Exams for investors are a bad idea

ASIC chairman Greg Medcraft's suggestion that investors should sit a two hour exam before investing in certain financial products has set the cat among the pigeons.

The Australian Securities and Investment Commission (ASIC)  is intended to regulate certain financial markets. The big four banks are regulated by the Australian Prudential Regulation Authority (APRA). Among ASIC's clients are a host of deadbeats that give the appearance of being banks without being banks. The most recent failure was the Banksia ( note "Bank"sia ) finance group centred on Kyabram, a  rural township in the north of the State of Victoria. Why anyone would entrust their life savings to an institution of this nature when they could cross the street get the security of a major bank at the cost of a few percent is beyond me. But then I am a city slicker, I don't hate the banks as many country people with long memories do. As far as fixed interest investments are concerned, the difference between the return on a secure investment and a risky one is so inconsequential it is not worth bothering about.

But what the ASIC chairman was really on about were things like contracts for difference (CFDs), debentures, FX trading and self managed super funds (SMSFs).

There may be people who make money out of CFDs, let us just say I've never met anyone who has. CFDs tend to be marketed to gullible people who have no idea of  the risks involved. As for FX trading, the average punter would be competing against professional traders who in all likelihood have PhDs in maths. I was at one time fairly good at maths, but when I last tried balancing my cheque book (a long time ago when I had one) and was defeated, I decided my maths weren't up to FX trader standards. The truth is all these instruments exist to transfer money from the amateurs to the professionals, much the same as any gambling product.

Can you tell people this? Of course you can. Will they listen? Probably not. It's amazing how many people will  commit thousands to an investment they don't understand when their largest previous outlay was a Lotto ticket.

Any investment is about the evaluation and management of risk. Without risk, there will be no return. The greater the risk, the greater the potential return. The risk involved should  be appropriate to the individual concerned. If a young man gets dudded for a few thousand on CFDs, it will be probably be a worthwhile learning experience. For an old age pensioner, it may be the difference between eating steak or cat food.

Even if it could be shown that a two hour examination would prevent people from making foolish investments -- which I very much doubt -- do they have a place in financial management? It is not the government's role to protect people from themselves. Financial advisers, stockbrokers and a host of other professionals exist to help people invest their money. On top of all that, do we really need an exam?

For a time I invested in what are known as "penny dreadfuls." Some people claim they make money from these stocks, which are more formally known as "small cap mining stocks". I know for a fact that some investors do make money from these stocks, but like most gamblers, you hear more about the winners than the losers. I broke about even. In the end, I decided it wasn't worth the aggravation. But if someone thinks they have found the next Woodside or News Corporation, they should be allowed to have a punt. If they want to have a share in a stock whose sole asset is an expanse of kangaroo pasture, that's their business.

A fool and his money are soon parted. It's an old saying but a true one. No investment is risk free, even if it is the risk that the capital value will be eaten away by inflation. In the end, you can't protect people from themselves. Exams for investors are a bad idea.