By James Saft
(Reuters) – It is perhaps the single easiest rule of thumb in investment: favor the simple over the complex.
Complexity, whether it be in a strategy or in a financial product, makes investors vulnerable: to being overcharged, to misunderstanding risks and to being unable to exit the position easily and economically.
To understand why this is true, on so many levels, look no further than JP Morgan’s chief investment office disaster. It involves a trading position which, despite being put on and overseen by people who ought to be the best in the world, landed the bank with a loss that is almost literally unquantifiable.
The advice that Morgan shareholders wish the bank had followed holds true for individuals as well: don’t invest in anything you can’t understand.
In fact, take it a step further – if you have to even consider whether you understand an investment, just walk away.