Why Investors Need To Understand What They Are Investing In

Is it okay to not understand what is it that you are paying money for?

For most things in life, the answer is usually no. When we pay $200 for a vacuum cleaner, we have an expectation of the value it would deliver. When we buy that $1,000 fridge, we are guaranteed that it would work well for us over the next 10 years. When we buy a $137,000 Audi A3, we understand exactly what is it that we are getting, and why we are paying so much for such a car.

Read Also: Best Value For Money Car In 2016

Yet when it comes to investing, it’s easy to find people, even smart, educated people, suddenly transforming into simple-minded individuals who will just about invest in anything, as long as you tell them what they want to hear. It doesn’t even matter if they don’t totally understand what is it that they are investing into.

The latest incident pertaining to Swiber bonds defaulting have raised the topic once more on whether financial institutions or retail investors are to be blamed whenever people end up invest lousy products that they don’t even fully understand.

Source: Straits Times

It’s hard to imagine why anyone would agree to invest $500,000 into something they don’t understand, just because someone from the bank advised them to do so. Do we really trust banks so much in Singapore that we are willing to invest in whatever they say?

A Google search for “Swiber Bond Defaults” brought up a number of news articles, including one that suggested a Déjà vu movement from the Lehman Brother crisis.

To refresh your memory, many retail investors in Singapore lost millions of dollars in 2008 after structured products that they bought from local banks went into defaults.

This article from the National Library Board estimated that about 10,000 retail investors placed about $500 million in these products.

Fool Me Once, Shame On You

Singapore investors have every right to feel hard done by during the 2008 global financial crisis. Many walked into trusted banks and bought what they thought were safe products from bankers who were advising them. Yes, the products sounded complex, but the assurance was that they were safe products meant for people with low-risk tolerance, such as retirees.

And given the complexity of the products that were sold (i.e. credit default swaps, credit debt obligations, securitisation, etc), we wouldn’t be surprised if some investors still do not know until today what they had invested in.

Don’t be too hard on yourself. Even the personal bankers who sold these products didn’t know what they were really selling. These products were THAT complex.

Fool Me Twice, Shame On Me Us

The latest string of defaults (or potential defaults) from the likes of Swiber, Otto Marine, Marco Polo, and we suspect, more to follow in the coming months, have ignited tension once again among the investment community in Singapore. Bondholders are coming together to collectively put pressure on these affected companies.

Unlike the mini-bonds that back in 2008, these corporate bonds are a lot simpler to understand. By definition, corporate bonds are debts issued by companies. Companies that issued the bonds are responsible for the full and timely of the debts.

Compared to government bonds, corporate bonds are almost always riskier and hence, they compensate (or attract) investors by giving higher interest rate. This falls in line with the risk-return trade-off theory. We earn higher returns only when we are willing to stomach the higher risk.

For example, Swiber issued multiple bonds in the past years. An earlier issue in April 2014 was at a 5.55% rate. An issue 5 months later in 2014 was priced at a rate of 7.75%. This could have signalled to investors about the decline of quality in the bonds being issued.

In the financial world, it’s unrealistic to expect that people are paying you more interest for no good reason. High returns always equate to high risk, though the opposite may not always hold true.

Read Also: Swiber Scandal – What Investors Should Have Looked Out For

Retail Investors Need To Start Understanding What They Are Investing In

As adults, we are taught to be responsible for our own financial circumstances. How we spend our money each month is a personal responsibility.

The same logic should extend to how we invest our money. If we cannot be bothered to learn and understand what is it that we are putting our money into, then whose responsibility should it ultimately be when something goes wrong?

Take a look at your investment portfolio today. It could include stocks, bonds, properties or even unit trusts that you have bought. Ask yourself what these assets are, and how they fit into your investment objective. If you can’t answer that question for yourself, it might be time to critically review your investment portfolio.

Read Also: 3 Questions To Ask Yourself Before Investing In Corporate Bonds

How can you start investing in ETFs? Sign for our “Fresh Graduate Introduction To ETF Investing In Singapore”. 

11 October / 6.30pm / $10

More details can be found on the event registration link.

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