[This article was first posted on 1 March 2008 on Five Cents Ten Cents on blogspot.]

Have you ever bought a bottle of wine from the supermarket, wine shop or duty-free at Changi Airport?

Do you read the labels on the wine to understand what have you bought?

For many years, I didn’t really read the labels because I didn’t understand what they described until I attended a couple of wine appreciation courses where the speaker shared with us how to read the labels. For example, the label above reads “Cabernet Sauvignon” which is a widely recognised and grown red wine grape variety. Wine labels go by grape variety or region or name of the winery and different types of wine have different types of labelling conventions based on country, custom and marketing.

Reading about savings and investments: Know what you are investing in!

This post is not about wine appreciation! It is about knowing what you are buying or investing. Many of us will rely on the recommendations of the sales lady at the Duty Free Shop in the airport or just pick the one that suits our budget and either red, white or rose wine based on the shape and look of the bottle. Few of us would actually take the time to learn more about it.

The same tends to apply to our investments. We tend to listen to the financial advisor or salesmen and women who have a vested interest to push the investment product or service to you for a commission.

Picking wine is one thing. Picking investments is another in that your investments typically involve large sums of your hard earned money which can grow or shrink depending whether you understand what you have bought. The risk of us NOT TAKING THE TIME TO READ AND UNDERSTAND what we invest is to take up more risks than necessary to earn the potential returns.

Structured Products: Risk-return in favour of the banks/issuers

Banks know that the average investor does not like to read. In the US, it is estimated that almost 1 in 2 adults never read a book afer they leave high school. I am not sure of the Singapore statistics but I dare say many adults don’t read fiction and non-fiction after the graduate. In this age of internet content, television programmes, movies, shopping, reading a good book at home doesn’t rank too high on many people’s list of leisure activities.

If you don’t read books generally and plough through details, chances are you won’t read the thick prospectus that banks and financial institutions are required by law to issue for investment products. Hence, banks and financial institutions go around splashing catchy advertisements on their “capital-guaranteed” structured deposits products only to have all the fine-print (at font 10 or less) saying the “capital guarantee” also comes with a catch, i.e. under certain conditions, say sub-prime or in the case of China Aviation Oil price collapse, the “guarantee” is not longer guaranteed.

Unfortunately, many unsuspecting investors didn’t read the fine print and their returns were far from what was suggested by the banks or financial institutions issuing the product.

I am not saying that structured deposits and products are all bad and all lose money. However, if you read the fine print and ask those who understand financial derivatives, many of these structured products are structured to weigh the risk-return trade-off IN FAVOUR of the issuing bank or financial institution. In simple terms, YOU TAKE MUCH MORE OF THE RISK, THE BANK / FINANCIAL INSTITUTION TAKES MORE OF THE RETURNS.

How the bank is able to do that is that they essentially make bets using a small portion of your monies invested with them for those few years on movements in currencies, share prices, interest rates and the remainder they put in relatively low risk assets. If the bets work out, the banks WIN BIG and give you a small portions of the gains as higher returns. In event that the bets turn out wrong, the bank can still give you back the “capital guaranteed” (less certain fees/charges) as the bulk of the investments were in relatively low risk assets.

Start reading today

There is no substitute for reading and understanding about investments. In this age of Google, internet and public libraries, the knowledge is out there. If you are someone who absolutely abhors reading but still wants to come out a winner in the journey of financial freedom, you need to then network with people. Ask questions, and find out more about the savings and investments where you intend to put your money.

Remember, in the land of the blind, the one-eyed man is king.

Be well and prosper.

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