The recent news about Goldman Sachs being charged with fraud reminded us of the importance of understanding what it is you’re investing in and avoiding complex investments.

A Wall Street Journal article titled “U.S. Charges Goldman Sachs With Fraud” (Saturday, April 17th), stated that Fabrice Tourre, a Goldman Sachs’ Vice President was responsible for creating a complex financial product called “Abacus”. The article reported that the Securities and Exchange Commission (SEC) found that Mr. Tourre had written in an email that “the whole building is about to collapse anytime now” and that Tourre described himself as “the only potential survivor, the fabulous FAB…. Standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Investors in the “Abacus” product reportedly lost one billion dollars. Very likely, some of them were looking for a silver bullet and blindly invested in a complex product that carried more risk than they realized.

Just before the tech-stock bubble burst, Warren Buffet was criticized for not including tech stocks in his Berkshire Hathaway portfolio. The price of his “A” and “B” shares dropped accordingly. When asked about why he didn’t invest in tech stocks, he stated that he didn’t invest in them because he didn’t understand them. He’s a firm believer of understanding the businesses he invests in. Many of the companies in the Berkshire Hathaway portfolio are anything but flashy, high-tech companies. His long-term returns were recently reported to be better than 20% annually for the last 40 years!

When hedge funds became the latest craze, we avoided investing in them ourselves and never recommended them to clients. To be honest, we have never felt we fully understood how they operated. The lack of transparency, high fees and lack of regulation added to our concerns.

We believe most investors will do well to avoid investing in anything complex. Having a knowledgeable financial advisor can certainly help, yet great care must be taken in choosing someone truly knowledgeable that can be trusted to act in your best interest. (See our previous blog titled “Is Your Financial Advisor Acting in Your Best Interest?”)

In summary, keeping things simple can avoid lots of problems and make life less stressful. Most assuredly, there are financial gurus out there designing the next exotic complex investment that will be hailed “a sure thing”. Our advice: Avoid it like the plague!