(The following is a column by SFP Certified Financial Planner Dan Serra that appeared on the McClatchy-Tribune News Service wire June 13, 2010).
This time of year always brings unwanted guests in my home. Not relatives, but insects. It’s peak time for flies and mosquitoes as the temperatures heat up. Determined to remove the pests, I visited my local big-box home store on a simple mission to buy a fly swatter. Once there, I was overwhelmed by all the gadgets for killing bugs. The technology invested in defeating pests is amazing, from zappers to traps to supersized citronella candles. But did I find a fly swatter? Nope.
Being a financial planner, this led me to thinking how often investments are complicated even though investing should be simple. All sorts of products have been developed to confuse us and rip away our confidence in putting money in a certain investment. My grandparents had simple options. Everything was done at the local bank. Now there are mutual funds, annuities and exchange-traded funds in all flavors. What’s an investor to do?
If you make a simple investment – a fund or fly swatter – things are a lot easier and the instructions a lot shorter. Not to mention the dangers of not knowing what you are buying.
How can an investment be simple? Start with the fee it charges. The lower the fee the more likely it will be simple. An exchange-traded fund invested in a set index of small companies will have a lower cost than a similar fund managed using a system developed by a so-called investment guru. That’s because you are buying something that requires little maintenance, won’t break down and is easy to operate – just like the fly swatter.
Second, investments that clearly spell out what your money is invested in and how make things easier. The prospectus for a bond fund will list the bonds so you know what is being bought and how much. More complicated investments list where the money is going but if they frequently change, the cost is likely to be higher, and the investor may not know what the investment is holding today. Funds that index investments seek to maintain a percentage of an investment without jumping in and out of different investments. This keeps costs low, too, because you don’t have to worry about replacing investments – just like the zapper that will eventually break or need a part. How many fly swatters break down?
So the next time you look at an investment, ask yourself are you buying the high-tech complicated gadget hoping it will work, or are you sticking to the tried-and-true fly swatter?
