What Mum And Dad Investors Will Never Get

Mum and Dad investors getting ripped off is a recurring theme in New Zealand’s investment industry.

I used to have sympathy for these people. Now I wonder how they possibly accumulated enough money to invest while simultaneously being so ignorant of how the real world works.

You can only trust yourself with your money. Just because you have a financial advisor who came highly recommended or they work for a well known investment company, doesn’t mean you can back off 1 inch on the level of due diligence necessary on anyone who comes into contact with your hard-earned cash. Relying on credit ratings, fancy pants directors or “believable” returns is a shortcut to disappointment.

You can’t rely on anyone else to look after your money. Everyone needs to take responsibility for their money. You can’t outsource this stuff to someone whose incentives are not aligned with yours. If you can’t spend the time to read extensively about finance and economics, you have no business going outside of a savings account. There is so much cheap or free content on the internet about these topics you have no excuse not to be able to explain the trade-off between risk and reward or understand intuitively how fees impact compounding growth rates. No excuse whatsoever.

You can’t blame the government or regulators. It never ceases to amaze me that investors who stuffed up want the government to fix things for them. They want their money back, they want a government guarantee or they want justice. Newsflash : regulators don’t have much power, they rely on disclosure initiated by the people they’re regulating and don’t actively go out hunting for people breaking the rules. They’re only human and it’s plain silly to think they can do anything in the face of the incentives faced by investment industry operators.

What “mum and dad” investors will never get is that no one will help them but themselves. They can’t rely on anyone else and need to wake up to how the real world works.

Because of asset-price inflation, a lot of these “mum and dad” investors have suddenly found themselves with a spare $250,000 or more. This means that they could get wholesale investor accreditation if they ask their accountant nicely.

It also means they are ripe for the plucking when it comes to the shadier side of the investment industry. Lower regulation for “rich” or “experienced” investors is an invitation to the slaughterhouse for “mum and dad” types who could no sooner dissect a product disclosure statement than build a model to recreate the likely investment returns of the product they’re thinking of investing in.

You are living in a fantasy world if you think professionals can do anything more than inform your own thinking about investment opportunities. Even then, you still have to spend the time.

If you don’t want to spend the time necessary to educate yourself, don’t participate in the investment industry by purchasing products you can’t understand and writing cheques to people because they’re “good blokes”.

You can start by having a look at Khan Academy or Investopedia.

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