Investment rules

“Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: that wisdom preserves the life of its possessor.”(Ecclesiastes 7:12)

Recently I browsed through a wealth management newsletter sent by a bank. One of the articles entitled `Avoid the most common investor mistakes’. Some of the pointers mentioned are planning, realistic expectations, cutting losses, avoid cheap and low-priced stocks etc. However, to me, after having worked in the financial sector for the past 12 years, the most valuable investment rules are ‘KNOW WHAT YOU INVESTED’ and “BE PRUDENT, AVOID BORROWING’.

Investing nowadays has become very complex, so be alert and not to be fooled by the ‘marketing’ materials which often disguised as ‘research’ materials. Do not be overdose on information which is so easily available that you can become paralysed by them, blurred your vision and drown you in useless details. Go for something simple and you can understand, rather than lured by the high `projected returns’. Preserving capital is the key in any investment.

The Lehman Brothers debacle in 2008 clearly illustrates the above investment principles. Investors suffered huge capital losses buying investment products which were paraded to the public as safe investments with attractive returns (not knowing that they are actually derivatives).

Thank God that none of my clients was hit by these derivative products. I had some clients who expressed keen interests in buying them. My ex-company was also one of the distributing channels. I browsed through the thick prospectuses and found them to complex to understand. At that time, there were many such products named themselves as ‘bonds’, been launched with big newspaper advertisements. Money from financial services sector was so lucrative that NUS Biz Adm’n undergraduate course received the most applicants and from the brightest in 2007.

The other thing that an investor should be mindful is be PRUDENT, avoid ‘gearing’. Invest only on money that you can spare and lose. A close friend told me that someone borrowed $200k from his bank to invest in Lehman’s bond. Yet another who is novice investor, tried to trade forex which is very risky as the gearing allowed is as high as 98% of the capital (you only need to fork out 2%).

In any investment, always work on the worst scenario, i.e. what is likely the maximum downside. Once you have done with it, the upside will take care itself because psychologically, most people know how to handle profit but don’t know what to do when their investment turns sour.

It is a very common practice for the sales staff to impress you with imputation of unrealistic projected returns during their presentation of the product. You should only pay attention to the guarantee returns, especially for insurance policy. Also, buy a ‘hybrid’ product such as investment-linked policy is not advisable. Such product will cause uncertainty to what you will get upon withdrawal or on maturity as the investment component in such policy can be very volatile, especially if it falls in a bad investment year.

Higher risk, higher return and vice- versa. There is no free lunch in this world. Do your homework. Keep track of your investments and be humble, learn from your mistakes. If you have no time to invest personally, then do it through professionals. Be very careful when someone offers you something that is too good to be true!