Cost of betting on a financial product

Dear Mr Tan,

If I invest in a financial product that guarantees a return of my principal, I know that I will not lose out. At least, I will get back my investment. If the stocks meet the target, I will get a good return. What are your views?

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REPLY:

You should look at the opportunity cost. For example, instead of investing your money for 5 years in a financial product, you could have bought government bonds to earn 3% p.a. for 5 years, or 15% in total.

If you invest $20,000 in a financial product, you are actually spending $3,000 on the bet, ie 15% for 5 years.

In thecase of the Swing fund, you got back only 2% after 5 years, or $400. This is a poor bet, compared to the cost of $3,000. Your payback is less than 15% of what you betted (ie $3,000). This is a poor return, considering that the stockmarket performed extremely well during the past 5 years.

Lesson: Do not bet on a financial product, as the odds are designed to your disadvantage.