Surprisingly, not clickbait NOR an advertisement.
It was the year 2018, about April.
We were looking for a bank to exchange currency with in the mall. Since I wasn’t familiar with quite a few of the popular Thai Banks, I asked my girlfriend, the local - for her opinion on which bank she used.
Now you have to understand: Manow and I don’t tend to discuss money much.
In fact, we barely talk about my work at all, at least not in detail – she sits patiently and listens to me complain about various clients, people, society in general – but it’s never a conversation topic aside from her encouraging me and just generally being there for me.
Additionally, both of us have a long history of not HAVING a lot of money, so we rarely talk about how we’d use it – even though things have changed a lot for us the last few years.
But I digress.
Here’s when it got alarming for me at the time: Manow proceeded to detail one of her favorite bank plans.
The way she described it was like this:
1) It requires a 5-year lock in period.
2) At the end of that tenure, the banker will look up something like a ‘lottery game’. If you ‘win’, you get double of your capital (or 100% gains).
3) But don’t worry - if you lose, your entire capital will be returned to you.
…Not to be overprotective, but how shady does that sound to you?
Double Whammy: It is 100% LEGIT
During my business trip in Thailand this year, I had been looking to convince a wealthy Thai prospect to port her money over to Singapore.
Being a complete novice at overseas business prospecting, I did casually bring this up in passing. I wanted to understand the nature of what kind of products or structures I was competing with in Thailand.
To my shock and horror, she did mention something similar:
1) It requires a 3-year lock in period, with the opportunity to 1.5/1.6x her capital.
2) It compares something against something else, that has a really low probability of ‘success’ on her part as the investor.
3) But even if she ‘failed’ she would still be guaranteed all her capital.
The main part that really got to me was that something so questionable sounding on paper was being offered, through regulation, by a BANK. Not some shady MLM company or questionable unsecured bond, but a BANK.
And so needless to say, I wasn’t really in a good position to compete for her business that day.
How is this POSSIBLE?
I’ll let all the clowns who have already figured it out take a moment to pat themselves on the back before pushing out the big reveal which I learnt only over a year later.
…Okay that was a little unnecessarily hostile, but I’m a lot more frustrated at myself than you. Don’t take it personally.
Here’s what it probably looked like on paper:
1) The bank offers a structured fund with a 5-year tenor.
2) The returns of the fund are paid out based on comparing two specific indices. [e.g. STI ETF vs SNP500]
3) The maximum payout of 200% is paid out on some criteria involving the performance of one index against the other. This is really important, but it typically has the bank specify that the position they take and by how much they expect the strength of that position.
For example, if they expect the SNP500 to grow against the STI ETF by 10% annualized a year, they might give you a guaranteed of 7% annualized at the end of your tenure.
4) Based on structure, it was more likely that it was about 15% every year, compared to trying to double money after holding the entire tenure. For the illustration, 15% annualized will double your money with a little excess in 5 years.
5) Structured funds like these are created and proposed based on historical performance. As my girlfriend pitched it as a ‘lottery’, it was likely that based on the index histories, the probability of this 200% wasn’t very high.
6) Such structures do often offer capital protection.
In the TLDR version – it’s simple: a structured fund will offer you all of this, completely legitimate and it’s designed for managed risk.
a) Is it really possible for the interest to be that high?
15% a year? Yes, it is.
Even non structurally – anyone who’d invested in the SNP500 in the beginning of this year probably made even more than that year-to-date.
High interest isn’t uncommon, especially in emerging market countries - which includes Thailand.
Inflation is immensely high, and much like when CPF was giving out 6.5% back when inflation was high in Singapore – such returns are difficult, but not unreal, in Thailand.
b) Was there an auto-redeemable feature, or early termination feature?
Structured Funds tend to have some kind of auto-redeemable feature, or early termination feature.
At least, according to my CMFAS papers. O_O
For example - assuming it had met the criteria early, for example, you would perhaps be able to take out your capital plus interest early (e.g. 1st year meets criteria, you get 100% + 15%).
I’m really not sure though. But that would have certainly made it a much more attractive product.
c) Whats the downside, then? Why wouldn't more people do this?
Primarily, its opportunity cost.
For example, if that money had been invested in the STI ETF, for example – even at an underperforming rate of 2.44%, a $100,000 investment could have netted over $12,800 in excess at the end of this 5-year tenure.
So of course, if the 'lottery' ‘fails’ and you just receive back your capital, you lost your opportunity to gain that money.
But even if the 'lottery' had succeeded, you could still have considerable opportunity cost.
For a better example, using an investment that Money Maverick has access to…
At a 17.82% annualized rate, a $100,000 investment would have become just over $227,000 in 5 years.
And $227,000 > $200,000, but my point being that opportunity costs comes regardless.
It’s always better to have a consultant help you filter and figure out making such a decision before committing.
d) Does Money Maverick offer these funds, or can I access them?
Incidentally, not yet – but I’m hoping soon. If I did, of course I would keep you updated. But at the very least, I would probably be licensed to do so.
e) …Then what was the point of this article?
Well not EVERY article is a marketing campaign for how awesome I am.
(He said, right after promoting himself.)
Sometimes Financial Stuff just fascinates me, and I love to talk about it.
What’s the Lesson Here?
I’ve had a specific fund in my portfolio go up from a fund price of $13.40 to $17.60 this year. That’s over a 30% gain on paper.
But if you read this article below, you’d know that it’s not exceptional. Even a plain vanilla ETF like the SNP500 has done 120.9% in a year before.
What I’m really trying to say is that the Finance World is really huge, and these things are NOT AS UNCOMMON as you might think.
While some may ascribe to ‘If it’s too good to be true, it probably is’…
…I’d typically rely on working hard, due diligence and taking managed risks before I write something off.
Moving into 2020 and ideally making the lives of my clients better and better, I’d never like to be that guy who over-promises and under-delivers.
If you open your mind a little bit, you can see some of the most amazing things.
With my investment experience, I would love to help you get there – whether you’re looking for an opportunity that blows your mind or working your way to Financial Freedom.
As one of the Top Financial Bloggers in Singapore (Feedspot, Withcontent.co), I would be happy to answer any emails and questions you may have, as I have been doing for my readers over the past few years - especially about Insurance and Investing, as it is my forte of personal and professional knowledge.
If you have any such questions about the articles and how it may apply to your finances, you can feel free to leave a comment, or drop a message through any preferred medium (if you prefer privacy).
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Money Maverick is a Licensed Financial Consultant with MAS, who specializes in Investments and Critical Illness Insurance.
The views on his blog are strictly of his own opinion and have no affiliation to any of the companies he works with.
Here are some of my resources on:
3) Retirement and Leverage: Leveraging a Private Annuity, Pros and Cons (ft. Jamus Lim)
4) Spending and Saving: The Biggest Spending Mistakes You DIDNT Even Know you were Making (and how to avoid them)
5) Job Assessment: A Case Study on How a $6k/mth GIrl makes MUCH more money than a $10k/mth Guy
6) Financial Optimisation: How I Avoid the Largest 'Fees' of All
Investments are also available using CPF (Ordinary Account), SRS (Supplementary Retirement Scheme) and Cash.
Roy: https://thehearttruths.com/2013/11/07/top-8-shocking-facts-about-the-singapore-cpf/: I know Roy is not bursting with credibility, but you can just take the picture without the added opinion – it’s an accurate picture.
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