works, it may well be the right decision to proceed.
Action Point
Do you really understand where your money is invested?
Have you invested in any form of scheme without doing due diligence?
Do you know what lies ‘under the bonnet’?
Why not take action now and analyse where all your money is invested to make sure that the risks you are taking are right for you and that the products remain suitable at this moment in time?
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