Investing tips?

[Carolus Rex]

Pekka,

After I logged off last night, I came to think of an interesting offer I read about at my bank's web site.

In short it goes like this. Before the end of January it is possible to sign up for "Aktieobligation 701". Basically, "aktieobligation" is a financial instrument that combines the potential of stocks with the security of an "obligation" (sorry, I've lost the proper english term right now; I'll look it up later).

It works like this:

i) You sign up and invest 10 000 or 11 000 SEK per aktieobligation (you can buy as many as you want though)

ii) There are four kinds of aktieobligationer to choose from. One is based on Swedish stocks, one on stocks of Nordic Banks, one on stocks in Eastern/Western Europe and one on stocks in BRIC countries (Brazil, Russia, India, China)

iii) Their duration time is (depending on which of the four you chose) two to four years

iv) No matter what happens (i.e. the stocks go down or are back at the same value as when you invested) you will always get back 10 000 SEK minus a brokerage fee of 2% -> you get at least 9 800 SEK back (the downside is hence limited). That means that if you have chosen to invest 11 000 SEK you lose at most 10.9% of your money; if you have invested 10 000 SEK your loss is 2%.

v) On the other hand, should the stocks go up, you get a part of the increase as follows. The actual increase in per cent is recalculated with a pre-specified factor. For example, say you buy Aktieobligation 701E (Europe East/West), which costs 10 000 SEK and has a recalculating factor of 75%. The duration time is four years. When the four years have passed, suppose that it has increased 40% in value. Your pay-off is calculated as follows: 0.4x0.75 = 0.3 -> you get 13 000 SEK (and have to pay 2% in brokerage fee)

vi) In v) above the recalculating factor reduced the return. If you instead choose Aktieobligation 701F (still Europe East/West), which costs 11 000 SEK, you get a recalculating factor of 140%. In this case, suppose the return is 40% after four years -> you get 0.4x1.4 = 0.56 -> 15 600 SEK back (minus 2% in brokerage fee). NB! The return is calculated on 10 000 SEK (the nominal value of the aktieobligation) even though you paid 11 000 (which gets you a higher recalculating factor)

vii) Hence, if you invest 1000 SEK more you get a higher recalculating factor (but you also risk to lose more; if you invest 10 000 you'll get back 9 800 in case the stocks go down -> 2% loss compared to 10.9% if you invest 11 000 SEK)

viii) At any time during the duration time you can sell your aktieobligation at the Swedish stock exchange should it rise in value (and you believe it will go down from there)

All this information is available (in Swedish) at http://taz.vv.sebank.se/cgi-bin/pts3...n/broschyr.pdf

Unfortunately, I think you have to be a Swedish resident to take part in this specific offer. The bank (SEB) is one of Sweden's largest and I'm sure the same type of instrument is available in Finland.

I'm thinking about this offer myself; 11 000 on the BRIC and 11 000 on the Europe East/West. The reason I avoid the two based on Swedish and Nordic bank stocks is that I already have (pure) stocks of this kind and I would like to diversify my portfolio. This is also the reason I like funds. They give you an opportunity to tap into other regions' possibilities.

Just a final word of advice regarding buying stocks or funds that have lost in value and hence appear to be "cheap". Be cautious about that. True, there are many examples of turnarounds (we have mentioned Ericsson already)... But the stock price per se is never an indicator of "a bargain". I think it's a psycologhical effect: "what once cost 100 SEK and now goes for 2 SEK must be a bargain!". The downside of a (pure) stock is always 100%, no matter what its cost is.

Carolus

[Carolus Rex]

Addendum:

i) I'm sorry if I misrepresented your origin, I seemed to remember you're finnish and I've never heard of an israeli with Pekka as a nick...

ii) I think Turkey has great potential, so don't let my advice on not to buy recent "losers" misguide you if you want to invest in funds there. The fall in value may be one of those "opportunities"... That's what happened with Indianbased funds... Fell a lot during the summer, but picked up 20-30 per cent during the fall (IIRC)... In general, though, I believe the advice is sound.

iii) Obvious, but anyway. Whatever people say here (including me), make your own decision. It's easy to tell others what they should do with their money...

Good luck!

Carolus

[Saras]

Carolus, what you describe is an index linked note. It's a ripoff - the bank charges you at least two bid offer spreads - on the bond, and on the options on the underlying baskets.

[Carolus Rex]

Thanks for filling in the missing term!

Yeah, the charge of 2% is high compared to fees on stock trades.

Still, they had a similar thing based on Chinese stocks that really took off (I wasn't in on it). After having reached 60%, the bank advised people to sell and cash in... Don't know how that compared to the development of regular China funds (their own as well as their competitors') considering the fees, though...

The higher fee is really an insurance premium you pay to avoid sleepless nights... Whether it's worth it or not is a matter of personal taste and risk profile.

A friend of mine has no home insurance (and never has had one)... He thinks it's a ripoff as the risk of a fire, theft etc is so low...

Carolus

[jig]

Vanguard

[Adalbertus]

Pekka, where to invest now for a short term, is a bit difficult - At the moment, it is stock market which goes up well, but you never know for how long. I've already heard prophecies that it will go down in the second half of 2006 - proven wrong. Growth will not continue for many years at that pace, I'm quite sure. On the other hand, I don't smell a hype as I did in 1999, and growth looks more sound at the moment. - I think a hype is a clear sign to quit, because it is generated by professionals who need to attract money to the stock market at any price - which in turn is a sign that proper growth does not make for rising stocks.

Interests go up, and therefore, funds investing in bonds don't develop well at the moment (looks a bit strange at first, but as the funds have to keep the bonds for some time, they have many of the old "bad" ones). Usually they have long-term profits of around 5% per year, but now you're happy if you got 2% or 3%. You rarely lose money, though.

Another problem with bonds is inflation. I fear the debts of many of our countries (EU, USA -but the USA have nearly no social obligations compared to the EU and to cut down military expenses is so much easier than social expenses ...).

Funds investing in Real Estate usually are only profitable on a longer time scale, you'll have to pay quite much to buy into one (5%). On the other hand, there may be some advantages in taxation - there are in Germany - and you're probably safe against inflation (I didn't think through it in all possibilities). And real estate funds had some consolidation during the last few years (in Germany, don't know about other countries).

There are also money market funds, they are "turtles", but mostly still more profitable than savings accounts. There is virtually no risk in investing there, but profit is low.

If you've got some time at hand, you might want to look into different funds and try to find a fund for yourself - many fund managers or investment companies have lists of funds with their data over the last years, or even lifetime.
And before doing that, you should know the time for which you want to invest, and the risk you are willing to take.