Don’t understand? Don’t invest!

A fairly simple rule to follow in order to avoid problematic investments is to only invest in what you understand.

It was refreshing to read comments in Investment Week magazine this week from two fund managers who are refusing to invest in commodity giant Glencore due to not fully understanding the business model.

Graham Ashby from LVAM and Paul Mumford from Cavendish are both reported as saying they would not currently invest in Glencore, despite a 13% drop in price since listing on the London market in May.

Ashby refers in the article to Glencore being “an enormously complicated business” where it is “virtually impossible” to work out where revenues are coming from.

Transparency is important when it comes to investing money.

By sticking to transparent investments and steering clear of opaque financial vehicles with complicated structures, investors can gain exposure to relevant asset classes without taking undue levels of risk.

We often criticise investment schemes for their lack of transparency and their complexity.

Simple, proven investments are usually the best. They rarely cause any real problems for investors, as their returns are transparent and predictable in relation to market movements.

When you introduce complexity to an investment, you often introduce a variety of additional risks including liquidity and fraud.

Photo credit: Flickr/Liz Henry