Financial illiteracy

The recent subprime mortage crisis has finally hit home and hit hard on the heartlanders. MAS estimated that around 10,000 Singaporeans are affected by the collapse of Lehman Brothers and may end up losing their hard-earned savings amounting to around 0.5 billion dollars in total.

In the recent gathering over at Hong Lim Park, many told a depressing tale. Most of these heartlanders who have invested in the minibonds in their 60s. They had invested their hard-earned savings; some as much as $100,000 to $200,000, after getting assurance from the relationship officers in local banks that minibonds were low-risk yet offered returns of 5% or more, which is a lot higher than the amount they are getting from putting their money in fixed deposits. Many of them could not read English and never fully understand what kind of product they were investing their money into. They trusted what the bank officers said and took the minibond to be simply another kind of 'fixed deposit' (the bond period was 5 years), which was low risk but could earn them higher returns of 5%. With Lehman Brothers filing for bankruptcy, there is a possibility that these investors could lose all their hard-earned savings. It's worthy to note that most of them were extremely low-risk investors. Capital preservation was of paramount important to them and they only agreed after repeated assurance from bank officers that their capital is protected. For many of them, it was the sum of money they had saved for retirement. Now they can forget about retiring~

Amazingly, as an Economic major, I have never been taught how to read a financial product throughout my 4 years in University! I can barely imagine how the aunties and uncles, most of them uneducated, were to make sense of what SWAP, bonds, minibonds and structured deposits were! Yet, it is amazing how these structured products were a huge sellout! Think about the thousands who bought the minibonds. Something doesn't quite fit right here. Of course, i know relationship officers and financial planners go through a lot of courses and as such i shall not question their professionalism. But seriously, if the potential investors cannot understand what the whole product is about, how are they supposed to invest in them? I was watching this tv news report in which the reporter got a copy of the minibond agreement. Yes the details were inside but it was not reader friendly at all! Any layman who looks at it will not be able to make good sense out of what the agreement talks about. In short, the whole thing was just too technical and too confusing, even for some of the financial consultants the reporter interviewed! It's such a complex product!

However, sadly, this is not the only structured product in the market. When we invest our money in something other than deposits, i wonder how many of us really know what we are investing into? My guess is not a lot, in fact, only a small proportion of the population who has studied in the relevant courses. Other than blaming the bank officers who made such products simpler than they were, and in some sense, making the product into something they were not, perhaps we should also acknowledge our serious financial illiteracy for it's our financial illiteracy that will cost us in the long run.

Simple rule: If you can't understand it, don't touch it.