Investing fundamentals #9 – Understand your investments

In the penultimate blog in a series about the ten fundamentals of investing, I explain why investors need to understand their investments.

When funds go wrong, it is often because the investor did not understand the investment.

We have seen plenty of examples of funds which can be best described as too good to be true, investing in exotic assets which the fund manager, let alone the investor, could not possibly understand.

If you are going to commit your money to an investment fund, you should know where the fund is investing and what type of underlying assets the fund will purchase.

Take time to read the Key Investor Information Document (KIID) provided by every fund as well as any marketing material produced by the fund manager.

If an investment seems too good to be true, it usually is. Funds claiming to offer a high return with minimal risks are pure fiction.

Investors are often stung by high risk funds attempting to mask these risks with fantastical marketing.

Sticking to ‘boring’ funds often makes sense, as these are unlikely to invest in risky esoteric assets.

Sticking to tried and tested investment strategies with exposure to investment types you can readily understand will still produce the returns you are looking for, without the risks associated with untested and high risk funds.

Read about all ten investing fundamentals by downloading our free guide:

The Investing Fundamentals Guide 2014