Product Selection

The Perils of Product Selection

Choosing the right investment is a thorny problem, and everyone wants to find the perfect high return low risk “sure thing”. But, as all the products say, “past performance is not an indicator of future results”, so how do we choose good investments without consideration of the past?

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Past performance

I think it's very difficult to move beyond past performance as an indicator when it's the most reliable piece of information we have. Although we can research a company to evaluate the likely value of its shares, our ability to predict the future is limited, and in some cases when we do have solid information about the future of that company, using that information to buy or sell shares is considered insider trading.

In addition, the Australian Prudential Regulation Authority (APRA) evaluates the past performance of super funds in order to make its assessment on underperforming funds. So clearly past performance is important, but it's not a guarantee of what could happen in the future.

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The basic test

If we want to do a very basic overview of an asset we're thinking about investing in, whether that be an ETF, managed fund, share or property, there are three elements we will want to consider:

-        anticipated return (while understanding this isn't guaranteed)

-        anticipated costs (brokerage, management fees, cost of owning the property)

-        level of risk

Once we have this information, we have a good basis for considering the problem of how to narrow things down even further.

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Personal preference and subjective opinion

In my opinion (ha!) this is the most interesting part of investment. We already know that when we donate to charity we are supporting a cause which is meaningful to us. Buying into an investment contributes to the value of that investment – the prices of shares, ETFs and property are all directly influenced by the demand for that product.

So the question becomes “what do I want to support?” as much as “what do I believe will increase in value?”

We are seeing an increase in people choosing to invest in industries and companies whose corporate policies align with their ideological positions on human rights, environmental preservation or social action, all of which are legitimate and valuable reasons to make a decision. If you were going to consider two companies which had roughly the same risk level and net return on investment, doing an additional layer of research to find out what the company's policy is on environmental impact, gender and racial diversity of employees, and past political donations is not an unreasonable way of making that decision. Your investment will support the business activities of that company, so why not make sure that it's a company you want to do well?

It's also worth considering if you like the product that company produces. If it's a company you have dealt with which has provided excellent customer service, or created a great product you'd recommend to your friends, then investing in something you have faith in makes sense.

It's good to remember that investing is a two way street – we invest to benefit ourselves, and our investment benefits the underlying asset. Investing mindfully with a view to both of those outcomes creates positive outcomes for us as individuals, as well as an economic incentive for companies to make the changes we want to see in the world.

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* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.