If you don't understand it, stay away from it

An article by ASIC Chairman Jeffrey Lucy, published in The Daily Telegraph in April 2006.

I always say, if you don't understand what you are investing in, how it works, and what the risks are, leave it alone.

Before handing over one dollar of your hard earned savings to any investment scheme, make sure you understand the basic principles of good investing and how to evaluate the associated risk.

When investors come to ASIC about money lost in a scheme, it often emerges that their understanding of what they were putting their money into is hazy, and that they had handed their money over despite being unsure about a number of aspects of the scheme. Make sure you understand the key features of an investment such as knowing exactly what you are investing in, how the return is generated, whether the returns rely on new investors being drafted into the scheme, and whether it is easy to withdraw from the scheme without incurring penalties.

Too often, ASIC sees failed schemes where many investors did not fully understand the risks and the basics of how the scheme operated. Borrowing money to invest in something that's already pretty risky, like property developments, can pour oil on the flames.

If you have tried to understand the investment, have read through the material and listened carefully to what you are being told, but still can't really understand it, it is probably because the investment hasn't been adequately explained. That is reason enough to stay away from it. Sometimes the lack of understanding stems less from a lack of financial knowledge than from either a poorly designed product, poorly drafted disclosure, or even worse, deliberately vague material - the latter is often a sign of a scam in ASIC's experience. So if you don't understand the offer it's not necessarily your fault - it may be that the disclosure is poor or it is deliberately vague, both of which are reasons you should not invest.

Investments sold at shopping centres, over the telephone or at highly charged seminars should be either avoided or considered afterwards, when you have the time to understand what the documents say and when you can obtain advice from your licensed financial adviser.

Investing doesn't have to be difficult or daunting. There is clear and straightforward help available from licensed advisers that you can feel comfortable and confident in.

Further reading

Last updated: 01/04/2006 12:00