Why Structured Products are Harmful to Retail Investors

Some of you are not even aware that the DBS High Notes you were sold by your RMs is a Structured Product. To you, you have invested wisely and conservatively in a safe and low-risk product. Most likely this was because this sort of investment product has a bad name, as far as retail investors are concerned, and would a salesperson tell you they want your money to buy a lemon (or would that be a Lehman)?

Here is a succinct post about why Structured Products are really bad for your financial health:


Tuesday, October 28, 2008
Nature and risk of the structured product
Hi Mr. Tan,

You said, on many occasions, that the investors have been mis-informed about the "nature and risk" of the structured product. Can you explain what you mean and what actually happened?

REPLY
If you invest in a bond of a company, you stand the risk of losing your investment if this company goes bankrupt. To reduce this risk, you can spread your investment over 6 bonds. If any one company goes bankrupt, you only lose 1/6 of your investment. This is called diversification and is a sound investment strategy.

If you invest in a structured product with 6 "first to default" swaps, you stand to lose all of your capital if any one of these 6 swaps failed. You stand the chance of losing your capital 6 times. Instead of reducing your risk to 1/6, you are multiplying your risk 6 times. It is highly risky. It is madness.

Many people were misled into thinking that they are reducing their risk by diversifying their investment into 6 entities. The actual situation is that they are increasing their risk 6 fold by the "first to default" swaps on these 6 entities.

This actual "nature and risk" of the structured product has not been properly explained in the prospectus and in the explanation given by the sales representative.

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Tan Kin Lian: Nature and risk of the structured product

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