Moonstone 26 May 2008 : Guaranteed or Linked ?
We received an enquiry from a reader on the “Guaranteed” versus “Linked” products which raised some very important issues for all those who use the Moonstone Investment Indicators.
Some of the questions concerning specific product houses have been referred to the companies for comment. Other matters raised include the following:
Question: Generally, where do you get the information from about whether a product is linked or guaranteed, and to what lengths do you go to verify that the information is correct?
Response: All information published in the Investment Rates section of the Moonstone Investment Indicators are either drawn from quotes packages that you also use, or are provided in the form of a standard quote that you would also be given by the product house. The distinction between linked and guaranteed is contained in the wording of the actual quote, although there is marked difference in the amount of disclosure between the various product providers.
Given that this is normally done on a Monday morning, we have to rely on the integrity of the various product houses. We have over the years had many queries relating to our figures, but in all instances the differences proved to be negligible, with the inclusion of VAT on commission being the main source for querying the difference.
Question: How much credit risk would a linked product have to carry before you would consider it inappropriate to include it from the table? E.g. if a company offered a product linked to BB rated assets, offering a return of 20%, would you include it in the table? How are you able to make an assessment of the credit risk given the generally low disclosure of the nature of the underlying assets?
Response: We have on occasion in the past refused to place product information that appeared to be out of line with what the current reality dictates. While the CAR ratio is an indicator of a company’s ability to meet its commitment, this may not apply to the company offering the product backed by paper bought from another. In these instances we refer to the credit rating of the company carrying the risk.
After discussions on this issue last week, we will soon also include a further column indicating the Fitch rating of product houses featured on Moonstone Investment Indicators as an added indication of the extent of the risk attached to the particular product. One has to bear in mind that these ratings are guides, and not guarantees, in itself.
This of course also applies to all the figures quoted in our publication, and is the reason why we are at pains to point out that our figures can never be used in place of an official company quotation.
We have used this opportunity to take a re-look at what we produce every week, and have held discussions with industry experts to ensure that the information that we provide you with will assist in safeguarding you against giving the wrong information, rather than contributing to it.We continue last week's look at the results of a nationwide telephone poll conducted in the USA in 2004 for Merrill Lynch which examined the investment mistakes of 1,000 investors and their related attitudes, beliefs and behaviors.
Investors and Advisors Have Different Takes on Biggest Mistakes
Interestingly, research among professional financial advisors found a startling difference of opinion on investor mistakes.
Advisors believe failure to observe basic investing fundamentals like asset allocation or rebalancing are the biggest mistakes their clients make, but these sorts of long-term, big picture factors are well down investors' lists.
"Investors and advisors alike agree that waiting too long to invest and not investing enough are critical mistakes, but beyond those, investors tend to focus on the 'glamorous' mistakes like riding winners down, holding onto losers, buying on a tip or putting too much money in a single investment. These mistakes may make for interesting cocktail party complaints, but in the greater scheme of things, it's the bigger, systemic failures like ignoring their asset allocation that do the greatest damage to investors' portfolios."
According to study director Dr. Brian Perlman, CFO of Greenwald & Associates and a psychologist and Chartered Financial Consultant, "Too many investors focus on fighting the battle but not winning the war. Everyone makes mistakes. What many investors don't understand is the critical role careful planning and professional money management can have in preventing those mistakes from derailing their future financial security."
What, Me Worry?
Mistakes notwithstanding, investors generally believe they are doing a pretty good job. Eighty-eight percent of investors surveyed describe themselves as very or fairly successful, 86% believe they will have a financially secure retirement, and 82% say they stick with a consistent investment strategy even when the stock market is volatile. But there are some troubling counter-indications: Almost one-third (30%) of all investors have no financial plan and while nearly 60% of investors say they are very good at home or car maintenance, only 29% say they are very good at managing their investments.
In addition, when asked the reasons for the mistakes they make, 64% said "Mistakes just happen," suggesting they believe investing mistakes result from random events rather than poor planning.
"Investors are confident — whether they should be or not," Doll said.
In Afrikaans we use the word “domastrant” (a combination of ignorant and cocky) to describe this more accurately.
Ladies, do not miss next week's exciting episode of this thrilling drama when we look at how gender determines investment strategy. Gentlemen, it may just convince you change your strategy for the better.
