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Be cautious even as we accept higher risks.

Sunday, November 25, 2012

When I did a Diploma in Business, I had to study Business Law. One thing I remember is that something we buy has to be "fit for the purpose it was built for" and be "of merchantible quality".

So, let's say you bought a contraption which was supposed to keep food fresh but it did not; then, it was not fit for the purpose it was built for. If the contraption really did keep food fresh but it started to fall apart within the first week of use, then, it was not of merchantible quality.

Singapore's Lemon Law which kicked in on 1 September 2012 stipulates a 6 months period in which buyers now have to take action on any defective product. This addresses the issue of "merchantible quality".

In the weekend edition of The Business Times, I read an interesting article on whether conventional wealth management wisdom which says that people nearing retirement should have more of their wealth in conservative bonds is "fit for purpose". This actually raised a question in my mind as to whether wealth managers are providing products which are fit for purpose or are they self serving sales people.

In the few encounters I had with wealth managers, I was advised to be more aggressive with my investments because people in their 30s and early 40s could afford to do so. One asked me why was I so conservative when I told him I was not interested in any of his proposals which sounded rather risky to me. I was then advised that only people nearing retirement should be more conservative.

So far, my personal experience with wealth managers has not been positive, having lost much money through products they sold to me. Unlike physical goods, wealth managers do not have to provide any guarantees as to a financial product's performance. This could be the reason why when the Mini Bonds and other structured products offered a "capital guaranteed" feature, they drew so many investors. Of course, they were not of "merchantible quality" but no buyer could tell until things fell apart. Unlike physical goods, it was too late to do anything.

In an environment of very low interest rates and high inflation, we have to seek higher returns on capital to protect our wealth. However, we have to exercise caution even as we accept higher risks.

Related posts:
1. Low interest rates' a double whammy for some.
2. To protect our wealth, we have to take risk.
3. Fraud: Like taking candy from a baby.


Singapore Man of Leisure said...

As an ex-salesman, I believe everyone has the right to make a living; but it's a bit sad and most frightening how consumers who are not financially literate can be taken for a ride by those with "good intentions".

If freshly minted CFAs "sell" to those nearing retirement the "safety" of bonds today (blindly parroting what they have learnt by the book), they can do a lot of hurt to those who can't afford to be "wrong".

With interest rates at near record low today, a few percentage increases will take cut a big chunk off the retiree's capital...

It's tough environment right now.

Equities can easily tank 20%, bonds in a bubble, properties hot hot with govt cooling measures, cash being eaten by inflation...

This is not the time for outsourcing financial literacy!

AK71 said...


You are really a crouching tiger, hidden dragon. I believe I have much I could learn from you if you are willing to share. ;)

Yes, the environment is difficult. More and more, I feel that we are all walking on the edge. Many are keeping cash and waiting for the stock market to crash before buying in.

However, there is now more talk than ever of stagflation. How would this play out?

As for being a salesman, I always try to do what is best for my clients, taking time and making an effort to understand their needs and selling them what they need. I never upsell. I want to be able to sleep well at night.

Unfortunately, I know of many other salesmen who do not share my sentiments.

Every salesman has the right to make a living but he also owes a duty of care to his customers.

My mother was recently sold an insurance policy by a lady at DBS. She came back and told me about it. My mother has some money but she is not really financially savvy. I had to convince her that the policy was too expensive for her and the benefits were irrelevant. She cancelled the policy the next day and had to pay a cancellation fee. Anyway, I digress...

Now, getting seniors to put their money in conservative bonds could indeed be the worst advice possible. Yield on such bonds would have to continue declining in order to see meaningful returns. With yields already so low, how likely is this? The real yield is already negative for such bonds.

Outsourcing financial literacy is not necessarily a bad thing. There is much we can learn from others. However, we must not think that everyone is full of human kindness. :)

K-Enterprises said...

Hi AK71,

There are not much asset classes to choose from that offer high yields at this point of time. REIT's yields are being compressed with prices already 30-40% higher than they were last year. Inflation has been creeping up too making matters worst. Bluechips are not offering respite too as they are too exposed to market swings. Having a difficult time searching for yield generating assets now =((

AK71 said...

Hi Kelvin,

I am lucky to have built a substantial position in selected S-REITs over the last few years. Indeed, I am reluctant to add to my long positions in S-REITs now.

However, if I were not earlier invested at lower prices, I would put some money in S-REITs even now because I believe that we could see further yield compression.

A 6 to 8% distribution yield together with rather robust fundamentals is still very attractive to many investors.

Anic said...

Hi AK71, I have been a quiet reader of your blog and thank you so much for sharing your knowledge and experience..

> A 6 to 8% distribution yield together with rather robust fundamentals is still very attractive to many investors.

I agree with you fully... One of my main concerns is inflation. At least it fights the inflation..

AK71 said...

Hi Anic,

I am always happy to hear from readers. Thanks for making the effort to write. :)

Managing our wealth, we should at least protect what we have from being eroded by inflation which is likely to stay high for a few more years. Investing for income in robust entities is able to help us do this.

Beating inflation is something I have always been concerned with and I first shared my thoughts here in January 2010:
Grow your wealth and beat inflation.

Some friends who told me that they were saving money 2 to 3 years ago and were unwilling to buy real estate then are now biting the bullet and buying. In a way, it is the same with S-REITs. We know prices are elevated now but if the investments still give us positive returns, people would still be drawn to them.

la papillion said...

Hi AK,

It's interesting...when the price of service is low, nobody will buy it. When they charge high high, then everybody think it must be good, that's why they dare to charge so high. The more they price their service (up to a pt of cos), the more their business grows.

This works for service only, because it's not immediately comparable. Hence price becomes the benchmark for comparison. Doesn't work for commodities hor :)

I guess it's the same for property and shares in general too.

la papillion said...


Forgot to ask you this...Where did you study your diploma? Can share your experience? Is it helpful etc? Have an idea of taking it part time if time permits.

AK71 said...

Hi LP,

You have made an interesting point!

I remember in an interview, celebrity hair stylist, David Gan, said: "I have a bad habit. If it is not expensive, I don't buy."

Hahahaha... ;p

Of course, he said that in relation to the furniture in his luxurious condominium. I don't know if it is his general philosophy in life.

My mom told me that Bonia and Why handbags used to be relatively inexpensive. They are now priced in the same bracket as some luxury brands and their business is better than ever. Same same. ;)

AK71 said...

Hi LP,

I did it part time years and years ago. Night school. It was a private outfit and the diploma was awarded by some Aussie university.

I don't think the night school is around anymore but the university is still around.

It was a 1.5 years course and although it was demanding to hold a full time job and study at the same time, it was worth it.

I am sure that there are many places where you can do a business diploma or degree part time now. I think PSB provides such courses too.

la papillion said...

Thanks, that's all the assurances I need :)

AK71 said...

You are welcome. I sent information to you in Olympus. Check it out. ;)

Singapore Man of Leisure said...


I have to wait for quality posts like yours to act as my catalytic inspiration mah!

As a necromancer (I use OPM and OPT), basking in your protective Paladin aura, only then will I dare move a bit closer to the melee.

Your are my "tank" when slings and arrow come! LOL!

My version of financial literacy is about the ability to tell good advice from bad advice.

AK71 said...


Hahaha.. Actually, I think I am less of a Paladin than everyone seems to think. I played a cleric in AD&D but in real life, I am probably closer to being a wizard. :)

You are a person with a high EQ. I am perceptive enough to see that. You are more a survivor than I am as you have a functional diplomatic hat too.

On my last working trip to the USA, I told a vendor from Taiwan quite candidly that I do not have 大智慧 and that I was also a 直肠子. haha... As I grow older, I know myself better and it is humbling.

Anic said...

Hi AK71,

I too was too slow in buying properties (pure laziness...) and it is very expensive now..

I used to scare my friends who were risk averse and unwilling to invest: "the more you save in Bank, the more you lose" :)

BTW, you are probably 大智若愚.. :)

AK71 said...

Hi Anic,

Well, the saying that money should go to where it is treated best rings true. We should also go to where we are treated best but sometimes we don't. Why? Laziness? ;)

Yes, real estate in Singapore costs even more than in New York City! Now, that is amazing! Madness.

Nothing goes up forever. I believe prices will see a correction. It is just a matter of time. How big is the decline going to be? Thanks to all the cooling measures in place, we might not have a crash but a 15 to 20% reduction in prices is not unimaginable.

People who are risk averse and are 100% in cash do not want to lose anything but have everything to lose. It is a paradox. :)

I think we have to know what to invest in and not just when to invest. Anytime, there could be something we could invest in to make our money work harder.

大智若愚 - Too cheem! I had to google for the meaning.

Some talented people, it seems as if stupid, not flashy.

This is a translation by Google from Chinese but I kind of get the meaning. Aiyoh. You are too kind. :)

Kim said...

Yesterday I was about to also write the same four chinese character 大智若愚 to describe you too. But was too tired....ha ha..who know actually your other reader also think likewise. You are indeed clever and wise but has always acted humble and wanted to 'conceal' your 'real' intelligence :)

AK71 said...

Hi Kim,

You are too kind. Really. I have some 小聪明 only. I am also lazy and like to do as little work as possible. So, I try to get higher returns for the limited resources I have.

I think 大智慧 describes people who are able to keep big pictures in their minds all the time, people who are able to survive in any environment as they are able to mix with any crowd. They do not show their displeasure and they do not burn bridges or build walls.

Want to find someone with 大智慧? Look to SMOL. ;)

AK71 said...

The frenzy now to get into bonds is the opposite of what we saw in the '80s. "One of the things that's so disturbing is that people are rushing into the bond market having come out of stocks," Yamada says with a note of concern. Buying debt in the hopes of getting a 1% return isn't investing, it's hiding. That shouldn't be an option for managing your money.

Yamada isn't suggesting bond investors storm the exits, just that they exercise some caution. "The only advice here is stop holding long-end (treasuries) and start moving short-end so that as rates go up in the next five years you have an opportunity to roll your short positions into a slightly higher rate."

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