When it comes to money, the best approach is keep things straight and simple.
This article was first sent to Fools as part of 'The Good, The Bad and The Ugly' email series.
I've been working as a financial writer for 8 and a half years now and the biggest lesson I've learned during that time is the importance of simplicity.
All too often financial companies try to sell products with lots of bells and whistles that consumers don't fully understand. The sales pitch sounds good and people sign up for expensive, complicated products that often won't perform very well. In my opinion, the simple option is the best option most of the time.
Here are some examples:
With profits policies
I inherited some money in the mid-90s and my Dad recommended I chat to a salesman at an insurance company. This guy urged me to put my cash into a `with profits fund' that would `smooth my returns' so that I'd probably make money every year regardless of how the stock market was performing at that time.
I was pretty financially ignorant at the time, but some sixth sense kept me out of this one. Thank goodness!
Had I put my money in a with profits fund, it would almost certainly not have grown every year. Sure, at least some with profits funds had been able to deliver a smoothed performance during the 80s and 90s, but with profits couldn't withstand the force of the tech crash at the beginning of the noughties.
What's more, I would have probably suffered if I'd wanted to withdraw money before the policy reached maturity. In order to achieve the smoothing effect, the funds hold money back in the good years which they can pay out in the bad years.
As a result, a big chunk of the return for the holder is paid out at the end of the policy as a `terminal bonus.' If I'd withdrawn the money early, I'd have missed out on the terminal bonus.
I don't have space to talk about the high charges and the lack of transparency...
Funds of funds
Investing in unit trusts can be a daunting prospect. In the UK, there are around 2000 trusts to choose from - how on earth do you pick the best ones?
That's where `funds of funds' come in. You hire a clever uber-manager who spots the best funds and then spreads your cash across the best unit trusts. Sounds good.
Or maybe not.
The whole point of unit trusts is that somebody does the work for you and picks the best shares. But with a `fund of funds' you're paying for several expensive fund managers to pick the shares as well as another expensive manager to pick the funds. And yet, there's no guarantee that your fund of funds will outperform the stock market as a whole.
Why waste your money on so many managers?
Guaranteed equity bonds
Guaranteed equity bonds look great at first glance. They normally offer a guarantee that you'll get your 100% of your capital back at the end of the term with the prospect of capital growth if stock markets do well.
Trouble is, you're tied in for a period of years and can't withdraw your cash early. What's more, you normally won't receive any of the dividends that are paid out by the majority of companies on the stock market. Dividends are a big chunk of the return from stock market investment, so you're losing significant returns and flexibility in return for the safety.
It's all way too complex for my liking..
Three simple products
I prefer three simpler products. An instant access savings account, a cash ISA and the trusty index tracker.
If you have savings which you won't need for at least five years, then you should consider the index tracker. It's the cheapest and simplest way to invest in the stock market. There's no expensive fund manager to be paid, instead your tracker fund just mimics the rise and fall of stock markets.
True, the performance of tracker funds has been disappointing over the last ten years, but I think you'll see a better return over the next decade. After all, shares are cheap. And you'll receive all of the stock market's capital gain (assuming share prices do rise) and all of the dividend payout.
If you want a lower-risk option, look at savings accounts. There are same great accounts out there including the Egg Internet Only savings account which pays 6.55% AER including a 1.8% bonus for the first 12 months.
If you haven't used your ISA allowance for this year, you could also think about a Cash ISA. There are several ISAs out there that pay more than 6% and you won't have to pay any tax on your interest!
Keep it simple!