I have moderate tolerance for risk, my relationship manager declared after going through my bank records during one of our irregular meetings recently.
That sounded reasonable, although I couldn't recall ever having done any fact-finding exercise with anyone from the bank to determine my risk profile.
He then launched into his marketing spiel. I soon got bored. It was pretty run-of-the-mill stuff, variations of investment-linked products that I have heard and seen before. At some point, I interjected to say the projected returns were low. Ah, but the interest I was earning from money sitting in my savings account was far worse, he countered.
Indeed, he was correct.
But this line of argument turned out to be his key selling point, which was hardly an incentive for me to take out my cheque book. When asked what else was available, he hinted that there was a whole lot more, but these were open only to more privileged clients. Ouch!
I'd rather let my cash idle in bank savings or fixed deposits to await the next big investment opportunity. After all, holding cash in a safe-haven currency such as the Singapore dollar is, in itself, an investment.
While the meeting did not yield any fresh investment ideas, it made me think deeper on the issue of risk.
It is compulsory for a financial adviser to identify a client's risk appetite so that he can recommend the appropriate investment products to the client. But human psychology is complex and hard to measure. Our risk appetite may change as easily as our mind and cannot be so neatly pigeonholed based on a simple questionnaire. A person who spends most of his life keeping his head down may occasionally throw caution to the wind. Likewise, an individual known for making bold moves may sometimes choose to lie low.
Take me for example.
My early working life was driven by a desire to increase my savings. Even when I was drawing a monthly salary of $442 in my first full-time job, I would fish out my bank book every now and then to make sure the balance was growing. I lived a spartan lifestyle to achieve that. It was an ingrained habit.
After I started dabbling in the stock market, I would often feel a pang of insecurity whenever I saw my bank balance fall as a result of paying up for the shares I bought.
An inordinate fear of destitution meant I kept a high proportion of my investable assets in cash. It didn't help that as a financial journalist, I had a front-row seat watching and reporting on the destruction of wealth during the Asian financial crisis of 1998, the dot.com bust in 2000, the Sept 11 attacks in 2001 and the Sars (severe acute respiratory syndrome) crisis in 2003.
Just after the Sars crisis, an opportunity came up for me to trade my five-room Housing Board flat in Woodlands for another in Holland Village, where my parents-in-law live. The asking price for the five-year-old flat was $530,000, including a cash-over-valuation component of just $5,000. It was affordable but still I baulked. I was worried about the increased monthly instalments and additional financial burden, with a second child coming.
These anecdotes suggest I am a risk-averse investor.
But a few years, when another opportunity to acquire a residential property at three times the price of the Holland Village flat came up, I threw caution to the wind and emptied my bank accounts to make the down payment. It was totally out of character.
That the investment paid off handsomely is irrelevant from a risk perspective. In that one moment, a lifetime of risk-averse predisposition turned on a dime.
I'm not suggesting that investing in the Singapore property market is a high-risk proposition. However, the manner in which I did so was. Property is a big-ticket item and so most people borrow from the bank to finance their purchase.
Under a deferred payment scheme that was prevalent at the time, it wasn't necessary for a buyer to secure a bank loan to pay up the remaining 80 per cent of the purchase price until the project got its temporary occupation permit.
After signing the sale and purchase agreement, there was no rush for me to talk to the banks about financing since completion of the project was three to four years away. But that left me dangerously exposed.
If the property market had tanked instead of soaring the way it did, I might have faced bankruptcy if I had not been able to secure mortgage financing or sell the unit upon completion when the rest of the payment became due.
Risk is just one side of the investment coin. Returns is the other. Taking big risks does not necessarily reap high returns, especially if you pick the wrong investment or even the right investment but at the wrong time.
This leads to the question: Am I a risk-averse investor who occasionally loses his head in a moment of madness or an aggressive investor who bides his time before making a big play because of limited resources?
I hope I am the latter. Rather than dilute my cash holdings by putting them into regular savings and investment plans, I save up for a once-in-a-lifetime investment opportunity.
To be sure, I wouldn't have had enough cash to make the hefty down payment for the property had I committed a significant chunk of it elsewhere.
To use an analogy, it is akin to a fisherman who does not waste his bait on small catches. He goes away empty-handed on many occasions while his fellow anglers, who aim for smaller fish, catch them by the bucket. But when he lands a big one, he needs a cart to take the fish home.
Neither approach is superior to the other. One may work better over a certain period while the reverse may be true over another period.
I feel the big-catch approach works better in the current investment climate.
To kick-start the spluttering global economy, central banks around the world have flooded the financial system with cheap money. Eight years after the Lehman Brothers crisis, interest rates remain at rock bottom. This has caused an imbalance to the risk-reward conundrum, with investors having to assume a higher-than-usual level of risk to chase after meagre returns.
I'd rather let my cash idle in bank savings or fixed deposits to await the next big investment opportunity. After all, holding cash in a safe-haven currency such as the Singapore dollar is, in itself, an investment. That is also why investors in Japan and Switzerland are willing to hold yen and francs in a negative interest rate environment.
After much thought, I am doubtful of my relationship manager's conclusion that I have moderate tolerance for risk. A more accurate assessment is: It depends.