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Investment

A recent topic in a tennis forum sets me musing over my maiden venture in buying shares early at the start of my working life.

When the office was abuzz with news that SIA shares were plummeting by the hour, I said to myself in disbelief: “That cannot be! Our national carrier and pride ground crashing! (no pun). The power that be will not let that happen!”

To put my money where the mouth is, I almost emptied my savings in buying two lots. Two thousand shares were by no means a small consideration those days. Sure enough, share prices recovered within days and I beamed with confidence that my intuition was right. I resisted promptings to dispose quickly because I wanted the price to, in the terminology of the airline industry, to ‘soar’.

When I finally took position with a very tidy sum much to the envy of my colleagues, the counter continued to trade even higher. In retrospect, my colleagues missed the boat because they hesitated, forgetting that ‘He who hesitates is lost’. What caused SIA to slide the slippery ‘route’ for a couple of days remains unknown to me.

Encouraged by that episode, I embarked on further excursions in the stock market with the assistance of a friend who acted as my remiser. Those were the days when everything seemed going my way. It is said that in good times, even fools make money. However, as in everything in life, sometimes you lose; sometimes you win. Between then and now, I have come almost full circle and to ruminate on my investment path viz. country club membership, endowment policies, the infamous internet and communication, merger and acquisition unit trust funds would be a lengthy exercise on paper, spanning 30 (?) years and my recollection would be rather hazy.

Presently, the disparity in interest rates between what banks charge borrowers and pay depositors is scandalous. Given this uneven equation, even the most mismanaged bank will make money. It doesn’t encourage leaving your money in saving and F/D accounts. My portfolio is therefore endowment policies with profits, India and China funds, F/D with a fixed interest rate plus interest based on performance of the STI index and mostly premium currency investment. I am happy with the latter yielding potentially higher returns for the same time frame.

However, this form of investment is not without risks that banks prefer not to highlight but put them in small prints so tiny and fine that you need a magnifying glass to be able to read them. In fact, you may be required to sign an agreement absolving them from any blame. And although banks will not want to admit it, I view this as a form of betting against movements in currency exchange rates.

Naturally, therefore, returns are dependent on movements in specified currency exchange rates that, in turn, can be affected by many factors like national and international economic conditions, political and natural events, sudden interventions in the money market by central banks and other bodies imposing foreign currency exchange controls. Fluctuations in exchange rates of the paired currencies you selected may result in the loss of the principal sum to a considerable extent should the proceeds be paid in the alternative currency at maturity. One only has to look at the currency crises of the late 90’s affecting Thailand, Malaysia, and Indonesia. The trick, therefore, is to be selective. Go only for fundamentally strong currencies like euro, aussie or kiwi and avoid USD. The US economy is forecast to be weakening next year and the Asian economies may see repercussions from the new strain of bird flu virus.

Finally, never buy investment products from the banks. None of them are advantageous for you. That's right, none. They are all exploitative (of you) to a certain extent.

The only reason for their existence is to make free money off your money. They assume zero risk, and make a guaranteed return, while you take a risk and return is not certain.

For e.g. so called capital guaranteed funds.

Assume you invest $100k into this fund.

What the banks do is to invest 70-80% of your money in perhaps 5 year bonds which pay 3% p.a.

After 5 years (ignoring compound interest, which will make the actual return even larger) the bonds are guaranteed to pay you back $15,000.

So the banks will take a slice off this guaranteed $15,000 portion, maybe they'll take $2000 - $3000.

That leaves you with $12,000. Using this $12,000, the banks will use this money to buy options on futures, or stock indices and take a bet on their direction.

You can only lose what you paid as premium for your options, you cannot lose more than that, so that is how they "guarantee" your capital protection.

Let's say they make 15% from trading the first year. They'll probably makan a portion of that, and leave the rest to compound for you.

But they may also lose the money used to trade options.

Bottom line, with a little education and study, you can do the same thing without paying the hefty fees to the bank. And any savvy investor will not invest in capital protected funds, why do it, when the long term returns of a properly allocated portfolio will return you 9% p.a.?

So you see, bank products prey on the ignorance of lay people, and that's how they make money off you. My advice is to stay away from all investment products offered by banks.

posted by Victor Lai @ 11:49 PM