Sunday, July 18, 2010

Dual Currency Investment - Small Gain and Big Loss

Someone sent me an e-mail sharing his positive experience in dual currency investments. He found that it gave him a better yield than fixed deposit.

This is true. Many investors had similar positive experience. But, when it comes to a loss, they can lose big. And the odds are against the investor.

Take this hypothetical example. In stable times, you are likely to make a small gain, say 0.1% in 1 week. This amounts to 5.2% in 1 year, which is more attractive in fixed deposit. However, when the market gets volatile, you can lose 10% within a week, before you close the deal. At that time, you take over the foreign currency and wait for its recovery. But, it can get worse.

If you gain 0.1% on a bet and lose 10%, you need to have 100 winning bets to cover 1 big loss. You are likely to find the losing event occur earlier than 100 weeks. But that time, you would have learnt your lesson, and would not come back.

The dual currency investment is bad for the small investor, due to the high charges and marketing expenses. This is similar to any structured product. If you wish to speculate on foreign currency, it is better to buy the foreign currency directly and take your chance. At least, you have a more even chance of winning and losing.

Read the FAQ in www.tankinlian.com (Ask Mr. Tan). My book, Practical Guide on Financial Planning, has a few examples of investors who lost big sums on money on dual currency investments. www.easysearch.sg/ishop.