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Beware the lure of the exotic

Exotic attractions

Some people find complicated financial products compelling – especially advisers peddling a hot new fund for commission.

If there’s a whiff of the exotic thrown in, so much the better.

A person who knows nothing about Indonesia, Brazil, or South Africa will confidently tell you that these countries offer much better returns than the domestic market. Ask them why and they’ll point to our aging population, political sclerosis, or rising public debt.

They know nothing about the problems of their alternative countries. It’s just that the exotic unknown is more attractive than the all-too-familiar reality at home.

Overseas investing is a good idea – but as part of a diversified portfolio, not as a punt on crackpot Internet theories about the demise of the West.

Others think complex products and ambitious strategies must be superior to a tracker fund. Why shouldn’t they be? More expensive computers are better than cheap ones. Famous lawyers are superior to also-rans. Investing is counter-intuitive in how paying more usually means worse results.

At best, such people will waste money in active funds with high fees, or absolute return funds that cap returns and rake off the upside but that don’t entirely protect the downside.

At worst, they’ll put money into the next Bernie Madoff-style Ponzi scheme because they hear other clever people are doing so, and because the fact that it’s a black box makes it more attractive, not less so.

We all love mysterious strangers

Generally, it’s best to keep things simple when investing. When you become more interested in wealth preservation than in growing your nest egg you might try some risk-aversion strategies, but in your core saving years a simple ETF portfolio is probably your best bet.

Whatever you do, avoid rushing into exotic funds just because they sound sexy.

Of course, nobody puts money into something just because it sounds sexy. That would be dumb. No, rather like a country maiden stumbling into the path of Don Juan, they fall for the sexy talk:

  • The fancy brochures or snazzy website
  • The impressive back-tested returns
  • The puffy articles in the financial press
  • The high-blown talk of commodities or futures or frontier markets
  • The nifty name dreamed up by a guy with a cool hair cut

Most of this stuff is just pretty words. There’s nothing really new under the sun in investing. If complicated strategies were better, we’d know already. What we do know, rather, is that passive index tracking is usually best.

An example of how the unfamiliar is appealing

It’s easy to be swayed by the superficially different. To discover how I was fooled recently, first watch this advert from Shell:

I loved this when I first saw it. The combination of exotic location, mysterious utterances, and those surging guitar riffs made my spine tingle.

So you can imagine my disappointment when I did a bit of research via Google and found the truth rather duller than the fictional reality.

What does Mr Ohashi utter to his wife, I had wondered? “I fear the return of Godzilla,” perhaps? Or maybe: “Will this day end in darkness?”

No. He just says: “What is he doing?”

And what about the sage, sweet murmuring of his wife?

She says: “It’s because he’s a kid.”

Not much poetry in that.

Finally, I used Shazam to discover who recorded the guitar riff. I expected to discover some incredible Japanese hardcore band, but it was actually recorded by a U.S. novelty group called Green Jelly. Worse, it’s just a version of the children’s song The Bear went over the mountain, to see what he could see. (He sees the other side of the mountain…)

If this advert was filmed in Croydon, in English, with the music shaking a pair of old Charles and Di wedding mugs and the music replaced by Slade singing Humpty Dumpty, then nobody would buy it.

Think about that next time you’re tempted to put money into some complicated, exotic sounding financial product on the back of its mysterious charms.

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{ 9 comments… add one }
  • 1 Doug Warshauer July 15, 2010, 12:27 pm

    I think you’re right on target. Well done.

  • 2 Aury (Thunderdrake) July 15, 2010, 7:22 pm

    I’m not sure if I can really say the decline of the western world is really a “theory.” Especially given the debt the US racked up. Here in Canada? I think we’ll feel some pain, but it wouldn’t be catastrophic.

    But I don’t let these economic trends really distract me from what I already know. Overseas investing is something I do not understand, so I wouldn’t pursue it. I’m particularly savvy with bearish stock strategies and precious metals, so I stick to them regardless of the market climate.

    Which is an interesting duo. Stocks do well in prosperity, while precious metals do well in calamity. But that’s what also makes stocks rather pleasant. Being able to capitalize on these declines. From a pragmatic standpoint, more money is to be made capitalizing on bear markets. the 15 minute dow plunge is a great example of this.

    I think I’ll stick to domestic trends myself. 😛
    .-= Aury (Thunderdrake) on: 7 Reasons why I HATE mutual funds =-.

  • 3 Money Funk July 15, 2010, 9:48 pm

    Bit of rock n’ roll info… Green Jelly was formerly named Green Jello until they were being sued (what-eve’) by Jello and they put on a fantastic show with equally an equally fantastic stage presence. I remember fondly… 18, living in San Francisco…my hair was previously died red (yes, fire red), which I tried to bleach out. And since my hair was also showing roots…it turned to a nice shade of yellow and peach. Felt like a flower. LOL. Oh, this is how I looked during their concert.

    And that is funny with the commercial. I was allured, too.
    .-= Money Funk on: Keeping your Pet Safe with Spot-on Flea &amp Tick Control =-.

  • 4 UK Value Investor July 16, 2010, 10:47 am

    My in-laws came into a sizable sum a few years ago due to a road accident. After they told the bank that they’d like to invest some of it I happened to be at their house when the ‘advisor’ turned up. I could not believe the twaddle the bank were offering. No simple tracker for for this almost retired couple, no. Nor a simple stock bond split based on their age etc. Nope. They were offered all kinds of things with leverage (if the stock market goes up 50% your investment goes up 100%!) and things that had guaranteed payouts if the market went down by 50% or so. All of course with at least 5% up front costs and annual fees in the same ball park.

    Afterwards I said what I thought (just stick it in stock and bond trackers split by 100 minus your age or something similar) and forget about it. However, for a non-investor even that can sound scary and complex so they left it with the experts in the bank.

    How can investors be rational when they know absolutely zero about investing?

  • 5 Greg McFarlane July 16, 2010, 7:00 pm

    Another grand slam for the Monevator. I wish all personal finance bloggers could turn phrases so eloquently.

    The provincialism I see in the United States and Canada is staggering: I can only assume it’s part of the human condition, and thus similar throughout the world. An acquaintance recently told me that by virtue of America having “the worst financial regulation in the world”, she was only going to invest in foreign countries. Not only did she never specify which countries – I guess it didn’t matter, every one being an improvement over the U.S. – but I never had a chance to ask her what made the regulatory climates in Cape Verde, Tajikistan and Bhutan superior to the American one.

  • 6 The Investor July 22, 2010, 6:34 pm

    @Greg – Yes, your friend sums it up. I certainly think some international diversification is important, but knee jerk comments like hers are exactly what the fund management industry preys open. (Also, thanks for the generous words!)

  • 7 The Investor July 22, 2010, 6:36 pm

    @UKVI – That sort of thing makes me furious. Every now and then a financial adviser pops up on the Swindlers and Leeches post and says I’ve been too harsh. Well, maybe they’re the exceptions but the rule is pretty well established. 🙁

  • 8 The Investor July 22, 2010, 6:38 pm

    @MoneyFunk – Wow, that’s some deep knowledge you have there of the West Coast rock scene! From club flyers to frugal in two decades, eh? 🙂

  • 9 The Investor July 22, 2010, 6:41 pm

    @Aury – It’s definitely a theory: I can say it, and I am saying it. 🙂 The debt to GDP ratio is on a horrid trend in the US, but the assets of US citizens, companies and even the Government dwarf those debts. The US is far from bankrupt. I’m not saying it’s impossible it could be some day, but it’s more likely to go into gentle decline like the UK if it does lose some of its power.

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