StarBiz, The Star Malaysia, 29th December 2018
There are many ways to grow wealth, including setting aside some savings on a monthly basis, optimising tax benefits or by increasing income. These are deemed as “safe” measures which also means a longer period of time is required before any significant impact to your wealth can be seen. Nothing can beat growing money exponentially as quickly as investing – that is, provided that the right investment vehicle offering a high return is selected.
Nowadays, we are bombarded with all sorts of investment proposals by various parties. So much so that it becomes a challenge to sieve through all these schemes to identify which are the genuine ones. From new cryptocurrencies, gold investment schemes, private equity investment, property or development-related investment , we can safely conclude that there’s definitely no shortage in which manner that we choose to grow wealth.… .
Needless to say, if you were to put money into the right investments, you will be able to grow your wealth faster in order to achieve financial freedom. However, should you end up choosing the wrong investment, not only do you risk losing a portion of your capital, the possibility is quite real that you could lose every single ringgit of it! In this article, I would like to share some key questions that you should ask before parting with your hard-earned money and committing to any investment plan.
Is the investment regulated and by whom?
You need to find out which authorities regulate the proposed investment. In Malaysia, if neither Bank Negara Malaysia or Securities Commission are indicated in the prospectus as the licensing body, this is a sign that potential investors should probe further. For example, there are commodity trading investment schemes regulated by tax-free island authorities that have gone bust.
Having said that, not all investments marketed by a regulated institution can be deemed 100% safe. For example, a licensed asset management company may offer money market or bond funds which are relatively low risk, while promoting private equity investment fund or other alternative investments that are very high risk in nature. As such, it is better to practice caution when purchasing from regulated institution as some investments may still be riskier than others.
At the end of the day, investors need to hold on to the old caveat emptor adage and exercise adequate precaution before buying into any investment proposal.
Are there supporting documents to back the investment scheme?
Before you consider any investments, there is some basic information that you should have on hand such as a written proposal (which can be a prospectus or information memo), the company background, including who are its shareholders and directors and information on the underlying investment such as how it works, costs involved and investment protection, if any.
Rather than placing your full trust in the salesperson’s verbal claims and promises on the product, it is always prudent to ask for a written or official proposal from the investment company. When the information is there in black and white, you can always ask the salesperson to show the basis for his claims.
To illustrate the dangers of not reading the fine print, I had a client who was verbally promised a 10% guaranteed return by a salesperson of a Singaporean asset management company. Subsequently when this obviously failed to materialise, he discovered that there was no mention of such returns in the prospectus. Instead, there was a disclaimer to the effect that the investment return is not guaranteed and worst, subject to market volatility.
While written documents are more reliable compared to verbal claims by salespersons, they are not foolproof in any shape or form. There have been cases where the wordings in the documents can be ambiguously written or misleading. A case in example, is a Canadian property investment company that had claimed in its written proposal, that trustee protection would be available to investors. Based on its wordings, investors may assume that they would be accorded the same protection given by a local unit trust structure which is that of a 3rd party corporate trustee. Upon further investigation, the so-called ‘trustee’ is none other than the directors themselves of the said investment company.
The moral of the story is simple; if the investment promise sounds too good to be true, then it is very likely to be so. The 19th century novelist Charlotte Bronte once said, “Look twice before you leap.” Very apt words indeed when applied in the context of investments. If in doubt or even just as a precautionary measure, check with the regulatory authorities or refer to a licensed financial advisor for a professional viewpoint.
How will the company deliver the promised return with the underlying investment?
In the course of purchasing an investment, you may encounter a salesperson or review marketing materials which may claim that the returns are guaranteed. Therefore, it is imperative that we pose the question of how exactly are they going to deliver the guaranteed return? Is the investment company itself guaranteeing the return on the underlying investment or is there a 3rd party like a financial institution or a bank that is providing the guarantee? It would be sheer folly to take such claims at face value and not investigate further the actual role of the guarantor (if one even exists).
To illustrate, a few years ago, a crude oil investment had promised a 3% return every 3 months for a 2-year investment. On the face of it, the investment appears to be a fixed income return plan. However if one were to pause and ponder, you will question how the investment company could afford to realistically deliver steady returns when the price of crude oil itself is subject to market volatility. True enough, halfway into the investment period, the company failed to continue paying the promised income.
Yet another Singapore based investment company promised to pay a guaranteed return of 16% per year but they were in fact investing into foreign currency trading. Knowing that foreign currencies are always subject to fluctuation, warning bells should have gone off. Once again, the question that investors should be asking is how is the company going to deliver the guaranteed return?
Malaysians tend to be very ‘polite’ investors in that we shy away from actively questioning the salesperson about the investment proposal (even if the questions are very much justified). However, do not forget that it is our hard-earned money on the line and any investment advisor worth his salt would not be offended by relevant questioning but on the contrary, be pleased to be dealing with a concerned and financially literate investor.
Every middle-class individual has the potential to achieve financial freedom. Unfortunately, many are being hampered by losses due to risky investments brought about by ignorance or inexperience.
Good wealth management is not just about finding opportunities to grow your wealth. It is also about the ability to avoid wealth depletion due to making wrong investment decisions. A successful wealth accumulator is always someone who is good at minimising investment risks. I cannot impress enough how essential it is to do your research and due diligence before you invest, not after. If you do not have the resources or time for investing or if you are unsure of a particular investment proposal, it is always best to get a second opinion. When it comes to money, I do not believe in throwing caution to the wind. This remark from an anonymous author says it all: “Beware, some people will sell you a dream and deliver a nightmare.” It’s definitely better to be safe than sorry.