1. Difficulty in accessing how underlying assets performed

Money does not drop from the sky. Whatever you invest in, that product need to generate positive cash flows through some means and from somewhere else, usually from common financial assets of rental income from properties, mortgages, coupon payments from bonds or dividends from stocks.

It is difficult to access its probability of returns given its complex nature.

2. No market value when need to cash out before holding period ends and upside gains are usually limited regardless of how underlying assets performed but when underlying assets lose everything, you lose everything.

Despite all the intentions and planning, sometimes you just need the money before expected holding period ends. When it comes to properties, stocks and bonds, there is a market to cash out holdings in them. But for the case of structured products, cash out value depends on what the banks say.

This is precisely the reason why people can invest in more risky structured products rather than shares of publicly traded companies of equal risk. Or worse, invest in risky structured products when there are investments with similar returns for much lower risks.

Because they don’t see the value of their structured products keeping changing in market prices like stocks, they felt safe, however, what they owns may not be necessary better than stocks as at least for the case of stocks, one can participate in the every of the upside when the company does well while structured products can only participate in every of the downside as in when the underlying investment does not do well and investors lose everything.

3. Unclear risks

In the first place, it is unclear from most structured products how they generate returns; much less determine the probability of losing initial capital. In other words, there is difficulty in forecasting events. Although in general, no one has the crystal ball, but still you cannot possibly lend money to anyone unrelated to you and expect that he will pays back.

As a consequence of point 1, there is a risk that the underlying assets do not succeed in generating the required cash flows, or even worse, there is something happen that result in losing initial capital.

For stocks, you know you loss your whole capital if the whole company is involves in creative accounting and become bankrupt as a result like Enron. One can estimate the risk involved by looking at the financial statements.

For bonds, there are some other methods, other than credit ratings to access the risk of defaults. For properties and mortgages, there are other credits checking of persons behind the payments as well.

4. Usually higher risk for less than required returns

In other words, it is like lending $1000 to a person to gamble in casino, where he can win a 100% return on each bet but at the same time can lose everything. If he is lucky and wins, you still only get 5% returns from him but if he is unlucky, you lose every $1000.

When the risk is high, it is natural that the expected return is also high.

For structured products advertised as low risk, one can quote the words of Warren Buffett,

Managers thinking about accounting issues should never forget one of Abraham Lincoln’s favorite riddles: `How many legs does a dog have if you call his tail a leg?’ The answer: `Four, because calling a tail a leg does not make it a leg’.

Just calling something low risk does not mean it is really low risk. As millions of Lehman Brother Minibonds investors in Singapore and Hong Kong can attest to that.

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If you don’t do so now, it will be problematic when kids become adults and their toys become expensive.

Here are some of my humble suggestions for instilling kids of various age groups the value of money.

Ages 0 to 3

Under this age group, you don’t give them any money as they may mistook dollar notes and coins as food and sallow it.

Not only do you lose some money but that have to spend a few thousands on medical bills.

Ages 4 to 8

1. During a trip to shopping malls, explain what $10 can buy and what $10 is unable to buy.

This is to show them the value of money.

2. Either let them pay for things purchased or watch you paying for the purchases.

But please don’t let them pay themselves without supervision from you as there is a good chance that how come the cashier does not give change?

Lessons learnt from actions

1. Different physical items have different prices. You don’t want kids to have the idea that a roll of toilet paper worth more than a $50 dollar bill because it contain more materials.

2. There is no free lunch. Everything cost money.

Ages 9 to 13

1. This is the time to get them interested in looking at bank statements but not financial statements of listed companies yet. Arouse their interests in looking at their bank passbook and statements so that they know how much money they are saving.

2. During this age group, normal human kids already develop the ability of deferring consumption for future benefits. Get kids into thinking about medium saving goals and how long they need to save based on parents’ allowance from now to reach that saving goal.

3. Now is still not the age to talk about investing and asset allocations but is the time for them to learn about more efficient allocation of what they have. Like if they have $500 now, spending all $500 on the latest Nike shoes means that don’t have any left for Ipod.

Lessons learnt from actions

1. Saving needs to come first before everything else like investing.

2. Saving means sacrificing current consumptions for future uses.

3. Principle of scarcity – spending $500 on this means that there is no money for others.

Ages 14 onwards

1. Every teenager now has handphones. By giving them a fixed amount of allowance and make them responsible for their handphone bills is a good way to enable them to spend wisely.

2. Do not lent money to them for the latest Iphone purchase or some other luxury items that are deemed extravagant. Tell them to work in a part time job to afford these items by themselves. If really give them the money, reduce their monthly allowances until the amount lent is repaid.

3. Now is the time to start introducing to them the concept of investing, but avoid letting them read Rich Dad Poor Dad, in case they ended up believing that if you want to be rich and happy, then don’t go to school. Illustrate the value of investing by placing some of their money in higher interest savings account, though there is not any as far as I know.

4. Do emphasize that fact that if they start saving and investing now, their little wealth will be much more down the road due to compound interest.

Lessons learnt from actions

1. Learn how to earn what they want for themselves and realize that making money is not easy.

2. Learn the fact of making money work for you.

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To average Joe on the street, key thing on their minds is keeping finances in order until things are back to normal.

1. Aware of your cash balance

By right in the first place, you should record down on paper the monthly income and expenses. It is even more important now to do so since at this time comparing to a few years ago, there is a higher statistical probability of you being retrenched. Not only that, most companies has already freeze hiring. In other words, after being retrenched, there is also much greater difficulty in finding another job.

The general advice in this area is always stacking around 6 months of your monthly expenses.

2. Home loans and mortgages

This is where it requires some thinking and knowledge in real estate finance. With an expected steep and prolonged recession ahead, Central Banks all around the World is slashing interest rates; as a result, short term interest rates are expected to stay low for the entire year ahead.

This basically translated into substantial savings for those on variable loan packages.

3. Usual Credit Card Debt

The unfortunate thing is that the good times experienced just more than 1 year ago resulted in some, if not most individuals into bad habits arising from complacency, which is not paying credit cards bills in full.

Everyone knows that credit card debt is of of the most expensive loan and most still ended up contributing to the wealth of those that are already very rich – major shareholders of major banks. That is not wise which I sure most will agree.

The economic crisis brings a good time to tighten your wallets and pay off these consumer debts as soon as possible.

4. Consolidating debts

People nowadays not only have many other problems but also many debts, which eventually create even more problems.

Debt consolidation is a must if you have outstanding balances with credit card companies here, there and everywhere. In 99.99% of the cases, people will have difficulty paying off.

5. A good time to review insurance policies

If you are going to retrench or have already being retrenched and doing nothing at home now, this period will be a good time to thoroughly review all your policies.

One very important task that you must do at these times of uncertainty is to ensure that the hospitalization policies are in force. Medical bills are sky high these days due to medical students being the brightest in the country and expect higher pay, if not; they will give up practicing medicine and become an investment banker.

With giants like Lehman Brothers, Fannie Mae and Freddie Mac collapsing, what makes you think that the company you work for will be there the next day?

Depending on company’s insurance coverage is a serious mistake.

6. Review your investment portfolios

As I said before, since you are already doing nothing at home now or are going to soon, you may as well think about whether there is a need to restructure your portfolio.

Equities are now like having a closing down sales. By selling fixed income instruments like bonds and redeploying the sales proceeds into stocks, one really stands a good chance of making a handsome returns a few years down the road.

With the low Central bank interest rates now and possibly in the months and years ahead, global money supply will eventually increases, leading to a recovering economy and stock market.

7. Investment Checklist for ordinary people

Warren Buffett has an investment checklist when selecting stocks but his is going to be different from us average Joe on the streets. He once said that diversification is for birds. We practiced diversification because we all are birds when it comes to money.

Even you are planning to enter the stock or property markets now; you should ensure that the money is well diversified across different asset classes, nations and sectors.

The rule of thumb is dollar cost averaging – buying into the stocks via a fixed sum at regular time intervals because no one can time the market and you don’t want to spend your life watching the tickers.

In the long run, stock markets will always go upwards, reflecting the growth of the economy.

8. Becoming recession proof instead of prepared to be retrenched

No one in the right mind is going to lay off an Olympic performer in his or her job.

Going the extra mile by doing more other than your basic responsibilities, upgrade your skills by taking related courses to your profession and of course, be it in businesses or as an employee, networking and creating a good working relationship is essential as well.

9. Learn cooking

This is like killing 2 birds with 1 stone. Previously you may not have time to cook for yourself at home, now you have been retrenched or simply want to cut costs by cooking own food instead of buying processed food.

Along the way, a new skill is learned. Instead of going for a cooking course, experiencing the learning and trial and error process of it together with your spouse is, in my opinion, a wonderful experience.

10. Count your blessings and be grateful

With or without recessions, you are still 10 times better than someone in Africa. At least you have a roof over your head and food on the table.

Reflect upon these facts and you will feel more abundant and grateful.

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