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Nobody cares more about our money than we do.

Thursday, September 19, 2013

I read something by Suze Orman which resonated with me and I would like to share it here:

Right now, interests are still relatively low even though they’re headed up probably. We still have one of the lowest interest rate environments ever.

Everybody knows that when interest rates go up, the value of bonds go down.

If you are going to buy a bond mutual fund, you have to be very careful because if interest rates go up, the value of that bond mutual fund will go down. And, in a mutual fund, there is absolutely not maturity date.

So, what are you thinking? The worst thing you could do with your money right now is put it into a bond mutual fund.

Not too long ago, my dad came to me after visiting a local bank right here in Singapore. 

He showed me a few pieces of paper which a financial advisor at the bank gave to him. 

Basically, he was advised to invest in a unit trust which was invested in bonds. 

Luckily, he did not commit right away.

Bond funds are not the place to be now and I have said this in various blog posts before.

As I believe that the very low interest rates we currently see cannot persist for many more years, buying long term bonds is a risky proposition.
Why? See: CPF or SGS?

Now we have "perpetual bonds". What are these?  See:
Perpetual bonds: Good or bad?

We have to remember that nobody cares more about our money than we do. 

Don't take what "finance professionals" say as the Gospel truth, especially not when they want to benefit from our business.

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.
See: Be cautious even as we accept higher risks.

My parents have both been sold unsuitable products by "advisers" in local banks before. 

I tell them to remember that these "advisers" are just sales people and it so happens they work in banks and they sell financial products. 

The more they sell, the more they make. 

They are not altruistic or noble.

We have to look after our own interests. 

No one else would.

Related posts:
1. Unscrupulous and rude person from Prudential.
2. Inflation adjusted retirement income plan.
3. Know what is good for us.
4. Why a wealthy nation cannot afford to retire?


Elaine said...

She's my idol! Catch her on CNBC at 4pm weekends!

AK71 said...

Hi Elaine,

I watched her on the internet before. I don't have CNBC on TV. :(

SGYI said...

Hi Ak,

Sadly not many people understand how the fund works when they invest. How many people know bond prices and yields move in the opposite direction and what it means? I guess very few people understand it. Maybe even the financial advisers themselves don't really know about it. Or they know but still sell the bond fund just for the commission?

Dickson said...

AK, you can download the podcast on iTunes! It's the same as TV.

SnOOpy168 said...

wonder if there is a free-look / cooling off period for such product. My elder father was sold something like this at DBS Bank. Locked in for 10 year ! By the time I found out, it was like weeks later. The excuse, you get interest paid "upfront". It was a one time payment and then nothing until years later.

Solace said...

Hi AK,

Sadly such misrepresentation and mis selling are very common. I believe such trends will still continue as many of these financial institution are being regulated by MAS.

unsuspecting consumers can be badly advised thinking that banks products should be safe since they are regulated.

this is one of the reasons why i have put in lots of effort to get myself educated in finance literacy so that my love ones and i will not fall into such traps.

AK71 said...

Hi SG Young Investment,

This is why in another blog post I talked about "fitness for purpose". So, when these advisors tell older investors that they should be more conservative and invest in bonds even now, do they know what they are doing?

AK71 said...

Hi Dickson,

Er... I am really not savvy with this. iTunes? Must pay for this?

AK71 said...

Hi SnOOpy168,

My parents got sold something like this too. Structured deposits. :(

My mom was also sold an insurance policy which was unsuitable for her. Very expensive.

She went to the bank in the morning to take out her FD and came back in the afternoon with a new insurance policy. Basically, the advisor preyed on her fears.

Anyway, it took me an hour to convince her that it was rubbish and she went back the next day to cancel it. She was charged some $XX for administration fee!!!

AK71 said...

Hi Solace,

Unfortunately so. :(

Ignorance is definitely not bliss in such instances. We have to be financially savvy or else we might end up as victims of such unscrupulous "advisors".

Unknown said...

You are right. When you talk to them, you can tell they know jack shit'. These same people in our financial institutions target older people who have no clue of what they are buying into. I know people who lost 70% of their portfolio buying into unit trusts at the peaks of 2007 based on their past performance.
Problem is we lack financial knowledge, this should be taught in schools.

AK71 said...

Hi HM Shak,

I like the idea of teaching financial literacy in school. It is probably as important as moral education. :)

Anonymous said...

With all the bad experiences, my father must be really blessed years back. It the same thing, fixed deposit withdrawals and renewal, was told to buy a structured deposit, he was promised 2.5%PA interest guaranteed and capital guaranteed after 2 years. I was afraid that my father was conned and asked to see the documents, and it is really what it says, 2.5% guaranteed but locked up for 2 years. Capital guaranteed after maturity.

That was about a decade ago, I find the Ocbc structured deposit rather attractive too. I wonder whether this honest chap is? Is he still in the financial world leading an honest life and getting scolded and jeered by his peers, or has he progress further to spread the seeds of honest representation. I think the former is more possible. He might be out of the sector. I have a colleague who recently leave the financial world, I ask him why, he says it goes in conflict with his Christian values. A decade later, it should have gone from bad to worse

Oldman said...

Guys, can watch it here

AK71 said...

Hi Oldman,

Thanks for the link.

She has a good head on her shoulders and she says it like it is! I like. :)

AK71 said...

Hi Mike,

Your friend's heart is in the right place. I have a friend who did the exact same thing.

Actually, initially, he thought he was selling good products that would benefit people. When I explained to him why they were not good products, he gave up the job. He is not savvy in finance. He was just taught how to sell products and he believed what the trainers told him. He is now a school teacher. :)

AK71 said...

"With bank deposits in Asia’s largest wealth-management center earning less than 1%, the island’s more than 100,000 high-net worth individuals are looking to debt capital markets for better-yielding investments.

"Demand for yield is making it easier for Singapore small- cap companies to raise debt in the public markets, with some selling bonds equivalent to ten times their annual net profit.

"Singapore, Asia’s second-smallest country after the Maldives, had 101,000 millionaires at the end of 2012, up 10.3% from a year earlier, according to Capgemini SA and Royal Bank of Canada’s Asia-Pacific Wealth Report 2013."

AK71 said...

On Monday, the billionaire investor Warren Buffett mentioned that the stock market would be looked upon as cheap if interest rates would stay as low as they are.

...he also said that bonds are very overvalued and stocks are the cheaper of the two.

“If I had an easy way, and a nonrisk way, of shorting a lot of 20 year or 30 year bonds, I would do it. But that’s not my game. It can’t be done in the quantity that would make sense for us.”


SMK said...

i differ.

but then again, i don't see bond funds or bond etfs as income instruments or part of portfolios against volatility.

AK71 said...

Reader says...
you keep saying nobody cares more about our money than we do recently in fb and it got stuck in my head... lol

AK says...
I have been saying this on and off for years!
Some things like bird shit or chewing gum get stuck in your head is no good but if this gets stuck in your head, very good!
Bad AK! Bad AK! :p

AK71 said...

Jake Gan says...
But bond funds churn their bonds too right? So in a rising interest rate environment their bonds mature and they can buy higher yielding ones. Or is there something wrong with my understanding?

AK says...
Bonds are considered "safer" if they have a maturity date and you get back your capital at some point in time.

The problem with a bond fund is that the fund doesn't ever mature (even if the underlying bonds do) and if you want your money back, you will have to accept whatever unit price Mr. Market offers.

When you buy a bond fund, you have to take this into consideration because you might want to or need to make a redemption in future. So, it matters.

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