IF YOU look at some of the world's most successful companies it's pretty clear they typically provide products or services that are straightforward, functional and conceptually easy to grasp. And that's exactly what you should look for in an investment.
Experience has taught me that in life and investing, the simple things are often the best.
Take Coca-Cola, a simple soft drink found worldwide. Or Apple's products, very sophisticated bits of gear but fantastically user-friendly. Closer to home we have companies such as CSL, Woolworths and BHP that are established businesses with products that are easy to understand.
At the other end of the spectrum, I regularly receive marketing material inviting me or my clients to hand over our hard-earned cash for some scheme or other that is so complex or obscure no reasonable person could be expected to understand it.
And that's when my alarm bells start ringing.
Trying to explain what you've sunk your money into may make for impressive dinner party conversation, but it's never a good sign if you have to make a serious effort just to figure out the basics of how you make money from it.
Despite this, I still see very complex "investments” being heavily marketed to ordinary investors. I'm thinking of Bitcoin, foreign currency trading, contracts for difference and other types of derivative trading just to name a few.
Simply because something is complex doesn't mean it is good. If you come across an investment that seems impressive purely because it's complicated, try this litmus test: Have a go at explaining how it works to someone else. If they don't know what you're talking about, then chances are you don't either and I suggest you pass it up. After all, with around 2000 listed Australian companies, just as many managed funds, and untold numbers of investment properties on offer, there's no shortage of assets - many of which are straightforward - to invest in.
It makes a sensible rule of thumb, "if you don't understand it, don't buy it”.
If you struggle to understand how an investment works, it's a fair bet you have almost no chance of knowing what could go wrong and how you could lose money.
Keep it simple and it's harder to go wrong.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.