3 Questions To Ask Before Making That “Alternative” Investment
A Straits Times report on 4th October titled “Wine investors cry foul over dealings with 2 companies” prompted me to share my thoughts on the topic of alternative investments as a few of my clients were affected by their wine investment.
Alternative investments are non-conventional products offered to retail investors. According to MAS, many of these products have features that are similar to regulated capital markets products, but are structured to assign ownership of underlying physical assets (such as wine, land, etc.) to investors, thereby taking them outside the regulatory perimeter of the Securities and Futures Act.
Here are 3 good questions to ask before considering such investments:
1) What are the risks involved?
This is obvious but unlike traditional investments which are regulated, there are no clear standards on the amount of disclosure required. Thus, as an investor, you do need to do your homework on what to ask and the most important questions must be questions related to risk.
2) What are the exit options?
If you want to withdraw from the investments, make sure that you are able to do so through proper legal documentation and not promises. Unclear exit or withdrawal process from the investments can be a clue as to how stable the investments really are.
3) Do you understand how the investment can generate the returns promised?
The golden rule (and I know there are many other “golden rules” out there) of investing is not to buy into anything you can’t understand. You may be an expert in enjoying fine wine but wine trading is a totally different business. When it comes to alternative investments, it’s not the asset class that matters but the business of generating returns from the asset class that counts.
As a practicing financial planner for close to 14 years, I’ve had my share of stories from clients who made good money from such investments and others who unfortunately, got badly burned. While it’s good that there are plans to regulate such investments, we should still do our own due diligence as the silver rule (I made this up) of investing says…when it happens to other people, it’s a story but when it happens to you, it’s a tragedy.
Happy investing and make the alternatives count!
Article by Lee Meng, FChFP