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Beware of ‘alternative investments’

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EIGHT months into 2022, it has been a bad year for the capital markets. Equities performed poorly and many funds have underperformed in large part due to the global sell-off resulting from monetary tightening policies, high inflation and geopolitical issues.

Take popular app-based brokerage Robinhood Markets Inc, for instance. It is now shedding 23% of its workforce as it has lost seven million retail investor users (almost one third of total users) in the span of one year.

Locally, it would appear that things have come a full circle. Bursa Malaysia’s average daily trading value (ADV) has fallen to a decade low of only RM1.31bil for the month of July.

This is the lowest level since December 2012, according to a brokerage’s research report. It is a stark contrast to the RM10.3bil ADV level in the first quarter of 2021.

What this signifies is the participation of investors – be it retail, local institutions or foreign funds – have been lacklustre.

When the market participation rate is low, the vibrancy naturally becomes lacking and it is hard for the stock market to live up to its role of being a viable investment opportunity for retail investors.

This is where the problem occurs. Once retail investors cannot make good returns from the stock market, they start to turn to “alternative investments”.

The continued weakness of the ringgit also doesn’t help. As each day goes by, many grow increasingly concerned about the diminishing value of their hard earned savings.

A fine line between scams and investments

One of the most basic tenets of financial literacy would be first, to save, then to invest. In order to preserve the value of their money, many seek to invest. The idea may be correct but the approach can be tricky.

After all, many scams are disguised as investments and often paddled by persuasive charlatans. Without the right awareness and knowledge, it is easy to fall victim to such scams.

The idea of making multi-fold returns on your money within a short span of time is very alluring even to the smartest of people.

This is why we have witnessed how Ponzi schemes have evolved through the years with variations along the way such as gold scams like Genneva Malaysia Sdn Bhd, money game like MBI, forex schemes and even popular cash trust offerings that are being promoted heavily today.

The common underlying theme for all these “alternative investments” is to play on the greed and impatience of men (and women).

At times, it is a fine line because those who are not aware may not have the necessary skillset to discern. Ideally, the good sense of being careful is the best defence against such scams.

Red flags to look out for

Let me share a recent example that happened to me personally. I was approached by a licensed planner who wanted to market my fund to his clients. So, I asked about his past experience and the kind of products that he carries.

This licensed planner basically did everything under the sky from investment-linked products, unit trust, wholesale funds and countless others.

According to him, one of his most marketable products would be a “cash trust investment scheme”. The returns were guaranteed per annum with a locked-in period and steep penalty for early redemption.

When I asked him how does the cash trust scheme guarantees returns under such an economic climate, he basically gave me a smooth salesman pitch on how the cash trust operates on a web of complex structured derivative products, coupled with underlying real estate assets as backing by financial institutions.

Instantly, it reminded me of the cryptocurrency companies such as Terra and Luna that were supposedly stablecoins pegged to US dollar with minimal risk of default.

Despite being a licensed planner, he did not know what he was talking about. It was all about marketing the products to his clients for the commissions.

The red flags in this instance were quite clear – one, there is no such thing as guaranteed returns; two, the out-of-the-norm locked-in period coupled with a steep penalty for early redemption; three, the mechanism of delivering returns is inexplicable.

Apart from that, the biggest question mark for the cash trust scheme is the legitimacy of the structure itself, where it appears that the structure of custodian is being abused for “wide ranging investment purposes”.

This violates the legal framework which supposedly confers legitimacy. If the source of legitimacy for any investment schemes is in question, one ought to think twice before parting with one’s hard-earned money.

Nobody likes to lose money

No doubt, losing money is painful. Although one should only invest excess funds and be prepared to lose the money if things go south, but how many are truly prepared to face losses?

No amount of education prepares one to stomach losses. What most experienced professionals do not share is the amount of pain that one has to endure in their investment journey before becoming competent investors.

With that said, it is in fact a necessary path for those who aspire to become good investors, especially in the stock market. When times are tough and one throws in the towel, how then can one expect to grow?

All good things come to those who wait. You cannot grow a tree overnight and hope it bears fruits. There is no doubt we are all aware that the economy has its market cycle, and this is most clearly reflected by the companies that make up the stock market itself.

The right thing to do though is to adopt a long-term mindset when facing the cycles of the market instead of giving up altogether.

The practice of “switching” investment asset classes, stock markets or funds should also be avoided. Sometimes, I tend to hear retail investors lament that they cannot make money investing in Bursa and prefer to invest in overseas stock market.

It is my humble view that one should first hone the necessary skillset and aptitude to do well locally before looking outwards, as the bigger markets abroad would come with greater volatility and potential pitfalls.

Ng Zhu Hann is the CEO of Tradeview Capital. He is also a lawyer and the author of “Once Upon A Time In Bursa”. The views expressed here are the writer’s own.