A Guidebook for Today's Asian Investor

Part of building a framework of understanding in the investment world is to understand the three major asset classes: cash and money market products, bond and fixed income instruments, and equity products. There is a lot more to understand, too. However, in the beginning of an effort to acquire an understanding of the global financial markets, it is helpful to form a picture framework of the financial world by starting with these three asset classes.

Fixed income instruments are another of the major asset classes that should be understood by investors. They are more commonly called “bonds” in the daily vernacular of the financial world and there are several types of bonds. For simplistic purposes for now let’s just say that they (unlike time deposit or money market instruments) are an asset class that usually extend over a period lasting longer than time deposits and with a maturities that may be between 2 years lasting up to (in the case of US Treasury bonds) 30 years.

If you want to achieve superior investment returns, you will need to have equity exposure in your investment portfolio. Plainly said, holding ownership in shares or equities in a company is tantamount to having fractional ownership in the company in proportion to the total number of shares outstanding. The shareholder is “last man standing” after all claims such as debt (bondholders) are discharged when a company fails or "files for Chapter 11." Thus, shareholders have the most to lose in event of a company default. However, compared to bondholders who only receive a fixed interest from debt holdings in a company, shareholders in a company potentially have the most to gain if a company prospers.

In addition to gaining an understanding about the three major asset classes discussed in the previous chapters, it is important to grasp an understanding of some of the new types of products that that fall under the category of derivative and structured products. Some of these products and the terms affiliated with their daily usage may seem intimidating. However, don’t be cowed! Learn to use these products to your advantage and you will have better investment results.

Over the years I must confess that I picked up some valuable principles from some of the wiser persons that I worked with. I cannot emphasize enough the importance of having a framework or vision in your mind of how you want to structure the portfolio. The following four principles may help you set up that framework. They are some of the most valuable bits of advice handed down to me and I will share with you. It goes like this: If you invest, have a very clear picture in your mind of the following: i) Have a time horizon, ii) Set a risk tolerance level, iii) Have a return expectation, and iv) Have a yardstick for measuring success.

There are many things that affect the financial markets and there are many theories and concepts about its behavior.

Over the years I have found three concepts helpful in bettering one’s understanding of how the markets behave.They are i) Systemic Risk and Non-Systemic Risk, ii) the concept of Correlation, and iii) the concept of Standard Deviation. The “Black Swan event” that occured in 1998 when the hedge fund firm Long Term Capital Management L.P. serve a good case in point.

So now you have arrived.

You understand the basic fundamentals of building an investment portfolio. So let’s go for it! Let’s push forward and build some portfolios. We will start by building a conservative portfolio, then a Moderate Risk Portfolio, and finally an Aggressive or Growth Risk portfolio.

Once you have a firm understanding of the major asset classes, that is money market products, fixed income and bond products, equities, and alternative investments like hedge funds, then you may move to a new level and try to understand how these products are sometimes packaged into other investment forms like exchange traded funds (ETFs) or products linked to the major securities markets around the world.

Part of undertaking a wise investment decision process is setting realistic expectations. Choosing a benchmark against which to assess your investment portfolio’s annual success can be most helpful. It will help you remain unflustered during times when there is volatility in the market and you wish to assess your portfolio performance. One should always seek to find the “best of breed” when seeking an investment. Setting a benchmark for your investments should remain a fundamental part of your decision making process.

Sometimes reviewing history can help us understand the present as a part of a current or passing trend. What I have observed in the past 30 years in the financial industry is that markets continuously change and financial products continuously evolve. I like to make reference to the “Exocet missle analogy.” Most adults who were living during the brief 1982 war between Argentina and the United Kingdom over the Falkland Islands will remember the devastating effect of the new Exocet missle technology which, when the missile was launched, seem a real game changer in war technology. Financial products today really have no Exocet missle––that is a product that when developed is so special that when you have it, nobody can compete with you. Whatever product a bank or financial institution may develop, its market advantage is ephemeral and likely only a matter of months before other competitors will be offering a similar product at the same or cheaper price. Essentially the color of money is the same at all banks. (Note: And by the way, the Exocet missile, too, was eventually replaced by more sophisticated and deadlier air-to-target missile defense weaponry.)