Sir Richard Branson once famously said, "Complexity is your enemy. Any fool can make it complicated..."
I believe this is especially true when it comes to off-farm investing. Many inexperienced investors falsely believe that the more complex or fancy pants their investments are, the better their return will be. Sadly, in most cases, the exact opposite is true. Added complexity almost every time adds risk and cost to the strategy, without necessarily providing a greater return.
Don't get me wrong, when investing there is always going to be some level of complexity. My point is that the more complicated something is, the more moving parts there are and the more chance that something will break.
It's been my experience that often a big part of the reason an investor loses money permanently, is because they have invested in a product or strategy that was extremely complicated or complicated enough that they truly didn't understand what they were doing and the risks involved.
Understanding the investments and therefore knowing the risks you are taking allows you to manage them or at least have a plan B if things don't go to plan. Unfortunately, when you are not a full-time investor or when you don't have years of investment experience under your belt, then it is very hard to understand all the moving parts involved.
I want to be clear that this doesn't just apply to investments you have researched and chosen yourself. It can also apply to those investments that you have been recommended to invest into by a friend, family member, accountant, property salesman, financial adviser or any other professional.
I want you to think about it this way: Too much complexity when investing off-farm is like owning a Ferrari. They are an amazingly complex piece of machinery, they go incredibly fast, they stop quickly, look great and sound amazing (if that is what you are into). Many people dream of owning one. The fact is, that when something goes wrong, it really goes wrong and can cost you another small fortune to fix.
So how do you tell if an investment is too complicated. Well, a good place to start is if you don't understand it or the person advising you can't explain it well enough for you to understand.
If that happens, I am not saying you shouldn't invest, you just might need to spend some time asking more questions to get to know the strategy and the risks involved. If you still don't understand it then you might like to remember what one of the world's most successful investors Warren Buffett said: "I want to be able to explain my mistakes. This means I do only the things I completely understand."
Sometimes being a successful off-farm investor is as simple as making sure you always invest simply!
- Ben is an authorised representative of Charter Financial Planning. This article offers general advice only. You should seek advice tailored to your particular circumstances before taking action.