You know this is the prime selling season for the investment industry. All the silly products are being sold on the street promising great returns, no risks, early retirement and the utterance of “trust me, its a good product…” in brokerage offices all over the land. What has made this frenzy greater is that the markets are either falling or unpredictable. And, here comes inflation! Unpredictability for the average investor is reason to panic but, for their savvy counterpart, an opportunities to buy (although Buffet insists that a shrewd investor should park themselves on the nearest lazy boy and do nothing for now).

PPN, ETF, MIC, IPP, ABCP, GIC, M-O-U-S-E! What are we to make of all these products? There’s an old saying in the investing world- don’t buy what you don’t understand. If you don’t know what these acronyms stand for, don’t buy them. And always KISS- KEEP IT SIMPLE STUPID when it comes to investing. It sure sounds fantastic telling your friends you bought some derivative structured product at lunch but, if she’s holding a plain old blue chip dividend yield stock that keeps increasing its dividend every year, guess who has the money to pay for the bill?

My advisor has a “do not pass go” list of things we never discuss. Here they are with a short reasoning. Remember this is my list only. Feel free to invest in the products of your own choice after conducting your own due diligence.

PRINCIPAL PROTECTED NOTES (PPN)

In a nutshell, a PPN is a product which guarantees your principal if you hold onto to the note until maturity. This constitutes one part of your investment. The other portion is used to invest in other investment products such as a certain basket of securities, mutual funds or hedge funds.The gain in the other portion is capped to some % gain as a compromise to protecting your principal. For example, a PPN could invest in a basket of tech stocks and, after 5 years of holding on to the note, you are guaranteed your original investment back plus a portion of the gain on those tech stocks.

I avoid PPN like the plague. We, collectively, should take it as an insult that the investment community believes we are so uneducated that we could not protect our hard-earned money for 3-5 years (the typical maturity date of a PPN)? Putting my money in a high interest bank account would protect my principal and, depending on the interest rate, protect against inflation. There is no inflation protection in a PPN- at the very worse you get your principal back but inflation has eaten into the purchasing power of that money. Thus, in a worse case scenario, you have eroded the purchasing power of your money.

Fees are high, the upside on the note is capped, it is so confusing that the government has stepped in and is going to require greater disclosure rules to be given to investors. Here is the direct quote from the Finance Department when it issued the proposed new rules: “The complexity of such products can make it difficult for the average retail investor to fully understand the risks, fees and potential returns.” This is not exactly a ringing endorsement of the product- and this is from our government!

Reviews of PPN range from saying no to PPNs to PPNs give you the worst of both worlds (and this from a member of the investment community). And You can construct your own PPN without lining the pockets of the investment industry.

MUTUAL FUND OF FUNDS

I am not a big fan of mutual funds but really hate these variations. These are basically mutual funds that invest in other mutual funds. So…you can look at the marketing material, find out what mutual funds this fund is buying and do it yourself without paying higher fees. OR you can be lazy and lose tens of thousands of dollars in fees over the years for the manager’s skill in picking other funds which isn’t much of a secret since it has to be revealed in the offering documents.

Basically, the mutual fund manager is too lazy to actually pick stocks to buy and you decide to reward him for this laziness. Sounds like a great deal for the manager and a bad one for you.

I compare a mutual funds of funds to nightclubs that charge cover at one door and let people in free in the other door. Why exactly are you paying cover if you can get in for free?

SEGREGATED FUNDS

These are basically mutual funds which are offered by insurance companies. The funds are insurance products so they have the advantages of creditor proofing (creditors cannot attack insurance contracts in most cases but there are exemptions), estate planning (no probate is paid by the estate) and principal protection (if the funds are held for a certain period of time). Million Dollar Journey gives a more detailed summary on segregated funds.

Segregated funds suffer from the usual problems -fees are extremely high. Why would one want to pay such high fees to protect your principal when you can do it yourself (see my discussion on PPN)? If creditor proofing is a concern, the cost of a good lawyer to maintain and establish vehicles, such as family trusts, will be much less than the fees paid out over the life of a segregated funds (MER can be in excess of 5% in some segregated funds). It is a penny wise and pound foolish philosophy to purchase a segregated fund for creditor proofing purposes without paying for a professional’s time to discuss less costly alternatives over the course of one’s life- remember a professional’s cost may be a one-time occurrence but fees are constant.

Having said that, some people may be ideal investors for segregated funds. However, most employees, who have minimal liability risk, and those without massive tax liabilities at death (i.e. massive capital gains without an insurance policy to pay out taxes), would not fit into this category.

TIME-SHARES AND VACATION PROPERTIES AS “INVESTMENTS”

A time-share used primarily for vacation is great. But I would never buy it as an investment. All real estate suffers from liquidity issues- I can’t exactly sell my house on 1 day’s notice but I could liquidate my stocks tomorrow. Most time-shares I have seen have no liquidity; the contracts are quite tight as to what circumstances you can sell a time-share and many time-shares have veto rights even if you fall under one of the limited circumstances. Basically, you have to die before you can sell a time share. In other circumstances, time-share contracts assign the duty of selling the time-share to the management company who have no real incentive to sell the unit so it does nothing while telling you that it is trying oh so hard to sell your time-share.

Thus, even if the time-share was increasing in value, how exactly can you sell it if the terms and conditions conspire to lock you in for life? It is all a paper gain and it is hard to use it as collateral since, you guessed it, the contract prohibits you from doing that too.

Having said that, there are some great time-shares that are more investor friendly. You have to shop around and you have to read the fine print. The devil is in the details.

I also want to differentiate a traditional time share from these hotel-condo investments going up in large cities. These are functionally different products.

ANY PRODUCT DESIGNED PRIMARILY AS TAX SHELTERS

These come in varies shapes and sizes- from flow through shares endorsed by the government to invest in mining and exploration companies to “traditional” tax shelters. They all share one basic characteristic-to save me tax and not to experience appreciation. Most of these are not eligible for your retirement account so the high selling season was before year end and not now.

I like saving tax but there are other ways to do that than buy a product which may not appreciate (most flow through shares are designed not to make you money). Considering we use on average 7% of our retirement contribution room (that is not a typo), the statistics seem to indicate that we focus too much on overly sexy and complicated products to reduce tax and ignore the fact that an average person had 93% contribution room left in their retirement account to reduce tax.

The regualtory risk on these types of products is also quite high. Putting aside the government endorsed products, there are a lot of tax shelters which get challenged by the authorities and the claimed deduction may be denied years later with interest and penalties accruing during that time (which, in some cases, is double the actual denied deduction).

Products designed primarily as tax shelters are too cute by half for my own liking.  There are much easier ways to reduce taxes like contributing to your retirement fully annually. Simple and elegant.

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This is my terrible 5 list.  Let me know what you avoid buying.