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.