A retiree invested $250,000 with a bank. She lost 95.5% of the investment. The value of her investment is now $11,200. What type of investment is this?
PERPETUAL SECURITIES?
Some people speculated that she bought the Hyflux Perpetual Securities. However, these securities are now not traded. It does not lose 95.5% of the value. There is no market now, as the shares and bonds are suspended. The indicative value of the bonds show a drop of 52%.
DUAL CURRENCY INVESTMENTS?
She could have invested the $250,000 in dual currency investments. If she did, how could she have lost 95.5%? Even if the reference currency had dropped 20%, she would have lost only 20%. She also had the choice of holding the reference currency and hope that it would rebound some time in the future.
LEVERAGE
It is likely that she made the investment with leverage. This means that the bank lent her up to four times of her investment (i.e. $1 million) at a low rate of interest to increase her investment to 5 times. The loan carry a low rate of interest and the investment paid a higher return.
This is one way that it could have happened. For example, the bank lent her another $250,000 to invest in the Hyflux bonds. The bonds pay an interest of 6%. The interest on the loan was 2%. So, the investor would have made a profit of 4% on the borrowed sum.
If she had invested $500,000 on Hyflux bonds, and the bonds dropped by 50% (which it has), the total loss would be $250,000 and would wipe out most or all of her investment. This is probably what had happened.
Another scenario is that she had borrowed $1 million to make a total investment of $1.25 million on dual currency investment. If the reference currency dropped by 20%, it would have wiped out her investment of $250,000.
ADVICE
My advise to investors is NEVER TO INVEST WITH ANY BANK. The relationship manager has to sell the investment to meet sales targets. They are likely to make the sale without fully explaining the risk to the customer. They might even been unaware of the risk - is they are young and has only newly joined the bank.
Tan Kin Lian