Investment Risk Highlights and Three Important Dimensions of Investing
When it comes to investing, investors always have many questions running through their minds and all these questions vary from person to person. Mr David Gerald, President and CEO of SIAS covered the topic Investment Risks Highlights and 3 Important Dimensions of Investing at a previous My Money seminar.
Even before making any investments, we will typically need to decide how much money to spend or save and then whether to keep spare cash in a fixed deposit or to invest it.
David spoke about triangulating with three dimensions before making any investments:
- Know the products
- Know yourself
- Know the various strategies
There are plenty to questions to ask within these three dimensions including: How safe are the investments? How often should I review my investments?, etc
Not using these three dimensions might lead to sub-optimal results:
- Know yourself and know the products but don’t know the strategies => lower returns
- Know the products and know the strategies but don’t know yourself => mis-matched risks
- Know yourself and know the strategies but don’t know the products => missed opportunities
Know Yourself
I would say the most important dimension is to know yourself as the other two functions can be outsourced if you do not know them.
Knowing yourself is a very important aspect of any investment, your own liquidity needs, financial objectives, risk appetite, risk budget, financial health as well as any other potential financial issues.
Knowing the difference between your risk appetite (how much risk you want to take) and your risk budget (how much risk you can actually take) is absolutely essential.
If you are engaging a financial adviser, then the “Financial Needs Analysis” is a process to help investors understand their financial situation and needs. Your needs usually changes at different stages of life, hence the FNA should be reviewed periodically.
Know Your Products
Three general factors can be used to categorize investment products:
- Risk level
- Investment horizon
- Complexity of the product.
Try to choose investments with a medium to long term view in mind.
David talked about two products that are more common – Unit trusts and structured deposits.
Features of unit trusts include the following:
- Investment picks and market timing are outsourced to investment professionals
- Sales charges can be high
- Active fund management fees can be high
- Past good performances does not guarantee future good performance
- Professional investors can underperform the benchmark
- Liquidation is not immediate
Investing in unit trusts can get slightly tricky. Fluctuation of the values of the unit trusts depends on the risk of the underlying assets. The more risky the underlying assets the higher the fluctuation. Returns are also not guaranteed. Should investors feel jittery about market outlook or need money and too many investors redeem their investments, fund performance can be affected. Funds can also close down if their asset under management is too low.
Structured deposits usually provides higher returns than fixed deposits to investors due to embedded options. The high returns are generated from the premiums paid to investors for undertaking the risks of some events where they usually have certain market views when purchasing structured deposits. Several risks of structured deposits include:
- Investors may earn lower or no returns from such investments
- Counter party risks
- No government guarantee
- Once committed to a structured deposit, investors will not be able to liquidate the investments easily
- Loss of capital and returns might result upon early withdrawal
- Complicated terms
When it comes to investing, caveat emptor (Let the buyer beware)!
Overall, it’s a pretty interesting and humorous presentation so I would encourage you to have a look.