7 Financial products so bad they should be an April fools joke!

The most useless sign everIt’s April fools day, but since I’m still upset that I fell for two of them (Heyneke Meyer returning as springbok coach and myBroadBand launching uncapped fibre for R99 a month) I thought I’d spare you any more stupid practical jokes.

Instead, I’m offering you an antidote to the madness. A kind of an unApril fools joke. I’m going to list out the top seven financial products so dumb, we should all be wishing they were practical jokes instead of reality. So let’s count them down:

7) Unit trusts
I’ve waxed lyrical before about how utterly useless these stupid things are. Well actually only to the consumer, the producers of these products are laughing all the way to the bank. I can just see them in their board meetings giving each other high fives while chucking away to each other about how they manage to lose people money (relative to the market), and get paid to do so!

Us poor consumers on the other hand spend giant chunks of our investment earnings on something that performs like a damp squid in a teacup (yes I mix metaphors with blatant disregard for the English language). It is truly astounding how fund managers can be shown pages and pages of evidence that they’ll never beat the market, and yet their answer is always the same, “Uh yeah, but you know that’s in the past, we’re going to do better in future, we promise”. And we fall for it, again and again.

6) Extended warranties
In sixth spot we have extended warranties. These excuses for overcharging consumers are basically insurance against something breaking in a slightly longer time than a normal warranty. I’m part way through an insurance article where I’ll go into more details on this, but to be brief, the odds of the product breaking in the extended warranty period are far lower than you assume.

In addition, Consumer Reports has found that in the majority of the time a product does develop a fault between the original warranty expiring and the extended warranty expiring (which according to them almost never happens), the fault is actually cheaper to repair than the cost of the extended warranty in the first place.

For yet another reason to avoid the extended warranty, you only need to look at technical advancement. Do you really want to send a four and a half year old laptop away for a month to be repaired when it’s near the end of it’s useful life in any case? What about the iPhone that just broke after two years which will very soon need a new battery, or the Playstation 2 which you can’t get games for anymore? Don’t be dork and pay more for a product than you actually need to, give the extended warranty a miss.

5) Short term loans
So you have no money right now, but you still want to go on a relaxing holiday to the beach, so you think a short term loan will do just nicely for you. What planet are you from where things work like that, Planet Zuma? Short term loans can charge as much as 953% in interest, yes I’m talking about you you Wonga-robber. If you think that will an easy respite to a financial shortfall, think again. It’s going to bury you so deep in debt, that the loan shark collector who will eventually turn up, will need to bring an excavator to dig down to you before he can break your kneecap with a warning that he’ll be back next month. Sadly starting in one of these loan agreements is often the last step in the slow walk to bankruptcy, because, just like investments, debt also compounds it’s interest.

4) Credit cards
Credit cards aren’t much better than short term loans. You’re also spending money you haven’t earned yet on pretty things that will spend their lives gathering dust in the back of the closet, or things you can’t fit into anymore because you’ve overdosed on KFC lately. But of course you just have to have that Super Ultra HD 3D Smellovision which would have cost someone who saved up his cash R20 000, but for you who just can’t wait, you get it at the bargain basement price of R25 000 over 6 monthly payments. Yes, for being so financially astute, you get a TV for 25% more than it’s worth! Cut up those cards and get a debit card. You’ll still be able to swipe for things instead of paying cash, and you can still order your must have robotic vacuum cleaner online through your favourite website peddling not so cheap Chinese gadgets.

3) Pyramid schemes
I once succumbed to the “business meeting that will change your life”. Change my life it did, as I nearly stabbed myself in the kidney to get out of that place. And contrary to what you seem to believe, your amazing essential oil pack is not that essential to me. You know, I doubt I couldn’t be less “on fire” for your network 21 scheme, but keep talking while I add you to the ignore list on my phone and block you from my Facebook, forever. Herbalife? More like Herbadeath of our friendship. But don’t worry, keep spewing those motivational quotes that have absolutely nothing to do with the product you’re so desperately trying to sell to reclaim your spare bedroom space while trying to convince yourself it’ll bring you enough “passive income” to quite your day job. No, just no and go away forever you life-force sucking leech.

2) Ponzi schemes
I can’t believe I have to write about this, but open up a news site or one of those antiques called newspapers and you hear about these far too often.

Yes, you’re going to get 20% returns per month guaranteed when the market average is around 1%. And yes, you can give this magical person R1000 now and in three months he’ll give you R3000, it all sounds so logical. If you believe any of that you need to walk around with a sign on your neck that says “I’m stupid”. You are the reason that the chainsaw I saw at builders warehouse has a warning sign saying “Do not hold the wrong end of the chainsaw”, and that my wife’s hairdryer says “Do not use in the shower”.

Common examples include Instant Wealth club (that doesn’t sound suspicious), Kipi, MMM South Africa, Creation Adventures, but there are many others. A simple rule of thumb in detecting these is this:

If it sounds too good to be true, it probably is.

1) “JZ”

Yes, I’ve saved the best for last. The absolute worst financial product we have in South Africa at the moment is our president. I didn’t capitalise that on purpose. This is a man so stupid, he can’t even read numbers, never mind manage a sophisticated economy.

But now he’s been ordered to pay back the money. Gee thanks, even a blithering idiot knows that asking a criminal to pay back a tiny portion of money, with money he’s also stolen is not restitution. There is only one fair outcome here, to put JZ in prison. The minimum sentence for corruption is 15 years, which would please me greatly. He won’t be alone either, he can have his friends Ajay, Atul and Rajesh living right next door, and his son Duduzane just down the passage. Think of it as a very secure Nkandla, without the worry of useless firefighters, stray CIA cows and attack chickens.

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  • Jo Martin

    Hi Patrick, read all your posts and always look forward to the next blog! Entertaining and very informative – thanks man. I am an avid undercover investor, rapidly changing my portfolio from active to passive etf’s and Index funds. You started the ball rolling and with further investigation, the final shreds of the active debate snuck out the kitchen door. I’m also a paraglider pilot, so give me a shout when you’re back in Cape Town and we’ll go thermal hunting.

  • grahamcr

    There is one elixir that is a panacea for most of the listed items – avoidance

  • Totally correct, though I’m having trouble avoiding product number one, do you have advice on what could be done?

  • Thanks for the kind words Jo.

    Cape Town flying has been some of my favourite (and scary at Porterville). I really love the Hermanus, Franshoek and the lazy evening flying from Lion’s head. Will give you a shout if I make the great trek again sometime 🙂

  • Credit Cards aren’t bad if you have discipline. If you don’t have the money in your account don’t swipe the card.

  • Agreed. This is what helped me to bootstrap my business because I couldn’t get any bank loans. And with discipline I made a come back.

  • Bokkeman

    Credit cards actually represent one of the few (only?) ways to “get something for nothing” from a bank – if and only if you configure your card to be paid off, in full and automatically, every single month. Because interest is only levied on balances that go past the payment date, you effectively get a 90 day interest free loan from the bank – while you earn interest on the same money which is going to settle your card later in your current/savings account. Just as long as you never ever change that setting from “paid in full by debit order” to “pay the mininum due”. Not ever. The banks are counting on you doing just that, and to become one of those that subsidise the disciplined few who keep it on the first setting…
    Do you agree?

  • A lot of discussion on the credit cards, and you’re right, it is practically something for nothing if you can be disciplined, but those of you pointing it out are clearly not the average consumer, for whom a credit card is a financial anchor dragging them down constantly.

    Just one note on your usage of a credit card, it’s only store point of sale purchases that are interest free, and only 55 days in my case as an FNB account holder. Any cash, fuel spend, EFTs and account charges attract interest from day 1, so be careful there.

  • Bokkeman

    Thanks for clarifying – I think my “90 days” claim was a combination of advancing age and poor memory – and I refuse to accept that they’re related.

  • supersunbird

    Nothing wrong with unit trusts, more about that in the comment I made in your unit trust article…

  • Thanks, saw the comment. You are right, but only when dealing with a unit trust that is very different from the norm. In most cases they totally suck.

  • Alan Smith

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