Saturday, 23 March 2013

JP Morgan Asia Confidence Notes - Lesson Learnt

We are supposed to diversify our investments, or not putting all eggs into one basket.  This could reduce exposed risk, and in case one investment failed badly, will not affect the overall health of the full portfolio.  Definitely we would not want one bad egg to affect all the eggs in the basket.

However, those toxic structured products that were sold before Lehman Brothers' collapse, although having many component companies in their fund structures, did not work this way.  Just one bad egg (Lehman Brothers) and the whole product failed.

Same with JP Morgan Asia Confidence Notes.  When we invest money into 4 markets, we hope to diversify.  And if one market fared badly, we do not want it to affect the whole investment. 

However, in JP Morgan Asia Confidence Notes's structure, any one market will drag the whole portfolio down.  Since if any one market fall 50%., the trigger event would activate, and does not take into consideration performance of the other 3 markets.

In this way, instead of one chance for failure, we have actually exposure to 4 times chance for failure.

There are just too many factors that would affect the market.  Some we can think of, and some we may not imagine yet.
1. Regional or World-wide financial crisis.
2. Regional conflict (war) that have potential to drag in more and more countries.
3. A superbug that is more virulent than SARS.

4. Freak election that overthrow the Singapore government 

Of course not all structured products are bad, we need careful consideration before investing.  Definitely, purchasing one with your life savings, on the spur of the moment, during a short bank visit is a big no-no.

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