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Monday, August 29, 2011

Be aware of investment risks

A few people have approached me for assistance regarding their investment losses. They entrusted large sums of money to the wealth managers working for the banks. The investors claimed that they were not aware about how their money were invested and trusted that the wealth manager would take care of their investments. They end up with large losses.

In some cases, the investors were not able to read the portfolio statements, so it is likely that they were quite ignorant about the investments.

Some of the investments were in linked investments or leveraged investments, which carried high risks. These types of investments are speculative, and depend on the skill of the wealth manager to make the right timing decisions. It is almost impossible to acquire this type of skill. Some timing decisions is similar to gambling in a casino - a lot depends on luck.

It is likely that the wealth managers who contributed to these bad investments are also inexperienced in this field.

The more experienced wealth managers are likely to give more prudent advice - such as diversification of risk and selecting the right asset mix. In these cases, the potential return is likely to be modest, after deducting the fee payable to the manager. The investor should accept the lower yield, that commensurate with the lower risk. If the investor wants a higher yield, the wealth manager is likely to be forced to take a more risky approach - which can lead to disaster.

It is important that the investor should be aware of the risk and should select the knowledgeable wealth manager. If the investor is not aware about the risk of investments, it is better for the wealth manager to decline to take the client - so as to avoid these potential problems.

My advice: never invest in any investment that you do not understand. Invest in your education by attending the financial planning workshop organised by FISCA (www.easysearch.sg/fisca).

Tan Kin Lian

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