REVEALED: The Hidden Catch Behind All The Common Investment Products Available On The Market


We have all experienced a pushy sales person trying to sell us an investment product that sounds too good to be true. However, we often cannot seem to figure out what’s the catch behind it.

In this article, I am going to reveal to you the hidden catch behind some of the most common investment products you can find on the market:

1) Investment-Linked Policy (Insurance)

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The Promise:

  • It will give higher returns than other traditional forms of life-insurance products
  • Flexible coverage
  • The policy with the lowest mortality charges for young individuals

The Catch:

Investment-Linked Policies (ILP for short) will only give higher returns if your funds are invested into the right funds. Also, you are only allowed to select from the limit number of funds your insurer has.

While it is true that the policy have one of the lowest mortality charges for young customers, you must not forget that it will eventually increase as you age. As you approach 55, the mortality charges would be one of the highest.

This is why if any insurance agent who asks a 40 plus year old man to buy an ILP should consider having their integrity checked.

The Solution:

If you are considering buying an ILP, I would recommend you to

  • Buy a standard term plan which will not increase in price
  • Invest the remaining into the STI ETF monthly

By doing so, you ensure that your insurance premiums stay fixed for the rest of your life while at the same time you get to invest in a quality index fund that will outperform 96% of mutual funds out there.

In a sense, you are actually structuring your own ILP product!

2) Hedge Funds / Mutual Funds / Unit Trusts

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The Promise:

  • Their professionally managed fund would beat the market.
  • By investing with them, your money will grow faster than market performance.
  • Hedge fund managers can short the market as it is dropping so your money earns, regardless of market direction.

The Catch:

Did you know that 96% of fund managers cannot beat the market consistently? And in 2011, 84% of the fund managers in the market actually underperform as compared to the benchmark!

One of the main reasons why investors of fund cannot beat the index is because the fund managers are charging their customers too much!

Think about it… the initial sales costs of 3% already contribute to a huge part of the problem. On top of that, you still have to add in transaction fees, fund management fees, etc. With all of that involved in the picture, how is your fund going to outperform the market index?

Yes, there are a few fund managers who outperform the market. However, the minimum investment they require is at least a few million dollars.

So here lies an interesting contradiction; if you can buy into the fund, it is probably not the fund that you should buy into (unless you have a few million).

The Solution:

You can easily outperform 96% of all these fund managers… just by investing in a low cost ETF!

3) High Dividend Stocks / High Yield Fund

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The Promise:

  • They will pay you a high dividend yield every quarter
  • You can get money just by buying and holding on to these stocks

The Catch:

To understand this, you must understand there’re two kinds of companies who will pay high dividends yields: Great companies who have a lot of money and high risk companies who need to pay high yields to attract people to buy their stocks.

In the event of the first one, if the company is great and the dividend is good, many intelligent will snap up the stocks quickly and the stock price will increase, hence dividend yield will drop. If you are able to get a good company at a low price with a high dividend, congratulations!

In the event of the second scenario, a high risk company can still pay high dividends. However, as the company isn’t as strong, one of two things will happen.

The dividend eventually has to drop since the company is not doing well fundamentally and the dividend payout is unsustainable.

The other thing that might happen is that the capital value of the lousy company stock will eventually drop. While the dividend payout is still good, you would have suffered so much capital loss that your investments would still be making losses after adding your dividend gains

The Solution:

Do your research and understand the underlying factors before you purchase a stock. Value investing book such as Benjamin’s Graham’s “The Intelligent Investor” might be a good place for you to pick up the skills of stock analysis.

Image Credits: c2.staticflickr.com

Interested to find out the catches behind other investment products?

Let us know which products specifically in the comments below!

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