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Thursday, September 7, 2006

Wait for a better time

An investor who is locked into a 10 year structured product (sold by a bank) asked my advice if it is better to encash now and take a loss. Here is my reply:

Dear

If you keep the investment for the remaining 8 years, you can get a return of about 1.5% p.a. You avoid the loss of 20% (or about 2.5% for each year). Your total opportunity cost is 4% per year.

If you take a loss now and re-invest it, you must earn 4% to break even.

If I were you, I will keep the investment for the time being and wait for a better time to encash it, eg if the loss is reduced significantly.

Otherwise, I will keep it till the maturity date.

It is good to take investment risk, if your cost of funds is 2.5% (like money in the CPF or bank deposit). It may not be worth the risk, if the cost of funds is higher, at 4%.

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