A Personal Finance and Investment Arm of The Business Times


Lessons from the Swiss France Crisis of 15 January!

I was at a meeting at the United Nations Economic and Social Council (ECOSOC) in Geneva on 15 January, when the chair of the meeting abruptly announced that the Swiss National Bank had just terminated the Swiss Franc's peg to the Euro.

This surprise announcement must have been "very significant" for the chair of the meeting to interrupt the meeting's proceedings.

To try to understand the catastrophic impact – if you were long on the Euro against the Swiss Franc on a leverage of 20 times – the loss would have been five times your margin deposit, as at its worse point – the Euro fell by as much as 25 per cent on that day.

The hamburger I ate on that day in the morning was 1.135 to the Singapore dollar.

The next day, the same burger became 1.165 on the credit card machine.

The fallout may never be fully known?

Subsequently, the news in the following days revealed the collapse of two international forex brokers and some hedge funds.

The fallout may only be known much later, particularly the consequences of counter parties – as to how much has been lost by financial institutions, central banks, sovereign wealth funds, etc.

Investors focus on the wrong thing?

Once again – perhaps the real lesson is that most people focus on the wrong thing in investing.

They focus on the returns, when they should be focusing on the risk!

Whenever you invest in anything – you must ask what is the worst that can happen?

Also, you have to ask whether you may have any further liabilities even after you have lost all your money in your account, like in the Swiss Franc/Euro cited in the example above.

One should also be aware that a "stop loss" may be useless under volatile market conditions.

If you buy a stock – the company can go bust.

If you buy a property – it could be destroyed in a natural disaster that may not be covered by insurance.

If you buy a synthetic Exchange Traded Fund (ETF) – the counter parties may fail to fulfil their obligations in a severe market crash.

If you invest in a unregulated alternative investment like wine, art, eco-housing, etc – your only recourse may be against a company that has "run away".

Inflation risk?

Also, not forgetting that perhaps an often overlooked risk is that bank deposits below the inflation rate are actually losing money all the time ("Cash and stocks are tops with investors", Straits Times, Jan 31)..

A possible approach to risk?

So, what is a simple moderate solution to investing? Use a diversified portfolio of different asset classes globally, such as equities, bonds, commodities and properties, using an investment vehicle that in effect have the funds actually held in trust by a third party custodian – like unit trusts, investment-linked products (ILPs), ETFs, etc.

No such thing as a free lunch?

Finally, since I keep focusing on risk – what about so many investors who borrowed in Swiss Francs to invest in all kinds of investments, because of the low interest rate?

Well, that is another article for another day – and by the way – the Swiss Franc now pays a negative interest rate.

Leong Sze Hian
Leong Sze Hian

Leong Sze Hian is the Past President of the Society of Financial Service Professionals, an alumnus of Harvard University, has authored 4 books, quoted over 1500 times in the media , has been host of a money radio show, a daily newspaper column, Wharton Fellow, SEACeM Fellow, acting managing editor and columnist for theonlinecitizen, columnist for Malaysiakini, a Member on the CIFA International Advisory Board, executive producer of the movie Ilo Ilo (40 international awards), treasurer of Maruah, and invited to speak more than 100 times in more than 25 countries on 5 continents. He has served as Honorary Consul of Jamaica and founding advisor to the Financial Planning Associations of Brunei and Indonesia. He has 3 Masters, 2 Bachelor’s degrees and 13 professional qualifications.