Get familiar with financial terms

I HAVE been amused by comments on forums about investors asking the Government for help with their failed investments.

Although information is easily accessible, many of us ignore obvious facts and instead choose to make our decisions based on sales pitches.

Therefore, it is important to have a basic understanding of financial terms, so that we would know what constitutes misselling:

Low- or no-risk savings
The only low- or no-risk savings instrument is a pure savings or fixed-deposit account without an insurance element.

As long as an insurance element is included, it is a form of investment.

By default, it involves the participating or life fund of an insurance company, which consists of equities and fixed-income instruments.

Life-fund growth projections have been cut aggressively over the last ten years to 3 to 4 per cent now, after distribution charges are accounted for.

Equities generally appreciate in normal times, while fixed-income instruments do not.

As life funds contain a large proportion of fixed-income instruments, it is not difficult to understand why the returns from life and endowment policies are not impressive.

If the growth rate falls below the inflation rate of 5 to 6 per cent, the risk would be the erosion of my savings by inflation.

Therefore, if I had chosen an investment-linked product, which is perceived as being higher- risk, and chosen to have my investment fully allocated to fixed-income instruments, would that make my investment safer, as the salesperson would have me believe?

The so-called 'savings' are also cancelled out by the commission and insurance charges.

How can such an investment fairly be called 'low-risk'?

Long-term savings
Life-insurance and endowment plans of 25 to 30 years take on average 20 years to 'break even'. As a savings plan, it is ineffective.

Guaranteed payout by end of term
The 'guaranteed' payout at the end of a policy term is actually the sum assured of an insurance policy.

While most think the bonuses as guaranteed, they are actually almost entirely non-guaranteed, and dependent upon the performance of the life fund.

Product or fund of the month
There is always a rush for certain funds if they are seen as being the best investments at the time.

While their launch might coincide with their peak, things could go down from there.

Low-risk or guaranteed funds
These are commonly sold whenever markets take a downturn.

Guaranteed products were aggressively promoted in 2002 to 2003, and structured products from 2005 up to the present.

If not for the financial crisis, structured products would still be sold as 'safe' products.

Incentives and gifts
More complex and sophisticated products usually come with gifts or incentives, as they are harder to sell.

Complex financial terms
Terms like 'leveraged' and 'enhanced' sound good but do not reveal anything about a product.

When it comes to investing, act prudently and understand what you are getting yourself into, and learn to accept and embrace the outcome.

Mr Teo Eng Kiat, My paper.