Tuesday, September 30, 2008

Understating Risk, Overstating Benefits

Blood on the street / Maximum Pessimism???
There was blood everywhere round the world. The Financial markets are flushed with a sea of red. There is so much fear and uncertainty that the market becomes psychologically driven. There was also a lot of frustration and unhappiness on all the mis-sellings of certain Financial Products such as Pinnacle Notes, Lehman Minibonds, etc that made the banks CEOs rich.

Baron Rothschild is credited with the expression "The time to buy is when there's blood in the streets." The late John Templeton was known for his philosophy of investing at "the point of maximum pessimism." And the famous money manager Peter Lynch has written that "In many ways, the key organ for investing is the stomach, not the brain."

It is easy to say that when things are going well, but when we are in this environment full of fear and uncertainly and with the US Law makers just rejected their $700B bailout plan. its certainly very hard to convince anyone on the idea of accumulating funds now.

My advice for my clients will be to stay invested if you are still in it. It is too difficult to try time economic and market cycles, and that it is much wiser to follow a disciplined investment process. Its a hurricane out there, if you jump now, you have a higher chance of getting drown.

If you have spare cash, its a good time to accumulate in a gradual manner. We do not know if its the bottom but we believe that its somewhere near the low and the market will comes back alive when most of us are still pessimistic and hoping the market go down further.


Understating Risk , Overstating Benefits
One of my client called me and complained about how her RM convinced her 2 months ago into buying Foreign Exchange Fixed Deposits currently at a loss of 6% and the DBS High Note 5, which is currently pending pricing valuation. She is actually a very low risk investor who always look for the highest Fixed Deposit or Endowment funds. She went into these investment purely because the RMs understated the risk involved.

RM turning into Currency Traders?
Over a short 2 months period, she was told to switch among different currencies ranging from Euros, Aussie and NZD. She felt stressed with all these currency movement and wish to redeem her deposit. It was only then she discovered that she had lost 6% in just 2 months. As the deposited amount is quite substantial, 6% means a lot to her.

How I feel about this?
I'm certainly not an expert in currencies but I'm surprised that the RMs in the banks are. They are able to tell when to trade currencies for their clients. To me, forex is for professionals and real savvy investors and certainly not for anyone on the street. I'm not sure what qualifications and experiences these RMs have, that they are able to recommend and switch currencies for their clients.

She is currently holding on to the New Zealand Dollar. What is your current view of this currency?


Anonymous said...

They try to be every thing like the insurance agents. Agents suddenly overnight became stock broker, remisier, stock tipsters, analyst,
investment managers and chartist.RMs have to be like the insurance agents.

Anonymous said...

They received daily market updates and views from their bank research team..

just like you get your portfolio composition from your IFA firm.

By telling people to stay invested.. aren't you doing what the RMs are doing.

How do you know staying invested is good? You can tell me stocks historically have avg 8% in the long run.

Have you ever considered what they meant in the long run? Have you ever taken a look at 10yrs, 20yrs and 30yrs period.. have stock returned a positive return?

Anonymous said...

These RMs didn't do anything wrong. They take direction fm their investment team jus like you follow your investment team advice.

Foreign FD are not Forex trading!!! Upgrade yourself!!! Go learn the diff and know their risk.

Khiat Han Hwee Adrian said...

I do not know what are the charges involved when the RM buy-sell currency on behalf of their clients. Don't think the RMs will do all these for free.

I'll advise those who are still in it to stay invested espcecially if they have the capacity to do so. If the market got to rebound, they will miss it.

If you are talking about 20-30 years history, the equity returns are indeed in the positive territory. I'm talking about a properly diversified portfolio.

Anonymous said...

Actually, all financial advisors and bankers and Rms are the same.

They are all selling a theory or a concept.

It's amazing people continue to trust advice from people who are as poor as them.

If you are educated, the best bet is take out 1 hour a night and do your own reading and investment.

Don't depend on others.

Khiat Han Hwee Adrian said...

Some people rather take that 1 hour a day to spend time with their family or for their own leisure. Not everyone is able or keen with finance issue or have time for it. Time is a scarcely limited resource.

Thats why there is a need for Financial Planners to walk along with them and give them regular updates.

As for the statement, "Its amazing that they continue to trust people who are as poor as them"

Not sure if you mean, if the planner is poorer than the client, then they should not trust the planner.

Anonymous said...

The very reason why banks went into foreign currency forex trading is they will never lose out in making money if their bet were right or wrong. This is another way of earning big at the expense of bank customers.
I held another foreign currency because the banker talked me into this dual foreign currency scheme. But later when I did some research I knew it was far more complicated than I earlier thought.
After the term period, I insisted on putting my foreign currency into FCFD.
I hope our local banks must not think of short-term gains at the expense of their customers because they are going to lose the customer/s eventually.

Anonymous said...

The benefits of a product are clearly stated on the colorful cover page, the risks hidden somewhere within the 200 page prospectus.

It's amazing how many rubbish products there're out there. My email acct (IFA company) is bombed by our business partners' updates all the time. It just so happens that they are products unregulated by MAS.

The companies that provide regulated products never bomb my email account before.

Food for thought.

Anonymous said...

"Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it."
Peter Lynch

You know what type of idiot business is full of idiots.....life insurance business. There are 14,000 businesses run by idiots.
No wonder a lot of idiots were conned by these idiots

Brendan Lee said...

NZD is expected to fall further.

New Zealand economy is in recession now, their central bank will have to cut interest rate to support their economy. When interest rate is cut, NZD will depreciate.

For more information on currency trading, take a look at my website: http://www.forexandbinary.com/

Brendan Lee said...

If 6% loss means a lot to your customer, then she got to be ready for 10% loss.

I think one of our local bank is aggressively promoting this 8% NZD deposit few months back. Some of my readers ask me if its good, I said no.

Many people only think about the interest rate, forgetting about the exchange rate risk.

End of the day is it the RM's fault again?

Khiat Han Hwee Adrian said...

The RM told that client of mine that if she hold the Fixed Deposit for a full year, she may not lose any money because the interest gained will cover her losses.

Of course, you and me knows that this is true only if the currency stay at current level.

Anonymous said...


We live in a world of greed. Look at the case for the recent Lehman bro's minibonds products. This product itelf is a derivative instead of "bond". But why are so many ppl caught by surprise at the end of the day when this event get out of hand? Everybody takes for granted in purchasing tranches of the bonds offered by Freddie Mac/Fannie Mae until subprime crisis broke out. They have no one to blame but themselves when things get out of hand. It all boils down to individuals' finance intellectual and receptiveness. Cavet emptor!

RM raking in so much? Have you ever wondered why they're so successful? One look further and you'll realise that it a matter of tactics and strategy. 1)They have a very strong brand name to depend on and it's called SINGAPORE BANK. Aunties and uncles who buy the products from brand will definitely feel safe cause it's offered by the BANK. 2)RM have a sales target to hit so they will definitely have some kind of backup products to cross sell when the first product is not suitable.
Should you believe in long term standing you will never employ such strategy. RM are gone by the time you try to go back to the bank!

At the end of the day just believe in yourself. Continue self-upgrading in this new economy and take the comments posted with a pinch of salt. Your true accomplishments will be rated only on the day you step into the coffin!

Anonymous said...

To anyone who's still looking, SG govt bonds can be transacted by the banks and any IFA who uses the iFast platform. Not sure about Navigator.

You either have to ask for it, or hope you meet one who cares enough to recommend it.