22pc in 30 months
Investment Returns, Fixed Income Investments, Invest Smart, Structured Products

Clients To Receive 22% Cash Returns in 30 Months

22% Cash Returns in 30 Months

We are pleased to announce that another Fixed Income Note from Natixis S.A., has matured last week after just 30 months in operation.

In addition to receiving their full capital back, our clients invested in this note are due to receive cash returns of 22% in 30 months.

Our clients were invested in the following stock indices 'Wisdom Tree Fund' (India), 'iShares MSCI Australia', 'iShares MSCI Canada', and 'EuroStoxx 50' (Europe), through this fixed income note.

This Natixis S.A. Note is just one of a unique range of fixed income products offered exclusively by us.

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12pc in 18 months
Investment Returns, Fixed Income Investments, Invest Smart, Structured Products

Clients To Receive 12% Cash Returns in 18 Months

12% Cash Returns in 18 Months

We are pleased to announce that another Fixed Income Note from Natixis S.A., has matured last week after just 18 months in operation.

In addition to receiving their full capital back, our clients invested in this note are due to receive cash returns of 12% in 18 months.

Our clients were invested in the following stock indices 'ASX 200' (Australia), 'Dax 30' (Germany), 'Nikkei 225' (Japan), 'SMI' (Swiss Market Index) and 'S&P500' (U.S.A.), through this fixed income note.

This Natixis S.A. Note is just one of a unique range of fixed income products offered exclusively by us.

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10pc in 12 months
Investment Returns, Fixed Income Investments, Invest Smart, Structured Products

Clients To Receive 10% Cash Returns in 12 Months

10% Cash Returns in 12 Months

We are pleased to announce that another Fixed Income Note from BNP Paribas, has matured last week after just 12 months in operation.

In addition to receiving their full capital back, our clients invested in this note are due to receive cash returns of 10% in 12 months.

Our clients were invested in the following stock indices 'HSCEI' (Hong Kong), 'Nasdaq 100' (Nasdaq Composite Index - U.S.A.), 'Nikkei 225' (Japan) and 'OMX 30' (Stockholm, Sweden), through this fixed income note.

This BNP Paribas Note is just one of a unique range of fixed income products offered exclusively by us.

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Why Investing In Bonds Is Not As Safe As You Think It is
Invest Smart, Investing Safely

Why Investing In Bonds Is Not As Safe As You Think It is

Investing in bonds is not easy and safe as people think it is. There are a number of risks involved. While the first 5 risks are well-known, the last two and are more important in my humble opinion.

These risk of investing in bonds are:

  1. Interest rate risk
  2. Reinvestment risk
  3. Call Risk
  4. Default Risk
  5. Inflation Risk
  6. Portfolio Concentration Risk
  7. Opportunity Cost Risk

Interest Rate Risk For Bond Investors

Market interest rates are a function of several factors, including the demand for and supply of money in the economy, the inflation rate, the stage that the business cycle is in, and the government's monetary and fiscal policies.

From a mathematical standpoint, interest-rate risk refers to the inverse relationship between the price of a bond and market interest rates. 

  1. To explain, if an investor purchased a 5% coupon paying corporate bond with a 10-year maturity that is selling at par value, the present value of the $1,000 par value bond would be $614. This amount represents the amount of money that is needed today to be invested at an annual rate of 5% per year over a 10-year period, in order to have $1,000 when the bond reaches maturity.
  1. Now, if interest rates increase to 6%, the present value of the bond would be $558, because it would only take $558 invested today at an annual rate of 6% for 10 years to accumulate $1,000. In contrast, if interest rates decreased to 4%, the present value of the bond would be $676. As you can see from the difference in the present value of these bond prices, there truly is an inverse relationship between the price of a bond and market interest rates, at least from a mathematical standpoint.
  1. From the standpoint of supply and demand, the concept of interest-rate risk is also straightforward to understand. For example, if an investor purchased a 5% coupon and 10-year corporate bond that is selling at par value, the investor would expect to receive $50 per year, plus the repayment of the $1,000 principal investment when the bond reaches maturity.
  1. Now, let's determine what would happen if market interest rates increased by one percentage point. Under this scenario, a newly issued bond with similar characteristics as the originally issued bond would pay a coupon amount of 6%, assuming that it is offered at par value.
  1. For this reason, in a rising interest rate environment, the issuer of the original bond would find it difficult to find a buyer willing to pay par value for their bond, because a buyer could purchase a newly issued bond in the market that is paying a higher coupon amount.

    As a result, the issuer would have to sell the bond at a discount from par value in order to attract a buyer. As you can probably imagine, the discount on the price of the bond would be the amount that would make a buyer indifferent in terms of purchasing the original bond with a 5% coupon amount, or the newly issued bond with a more favorable coupon rate.
  1. The inverse relationship between market interest rates and bond prices holds true under a falling interest-rate environment as well. However, the originally issued bond would now be selling at a premium above par value, because the coupon payments associated with this bond would be greater than the coupon payments offered on newly issued bonds.

    As you may now be able to infer, the relationship between the price of a bond and market interest rates is simply explained by the supply and demand for a bond in a changing interest-rate environment.

Reinvestment Risk for Bond Investors

  1. One risk is that the proceeds from a bond will be reinvested at a lower rate than the bond originally provided. For example, imagine that an investor bought a $1,000 bond that had an annual coupon of 12%. 
  1. Each year the investor receives $120 (12% * $1,000), which can be reinvested back into another bond. But imagine that over time the market rate falls to 1%. Suddenly, that $120 received from the bond can only be reinvested at 1%, instead of the 12% rate of the original bond.

Call Risk for Bond Investors

  1. Another risk is that a bond will be called by its issuer. Callable bonds have call provisions, which allow the bond issuer to purchase the bond back from the bondholders and retire the issue. This is usually done when interest rates have fallen substantially since the issue date. 
  1. Call provisions allow the issuer to retire the old, high-rate bonds and sell low-rate bonds in a bid to lower debt costs.

Default Risk for Bond Investors

  1. This risk refers to an event wherein the bond's issuer is unable to pay the contractual interest or principal on the bond in a timely manner, or at all. Credit rating services such as Moody's, Standard & Poor's and Fitch give credit ratings to bond issues, which helps to give investors an idea of how likely it is that a payment default will occur.
  1. For example, most federal governments have very high credit ratings (AAA); they can raise taxes or print money to pay debts, making default unlikely. However, small emerging companies have some of the worst credit (BB and lower). They are much more likely to default on their bond payments, in which case bondholders will likely lose all or most of their investments.

Inflation Risk for Bond Investors

  1. This risk refers to an event wherein the rate of price increases in the economy deteriorates the returns associated with the bond. This has the greatest effect on fixed bonds, which have a set interest rate from inception.
  1. For example, if an investor purchases a 5% fixed bond, and then inflation rises to 10% per year, the bondholder will lose money on the investment because the purchasing power of the proceeds has been greatly diminished. The interest rates of floating-rate bonds (floaters) are adjusted periodically to match inflation rates, limiting investors' exposure to inflation risk.

Portfolio Concentration Risk

  1. This is a simple risk to understand. In simple words it means ‘How much of your portfolio is any particular bond investment as a percentage?
  2. If you plan to invest in corporate bonds, the typical starting amount is USD 200,000. 
  3. Even if your total investment portfolio is USD 1 million, you would be investing 20% of it into one particular investment when buying a corporate bond directly.
  4. That means if the issue of that bond was to go bankrupt, you would lose the USD 200,000 and 20% of your total portfolio would be lost overnight.
  5. If your total investment portfolio was less than a million dollars, the portfolio concentration would be a higher percentage, thereby increasing your portfolio concentration risk even higher.

Opportunity Cost Risk

  1. This risk is the cost of opportunity cost of investing in bonds as compared to other investment types.
  2. That means when you invest in a bond, you are prioritising safety and fixed income i.e. a fixed rate of return.
  3. This approach works when the markets are flat or going down, because fixed income portfolio would give a steadier return as compared to traditional market-linked investments. But the other risks mentioned above would still apply.
  4. When the market is doing well, the bond investor would be giving up the upside potential of market returns by committing to a lower fixed coupon from bonds investments.

Summary

It is always better to seek professional advice when investing, as the risks mentioned above are not commonly known to the average investor.

The result of the DIY (do-it-yourself) investing is that investors burn their fingers by investing in the wrong instrument or using the wrong approach and get put off from investing completely.

Moreover, there are other ways to invest depending on the money you have to invest. 

Please feel free to ask your questions in the comments section below.

References:

Original article from Investopedia was rewritten to add my perspective - https://www.investopedia.com/ask/answers/05/bondrisks.asp

How 30 minutes Could change your financial future

In 30 minutes, you could squeeze in another episode of your favourite Netflix series.
Or you could take the first step towards planning your finances and getting your money working for you.

Click here to book your Free 30-minute consultation with me on Financial planning without any commitment.

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Markets are falling - Should you exit your investment portfolio now
Invest Smart, Investing Safely, Investment News

Markets are falling – Should you exit your investment portfolio now?

Yield curves have inverted, recession is expected soon, this recession will be worse than the last !!!

It's all doom and gloom, or is it?

Sharp falls in market prices generally make headlines across all media. And no sooner when the index falls, predictions of more doom start pouring in from all corners. Clearly, the mood is that of panic and fear.

And we don't blame investors if they are unwilling to invest or stay invested at this point in time. Simply because our brains are hardwired to make us run from danger at the first sign of it.

And when it comes to investing, nothing can be more scary than seeing your investment portfolio down by 30-40%. The truth is that investment decisions of the average investor are governed by fear

Average investors tend to exit their investment position when they start seeing drops of 20-25% or more. That’s one angle to it. However, the actual fear is of higher losses we may incur by not selling.

Now let us see how fear rules our buying decisions. Head back straight to 2008 when the credit crisis was at its peak. Most stocks were trading at dirt cheap valuations then. Yet there were very few people who stuck their neck out to buy. Why? The answer is again fear. And this happened because their thinking was based on the perceived situation in the market place.

Outside environment created a sense of panic which restricted individuals to buy. But those who overcame fear made a pot of gold out of their investments.

Thus, it can be seen that FEAR makes us take decisions which are not favourable over the long term. However, overcoming fear does not mean you have to be contrarian. It means executing the decision if you feel the process you followed to arrive at any decision (buy or sell) is right.

Stay invested without fear when risks are known. In the long-term prices always reflect fundamentals, and markets always rise in value given an investment term of 5-8 years or more.

Our investment portfolios carry different types of risk, and some of the risks have a lot to do with your behaviour and of others around you, such as:

  1. The risk of selling or exiting at the wrong time (out of fear), especially when markets are down.
  2. The risk of investing in a stock just because others in your office or friend circle (out of greed) are buying the same.
  3. Investing too much in one particular investment because it looks the best on paper.
Risk comes from not knowing what you are doing

In summary, the best thing to do is to stay true to the financial plan you have set for yourself with the help of your financial advisor, and not worry too much about what the markets are doing.

There are better things to think about in life than just your investment portfolio performance. Focus on your investment goals, not market returns.

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Why Investing To Achieve Financial Goals Is Better Than Investing For Returns
Invest Smart, Investing Safely, Investment News

Why Investing To Achieve Financial Goals Is Better Than Investing For Returns

The two basic approaches to get your money working for you are:

  1. Investing for returns, &
  2. Investing to achieve financial goals

Investing For Returns

This is a common way of investing for short-term investors who look at returns over and above inflation to justify the risk of investing. There is no clearly defined financial goals apart from getting 'X' percentage of returns based on their expectations and knowledge.

Pros and Cons

  1. Those who use this approach are happy in some years when the returns are as expected, and unhappy when investment portfolios are down, because no one can control or predict returns consistently.
  2. There is no clear exit strategy when this approach is used. Every year the expectations for returns go up, especially after the portfolio has done well in the current year.
  3. Those who take this approach expect to beat inflation year-on-year, which is unrealistic.
  4. They exit the investment at the wrong times when markets and portfolios are down in value and enter the markets when they are at the top or on the way up.
  5. This approach only works if the investment term is relatively short i.e. 3 to 5 years, that too with fixed income portfolios only.

Investing To Achieve Financial Goals

This is the best way of investing for investors who look at achieving clearly defined financial goals over a set number of years. There is a clearly defined exit strategy for each investment, and the investors knows more or less when and how these financial goals can be achieved.

Pros and Cons

  1. For example if the financial goal is to say accumulate USD 250,000 over 10 years to fund a child's higher education,
    1. the investor can exit the investment, if the portfolio hits this number earlier than expected.
    2. the investor can increase the regular contributions if the portfolio is not performing as expected.
  2. The exit strategy is clearly defined.
  3. Year-on-year investment returns are almost secondary, as long as the portfolio is on target to achieve the financial goal.
  4. The right time to exit the investment is when the goal is achieved, regardless of whether the market is up or down.
  5. This investment approach works for all investment terms, and these type of investors don't exit the markets at the wrong time.
  6. It takes a certain amount of discipline to stay invested, and generally this approach is best taken with the help of a financial advisor who will help you stay invested through thick and thin till the financial goal is achieved.
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DIY Investing Vs Good Financial Advice
Invest Smart, Investing Safely, Investment News

Do-It-Yourself Investing Vs Using A Financial Advisor

My rant about 'The Investment Guru from Canada'

This article is going to generate a lot of 'controversy', so here I go...

Just the other day, a long-time client of mine and a good friend called me up and said 'He wanted to meet me, and discuss a few things'.

I thought this was a normal request, so we met and started talking. He had just been to a 'Free Investment Seminar' organised by a "well-known investment guru" from Canada, who's apparently a big promoter of 'DIY (Do -it-yourself) Investing'.

There were three other speakers in this seminar, including one from a robo-advisory investment firm. Robo advisors are the new craze globally, where artificial intelligence and machine learning  "supposedly negate the need for a financial advisor".

This Canadian "investment guru" then started bashing all the 'expensive savings and investment options in Dubai', and started talking about the benefits and virtues of 'DIY investing', and 'ETFs (Exchanged traded funds that track global indices').

He also showed the effect of the costs involved when a financial advisor is used, and the savings when 'You do it yourself'.

The client was ready to stop / surrender all his existing savings plans, investments (at a loss), and put all his money into low-cost ETFs after listening to this investment guru, and I said (in my mind of course) - 'Here we go again'...

I had heard this same thing many times from various people I met, including clients who had attended his seminars, or visited his website.

Don't get me wrong. There is nothing wrong in using low-cost ETFs, index funds and what have you. In fact I promote the same in many of my website articles, my meetings with clients, and my email newsletters as well.

What pissed me off was, this 'Canadian Investment guru', was against employing the services of a financial advisor'. I honestly consider this investment guru to be a well-meaning idiot, because he cannot differentiate between DIY investing and 'What a financial advisor does for his clients'.

Six Reasons To Have A Financial Advisor Manage Your Investment For You

Some people are confident that they can manage their investments themselves, DIY (Do-it-Yourself) platforms are for these people. But if you need help in making the right investment decisions, a 'Managed investment platform' managed by a qualified financial advisor (who represents you), is right for you.

While, the right charging structure and investing without lock-in structures are important, a good financial advisor provides you the following services:

  1. Getting you started on the path to achieving your goals, by developing a proper financial plan of action for you. I cannot stress this enough. Statistically it has been proven that most people left to their own devices, will never 'Invest money' or 'Invest money consistently' unless pushed by a financial advisor, who makes them understand the importance of 'Starting to invest, early enough in life'.
  2. Making sure, with regular reviews that you continue on the path, till you achieve your goals. (This has very little to do with investment returns). Starting an investment is easy. You don't need a financial advisor for this. However, the difficulty lies in 'staying invested', and 'not exiting at the wrong time', for various reasons.
  3. Optimizes The Returns Of An Investment - Now any adviser who sells himself, that he can get a better return is a cheat, because nobody can guarantee better returns, but a good financial advisor can:
    1. Reduce the risk in your investment portfolio, by only suggesting you investments that you understand and you are comfortable with.
    2. Reduce the volatility in the overall portfolio, giving you a slightly easy ride along the way, making things more predictable. Not all types of investments are fit for the average investor, even if they take the shape of an ETF. ETFs can be based on many different types of investments.
    3. Match investment risk and returns to your risk tolerance - how you feel about your investment value going up or down. Each investor has a different attitude towards investment risk. This is very personality driven. Your financial adviser has to choose an investment that suits your investment personality.
    4. Match investment risk and returns to your time scale - The volatility (risk of investment value going up or down) should be the lowest when you need your money back for your important life goal. You cannot take risks with your money, when you need it the most.
  4. Reduce Costs, including tax - They can help you with kinds of investments that you may not normally think about, which give you tax relief or other kinds of tax benefits.
  5. Save you time - They can save you a lot of time, in which you can spend doing the things you like to do, instead of learning how to invest, and manage your money yourself.
  6. Control your investment behaviour - If you are on your own accountable only to yourself, it can be very tempting, and very easy to make bad decisions on your money, in the heat of the moment. When markets are not performing well, you may make a decision without fully thinking it through, and you would have been better off, not doing that. A good advisor can act as a check and a balance against that kind of stuff, and save you a lot of money through costly mistakes ...because no one can control the markets, but what can be controlled is the choice of investment and the level of risk you are exposed to.

I could go on and on, but a good financial advisor who represents you will also give you advice on 'other investments', that you may do outside of his services, e.g. real estate investments, etc...

His main gripe was on charges

I agree with him on the point of avoiding expensive savings plans (especially ones with longer terms), and heavy surrender penalties, but most investors don't have 50 to 75 thousand US Dollars to start a lump sum investment, which is required on good investment platforms as a minimum starting amount.

Currently the cheapest way to accumulate that initial USD 50 - 70 thousand dollars is to start a 5-year savings plan with Investors Trust - Evolution. Read my review of this savings plan here.

Short of asking you for an explicit fee for the above-mentioned services, the financial advisor can only charge you the assets under management fee of 1% per annum or take a commission on the savings plan. What's wrong with that?

This fee has got very little to do just with investment advice (especially in Dubai, where no expat want's to pay an explicit fee to financial advisors for their financial planning advice). 

Good financial advisors will generally charge you 1% per annum of the amount they manage for you in an investment, ideally with no lock-in structure or surrender penalties, as long as they manage the portfolio for you. ...and this portfolio can still be in low-cost ETFs.

The alternative he preached was to buy low-cost ETFs on DIY platforms, and pay very low transaction fees or annual charges (typically upto 0.35% p.a.) only to the platform, not the advisor.

This is the dumbest thing I have heard. It's like saying to a patient that he can google his medical condition, symptoms, and treatment, and get the medicine from the pharmacy himself. This is why I call these kind of investment gurus well-meaning idiots.

To apply an analogy, why does anyone need a doctor at all? Just eat Vegan food, exercise 2 hours a day, quit smoking, drinking, and you will live till a 100 years of age. Right?.

How many people actually do that to stay healthy? They still need the advice and consultation of a doctor to get well. Why don't they just google the symptoms and go to the pharmacy to solve their medical problems themselves?

Summary

All I have to say is 'Quality of Advice' counts as well. Choose your financial advisor carefully. Go through referrals from your friends, colleagues and relatives.

If all else fails, research your choice of financial advisor, see what he/she has to say on their website. Look for client testimonials, reviews from existing / past clients, Linkedin profile, experience, qualifications, etc...

But for your own sake, don't listen to 'Investment Gurus' and make decisions that affect your money in the heat of the moment'.

The guy is obviously there to get paid for his talk, not for charity.

Rant over - LOL !!!

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2.35pc in 3 months
Investment Returns, Fixed Income Investments, Invest Smart, Structured Products

Clients To Receive 2.35% Cash Returns in 3 Months

2.35% Cash Returns in 3 Months

We are pleased to announce that another Fixed Income Note from Societe Generale, France has matured this week after just 3 months in operation.

In addition to receiving their full capital back, our clients invested in this note are due to receive cash returns of 2.35% in 3 months.

Our clients were invested in the following stock indices 'India', 'USA', 'Europe' and 'Australia', through this fixed income note.

This Societe Generale Note is just one of a unique range of fixed income products offered exclusively by us.

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