Avoid complicated products

This blog was first posted on 17 July 2007

I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.

To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.

After spending this time, the investor will still have more questions. There are still so much uncertainty.

If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.

For example, they will tell you that the risk of a credit event is small, that your investment is safe.

Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.

What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".

I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.

Lesson: Do not invest in complicated products, that you cannot understand.

If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).