As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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Saturday, 14 April 2012

To observe due diligence, observe yourself first.

For retail investors, due diligence is about understanding themselves and how an investment product fits in with their life goals, investment horizons and risk profiles

Createwealth8888's comments: How many retail investors seriously do due diligence and put the risks of losing large capital before dreaming of huge rewards.

Generally, the nearer an investor is to retirement, the lower his risk profile should be. In other words, as a rule of thumb, investors should concentrate on making their money work harder for them during their younger years, and on protecting their investment gains as they approach retirement age.

Gerald Foo
Chief Operating Officer
Walton International Group (S) Pte Ltd

RECENTLY, the Monetary Authority of Singapore (MAS) announced new measures to safeguard inexperienced retail investors from buying certain types of investments without knowing what they are buying into.

Since January, banks and other financial institutions have been assessing customers' financial knowledge and investment know-how before allowing them to buy exchange-traded funds, investment-linked insurance policies, structured notes and other complex instruments.

The latest move by MAS highlights the ongoing need for financial institutions to undertake due diligence in terms of "screening" potential customers, and ensuring that certain products are only sold to investors who understand the inherent risks of these asset classes.

However, due diligence cuts both ways. While it is true that financial institutions must practise due diligence, the same can also be said of retail investors themselves.

In a nutshell, retail investors should undertake two forms of due diligence before parting with their hard-earned money - understanding themselves and understanding the product.

Understanding themselves is arguably the most fundamental form of due diligence investors must undertake, because it provides an overall investment framework based on their objectives, risk profiles and investment horizons.

For starters, investors should identify certain goals or milestones in life (such as their retirement or their children's university education), and how far these milestones are from the present time (the investment horizon). Then, they should work out the amount of money they will need when these milestones are reached. Doing the above will give them a clearer idea of the rate of return that any investment should yield over the investment horizon in order to reach their goals.

Createwealth8888's comments: Most retail investors may have clear investing goals; but many do not have clearer ideas of realistic yield or rate of return over the investment horizon in order to reach their goals. They have not seriously put in the expected number in their investment yield or rate of return worksheet. Worse still many are just tracking and monitoring their portfolio and yet thinking that they are measuring their investment performance to reach their investing goals. Without proper measurement, it is difficult to revise investment strategies and necessary risk taking over market cycles to meet investing goals.

The next thing to do is to ascertain their risk profile, which indicates the level of "uncertainty" they can realistically stomach while investing. Risk profile entails many things - current age, preferred retirement age, investment know-how, risk tolerance and much more. Generally, the nearer an investor is to retirement, the lower his risk profile should be. In other words, as a rule of thumb, investors should concentrate on making their money work harder for them during their younger years, and on protecting their investment gains as they approach retirement age.

After ascertaining their risk profile, the next step would be to analyse their income and cash flow - their monthly take-home pay, expenditure patterns, savings levels and so on. This will give them a better idea of what kinds of lump-sum or regular investments they can undertake so that they do not over- or under-invest their spare funds.

Investors will only be able to judge the suitability of any investment - the second form of due diligence - when they understand themselves first.

Createwealth8888's comments: It is so easy for retail investors to go around reading investment and finance blogs and get so excited and motivated over some bloggers' investment strategies and success without seriously understanding themselves first and knowing that their account size must fix into their investment strategies and investing goals over the investment horizon.

Read? Account size really matters!

For example, when they are faced with a product that is considered low-risk, they ought to ask themselves if the projected rate of return is sufficient to meet their goals, given their investment horizons. However, if the product is labelled high-risk, they ought to consider if the returns are commensurate with the level of uncertainty that the investment entails, as well as their own ability to deal with a possible loss of capital if the investment turns sour.

Investment payouts

Besides the product's inherent risk, investors should also understand the conditions under which investment payouts are made. Some products hold the promise of high payouts - but only if a certain stringent criterion is met, or after a minimum investment period has elapsed. People who have invested in such products might be unable to liquidate these assets and hence find themselves short of cash as various milestones approach.

Hence, it is important to compare the product's estimated holding period (the projected amount of time before liquidation occurs) and your investment horizon. This is especially crucial if you plan to invest in mid- to long-term asset classes, such as land investment. For example, from Dec 1, 1998, to Dec 31, 2010, Walton International, a group of asset management and real estate companies, has fully or partially exited 43 land projects. Of these projects, the shortest holding period was 2.36 years and the longest was 19.35 years as audited by one of the big four audit firms.

Many kinds of investment products also come with various fees attached, such as expense ratios and management charges. Investors should scrutinise the fee structure to understand how the financial institution puts their money to work - or how much the institution pays its staff using their money. Either way, such fees will erode some gains and investors have to accept that reality.

Forex risks are another reality that investors of foreign-denominated assets have to accept. Some investors choose to avoid forex risks altogether by parking all of their funds in local investments. However, portfolio diversification is a great risk mitigator and therefore exposure to markets outside Singapore allows investors to avoid putting all of their eggs in one basket.

Perhaps the best way to mitigate forex risks would be to understand the fundamentals for various foreign currencies and their long-term trend vis-à-vis the Singapore dollar. Then, look for investments in currencies that are likely to appreciate against the Singapore dollar over the length of the investment horizon.

Even after you have fully understood a product, do not plunge into the investment straightaway. Do additional research to locate any similar products, and compare the various offerings in terms of potential returns, inherent risk, investment time frames and so on. Then choose the one that best fits your goals and needs.

Due diligence is a cumbersome process - but it is rightly and necessarily so. This is because investors should only part with their hard-earned money if they have a clear picture of what they want to achieve, and how they plan to go about doing so.


  1. CW8888,

    We share a lot in common; and yet we differ in quite a few areas too :)

    Isn't it wonderful? We are 2 different individuals after all.

    We are both happy walking our own paths, while giving each other friendly jibes and pokes - it's to test how strong our convictions really are :)

    I like this post very much as you cheerleading others to be their own shepherd.

    Who else will take better care of our interests other than us?

    1. SMOL,

      Now I have included a Like button for you to click. Got the hint. Tks

  2. LOL!


    You now into social media too ;)



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