In today’s article we want to talk to you about why investors are so often drawn to investing in overly complex schemes and some of the potential dangers in doing this. We believe there has long been a pattern in investors actually favouring investment schemes that are more complex. This really should be the opposite, when you consider that usually greater complexity often means a bigger headache…and that is just in figuring out the thing. So, take crypto, for example….does anyone actually know what it is? Sure, some have what they might say a fair idea about it….but when you are investing your hard-earned money into something, do you really want to have “a fair idea,” or do you want to have a solid understanding of the product that you are investing into, so that you can actually do your diligence. Regulators are actually saying that crypto is like investing in the Wild West.
We have been operating for over nineteen years now, and we see similar things going on in short-term business lending. Some of our competitors that are from banking backgrounds love to complicate things for their investors and sometimes even the client too. A lot of these lenders have overly complex structures in place that make it difficult to even understand how you make your returns. It is almost as though, if they have a difficult degree in finance, they want to make themselves look more impressive. We are not sure what they are trying to prove, but we do know that this does not actually serve the investor well.
In fact, usually if something is very complicated in investing that is actually a red flag. It is the same with getting a loan. If you do not understand, for example, what your interest repayments are that you will owe on the loan, then that is a huge red flag and a sign of a loan shark. Still people seem to be drawn to these overly complex investment schemes. We think it’s a real shame and something we find difficult to watch, because we know it does not need to be and should not be that way. What we have observed tends to happen is that when someone comes off as well educated and uses a lot of complex spreadsheets and explanations, the investor gets a false sense of security that they must be in good hands. When really what has happened is that the whole thing has gone over their head completely.
So, then the investor finds themselves sort of falsely agreeing with them and subsequently, they give the lender way too much power. The truth is that it is never a good idea, when the investor cannot understand the process, or what they are really investing in. Making things overly complex can actually be bit of a guise too and even a strategy. The reality is that if they are using complex formulas and explanations and you don’t understand them, then you don’t even know if they are correct. You are really just taking their word for it. Unfortunately, in industries that are about making money, people’s motivations are not always honest.
Investors do not realise that if something is going over their head, then there is a problem, because the lender should be able to break it all down for you. It is completely reasonable and necessary for them to give you explanations that are easy to understand and straight forward. It says a lot about the lender when they choose not to give you this. It is a complete myth that more complexity equals a better investment. We find there is a lot more elegance in simplicity. Above all simplicity means that you understand it, and that has got to be one of the first rules of investing that you actually understand the process and know what you are investing in.
At HomeSec, the structure that we have with our investors is simple and best of all it is very secure. Our investors always know where their money is. If they invest in ten loans, then that means there are ten different loans on ten different properties around Australia. They are not in some kind of trust. We find that a lot of these “smart lenders” with their complex processes end up having bigger offices and more staff to maintain a sense of prestige, and this is what you ultimately end up investing in…. their own image. This is the kind of stuff that collapses entire economies, and you only need to look at the subprime mortgage crisis to see this. It really is about choosing to be the wise investor that can see through this. Unfortunately, though a lot of investors run straight towards these sorts of schemes.
At HomeSec, let’s say, we have a scenario where, a client’s house is worth one million, for example in Port Melbourne, Victoria, and they owe two hundred thousand to their first mortgage, and they want to borrow two hundred thousand from HomeSec. We will show the investor what the property is worth. We will inform them where the property is, so that they have this on their records, and they can do all their due diligence. We will also show them how much is owed on the first mortgage, so they know the LVR for that specific loan. And that’s it! They are on the title; they are on the mortgage and that is their property and their investment. If another property on the HomeSec books is affected by a flood or something unforeseen, then it does not matter, because it is a completely separate matter.
So, they have their own standalone investment, rather than investing into a pooled funds scenario, where each loan affects their total risk. It is so simple and such an effective way of receiving fantastic returns that are superior to so many investment options out there. Our investors enjoy returns over 12% pa., and they know exactly where their money is. So, don’t get lured into something that is overly complex that could get you into trouble. If earning great returns that are secure sounds better to you, talk to HomeSec today, and we will be only too happy to take you through our process.
