LATEST: The Petition is now closed. A total of 1080 signatures were received.
The Petition to the Singapore Government is now ready for signing at:
http://www.petitiononline.com/PSGCLS01/petition.html
Investors in the credit linked securities can now sign the Petition which will be delivered to the Singapore Government, tentatively by early October.
Saturday, October 4, 2008
Capital protected product
Here is an explanation from the London stock exchange:
http://www.londonstockexchange.com/en-gb/pricesnews/prices/structuredproducts/proddescriptions/capprotect.htm
Basically, the issuer of the product buys a zero coupon bond to provide the redemption of the capital at maturity date and uses the interest to buy an option.
If the option works well, it can give an attractive return. If the market moves in the wrong direction, the option is useless and the investor loses the option money entirely.
This product has a disadvantage. The issuer is likely to take away a large part of the investment (5% to 10%) as marketing expenses and profit. This leaves very little money to buy the option. This is why most capital protected product gives poor return over the past years.
For a capital guaranteed product, an additional fee is taken away to pay the bank that provides the capital guarantee. This reduces the return to the investor further.
Be aware about capital protected product. It is good for marketing, but is actually quite useless. Read this opinion:
http://www.wrenresearch.com.au/advisers/factsheets/060413/index-b.htm
http://www.londonstockexchange.com/en-gb/pricesnews/prices/structuredproducts/proddescriptions/capprotect.htm
Basically, the issuer of the product buys a zero coupon bond to provide the redemption of the capital at maturity date and uses the interest to buy an option.
If the option works well, it can give an attractive return. If the market moves in the wrong direction, the option is useless and the investor loses the option money entirely.
This product has a disadvantage. The issuer is likely to take away a large part of the investment (5% to 10%) as marketing expenses and profit. This leaves very little money to buy the option. This is why most capital protected product gives poor return over the past years.
For a capital guaranteed product, an additional fee is taken away to pay the bank that provides the capital guarantee. This reduces the return to the investor further.
Be aware about capital protected product. It is good for marketing, but is actually quite useless. Read this opinion:
http://www.wrenresearch.com.au/advisers/factsheets/060413/index-b.htm
Service to the people
Someone commented that my actions (in helping the people affected by te minibond and other structured product) reflect "service to the people".
There is another person who has sacrificed much for what he believes to be good for the people of Singapore. He is Mr. J B Jeyaretnam.
An open letter has been sent to the Prime Minister and his Cabinet to honour Mr. J B Jeyaretnam for his sacrifices and beliefs in serving the people of Singapore.
http://theonlinecitizen.com/2008/10/letter-to-pm-lee-to-honour-mr-jbj/
I respect Mr. Jeyaretnam for what he has done for the people of Singapore. I have added my signature to this letter. If you wish to join me, you can sign here:
http://www.petitiononline.com/IHOJBJ2/
There is another person who has sacrificed much for what he believes to be good for the people of Singapore. He is Mr. J B Jeyaretnam.
An open letter has been sent to the Prime Minister and his Cabinet to honour Mr. J B Jeyaretnam for his sacrifices and beliefs in serving the people of Singapore.
http://theonlinecitizen.com/2008/10/letter-to-pm-lee-to-honour-mr-jbj/
I respect Mr. Jeyaretnam for what he has done for the people of Singapore. I have added my signature to this letter. If you wish to join me, you can sign here:
http://www.petitiononline.com/IHOJBJ2/
CNBC short video on Minibond
CNBC's short video on Minibond.
http://www.cnbc.com/id/15840232?video=876393192
Chee Onn
http://onnzhai.blogspot.com
http://www.cnbc.com/id/15840232?video=876393192
Chee Onn
http://onnzhai.blogspot.com
Is it wise to cash out on the structured product now?
A few investors have asked for my advice whether they should cash out on the structured products that have not yet experienced a "credit default". The current price of these products now represent a loss of 20% or higher on the orignal investment.
I have replied that I am not able to give specific advice for any particular product. Each product has its own characteristics. To give proper advice, one needs to have more detailed data and to calculate the chance of a "credit default", which is quite difficult.
Here are some general remarks:
1. The quoted price now usually assume a "worse case" scenario. It is usually less than the current market value of the underlying assets. As there are more panicky sellers, the buyers can offer a lower price to make a profit (in relation to the actual risk). The buyer could be a savvy financial institution which is able to calculate the risk better than the retail investor.
2. The bailout plan passed in USA is likely to prevent further failures of large financial institutions, like Lehman Brothers. Perhaps, there will be no large failures of this kind in the future, even if the economy worsens.
3. If I were the retail investor, I would prefer to take the risk and wait for maturity. The chance of getting a higher return is better than cashing out now. But this is based on "gut feel" only.
I have replied that I am not able to give specific advice for any particular product. Each product has its own characteristics. To give proper advice, one needs to have more detailed data and to calculate the chance of a "credit default", which is quite difficult.
Here are some general remarks:
1. The quoted price now usually assume a "worse case" scenario. It is usually less than the current market value of the underlying assets. As there are more panicky sellers, the buyers can offer a lower price to make a profit (in relation to the actual risk). The buyer could be a savvy financial institution which is able to calculate the risk better than the retail investor.
2. The bailout plan passed in USA is likely to prevent further failures of large financial institutions, like Lehman Brothers. Perhaps, there will be no large failures of this kind in the future, even if the economy worsens.
3. If I were the retail investor, I would prefer to take the risk and wait for maturity. The chance of getting a higher return is better than cashing out now. But this is based on "gut feel" only.
A highly risky structured product
Some people (probably marketing the structured product) argued that 5% is a high return that justify a high risk. A safe return is 1% or less, which is the interest paid on fixed deposit. I disagree with this reasoning.
In my view, these investors are not risk takers. My reasons are:
1. Government bonds pay a return of about 3% per annum over a period of 5 years. It is guaranteed by the Government.
2. The 5% that is provided in the structured product is not guaranteed. It is actually paid out of the principal. Even if economic conditions are favourable, the investor may not get 100% of the principal paid on maturity. Even if the structured product is "principal protected", it is not the same as "capital protected".
3. It is irresponsible for the financial institution to earn a higher yield by risking the capital in credit default swaps. This is a gamble and is highly risky. This risk has not been properly explained to the investor. In most cases, the investor has been misled by improper advice and assurances.
There are strong grounds for the authority (MAS or attorney general) to investigate the financial institutions for wrong doings. I hope that the authority will act immediately. The purpose of the Petition to the Singapore Government is to ask for an investigation to be made to determine if any law has been broken.
In my view, these investors are not risk takers. My reasons are:
1. Government bonds pay a return of about 3% per annum over a period of 5 years. It is guaranteed by the Government.
2. The 5% that is provided in the structured product is not guaranteed. It is actually paid out of the principal. Even if economic conditions are favourable, the investor may not get 100% of the principal paid on maturity. Even if the structured product is "principal protected", it is not the same as "capital protected".
3. It is irresponsible for the financial institution to earn a higher yield by risking the capital in credit default swaps. This is a gamble and is highly risky. This risk has not been properly explained to the investor. In most cases, the investor has been misled by improper advice and assurances.
There are strong grounds for the authority (MAS or attorney general) to investigate the financial institutions for wrong doings. I hope that the authority will act immediately. The purpose of the Petition to the Singapore Government is to ask for an investigation to be made to determine if any law has been broken.
Selling of life insurance through multi-level
Someone asked if life insurnce is sold through multi-level, with high commission paid to all the levels. The focus of MLM organisation is to increase the volume of sales by paying high commission to all the levels.
The answer is "yes, in most cases". The total commission paid to all the levels can be as much as 160% of the annual premium, paid over the first three years. If you invest $500 per month in a life insurance policy, the total commission is as much as 160% X 12 X $500 = $9,600. The commission is taken out of your policy and is shared by the agent, agency supervisor and agency manager. This is money that you have to work very hard to earn, and you can lose it so easily and surely, when you buy a life insurance policy.
Most companies pay commission as high as indicated above. Some companies have only one level and pays a lower rate of commission. One company that I know of (which shall be unnamed) used to pay commission at less than half of the market rate, but I am told that this company has now increased its commission and advertising expenses considerably.
I generally advice people not to linvest in any life insurance product (i.e. whole life, endowment, education, investment-linked policy) due to the high charges. They give poor value to the consumer. It is better to invest in a low cost investment fund (i.e. equity, bond or money market fund).
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you have bought a high cost life insurance policy, it is usually better to continue the policy, as you have already incurred the upfront expense. But you should NEVER buy any high cost insurance policy in the future.
The answer is "yes, in most cases". The total commission paid to all the levels can be as much as 160% of the annual premium, paid over the first three years. If you invest $500 per month in a life insurance policy, the total commission is as much as 160% X 12 X $500 = $9,600. The commission is taken out of your policy and is shared by the agent, agency supervisor and agency manager. This is money that you have to work very hard to earn, and you can lose it so easily and surely, when you buy a life insurance policy.
Most companies pay commission as high as indicated above. Some companies have only one level and pays a lower rate of commission. One company that I know of (which shall be unnamed) used to pay commission at less than half of the market rate, but I am told that this company has now increased its commission and advertising expenses considerably.
I generally advice people not to linvest in any life insurance product (i.e. whole life, endowment, education, investment-linked policy) due to the high charges. They give poor value to the consumer. It is better to invest in a low cost investment fund (i.e. equity, bond or money market fund).
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you have bought a high cost life insurance policy, it is usually better to continue the policy, as you have already incurred the upfront expense. But you should NEVER buy any high cost insurance policy in the future.
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