Don’t trust movie stars: How to avoid common investing mistakes

Newbie investors can avoid being sucked into dodgy celebrity-endorsed products, overly complex schemes and other common investment pitfalls by following a few golden investing rules, experts have said.

Recently, many over-hyped and under-regulated investment schemes have suckered unfortunate investors who believed they were on to the “next big thing″⁣. In 2022, Australians lost hundreds of millions of dollars to investment scams, with a number of those related to relatively new asset classes, such as cryptocurrency.

Lindsay Lohan and Jake Paul recently agreed to pay fines for crypto endorsements.Credit:AP

For any potential investment, alarm bells should ring when you’re promised outsized returns, says Chris Brycki, founder of online investment adviser and fund manager Stockspot. Higher returns always entail taking more risk, he says.

Brycki favours investments that are simple over those that are complex, as it is easier for providers to take advantage if the investment is complex. “You should not invest in things you do not understand,” he says.

Richard Felice, financial adviser and co-founder of Belay Advisory, says information provided about investments has to be transparent and readily accessible. Investors should look at the track record of the investment and ask themselves if the investment earns its keep after fees, costs and taxes.

“If it has a convoluted fee structure that you do not understand, keep away,” Felice says.

Celebrity endorsements

Celebrity endorsements should be another red line, Stockpot’s Brycki says. Whether it is crypto or anything else, if it comes with endorsements by actors, rappers or sports stars, investors should be highly dubious.

Last week, actress Lindsay Lohan, YouTube personality Jake Paul and several other celebrities agreed to pay tens of thousands of dollars to settle claims they promoted crypto investments to their millions of social media followers without disclosing they were being paid to do so.

But endorsements don’t necessarily need to be from A-listers. Investors should also be careful about ‘finfluencers’ who give advice on social media but are not licensed to give financial advice, says Andrew Heaven, an AMP financial planner with WealthPartners Financial Solutions.

Legit investments

A legitimate managed investment being offered to Australian retail investors will have a product disclosure statement (PDS) that explains exactly what is being invested in.

“The PDS is not just a door-stop,” Heaven says. “It explains what the fees are, where the money is invested and what the manager is aiming to do on [investors’] behalf.”

Jonathan Philpot, wealth management partner at HLB Mann Judd, says you should be wary of “blue sky” investments.

Experts say people shouldn’t fall for celebrity cryptocurrency scams.Credit:Bloomberg

That includes crypto, where it is difficult to identify what fuels its price movements other than investors buying the hype and believing its price will go higher, leading to more investors to joining in.

Easy to understand

“Beware of exotic investments, unless you are a real specialist in that area; there are a lot of shonks out there that take advantage of people that really do not know,” Philpot says.

Belay Advisory’s Felice says exchange-traded funds (ETFs), as well as being good for experienced investors, can also be a good way to gain experience in investing.

ETFs are listed on share markets, such as the Australian Securities Exchange, with their units bought and sold just like shares. There are those whose unit prices track the performance of the largest 200 or 300 Australian listed shares, for example, and tend to be very low cost.

Younger investors are not likely to need the income produced by an investment. Some ETFs, for example, allow the income they pay to be periodically re-invested, where the income is used to buy more units in the ETF with no brokerage or other costs.

Compounding power

Re-investing the income from an investment can have a powerful compounding effect on growing the investors’ money, over time.

Diversification – not having all of your eggs in one basket – is also important, rather than taking single bets, with the mix of investments depending on your investment objectives and time frame, Heaven says.

You need to be conservative with money you are saving for your European holiday, say experts.Credit:Alamy

“If this money is for your big European trip in six months’ time you cannot afford to take any risk with the money; whereas if it is money for a deposit for a house in five years’ time you can likely accept some level of risk,” he says.

If you have a longer time frame for investment and can live with some risk, some share investments could be added to the mix, Heaven says.

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• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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