Managing Expectations for Investment Returns

Having reasonable expectations for investment returns can help investors cope with financial turmoil and prevent unnecessary risk.

When Investment Returns Are Too Good to be True

In China, the stress levels have been rising as defaults mount in the financial system. After losing his entire investment of 300,000 yuan (about US $47,500,) a disgruntled investor stabbed the chief executive officer of a failing Beijing-based asset management company, Global Wealth Investment.

A company source said this unfortunate event highlights the growing public anger of loosely regulated financial products. Wang Jie, the CEO, was stabbed in the shoulder on Sunday, October 11^th, during a meeting with investors, the company representative said. Although he was rushed to hospital, Wang is expected to recover from the injury, reports financial news outlet Caixin, who first announced the incident.

According to the source, who prefers to remain anonymous because she is not authorized to speak to the media, the attacker is a man in his twenties and was sitting next to Wang Jie during the meeting. “He was very young and didn’t control his emotions well,” the source explained. Police has declined to comment on the case.

Global Wealth, which used to have almost 200 employees and managed 700 million yuan in financial assets, now has just 15 employees. Its clients of the company took comfort from the fact that their investment was backed by Hebei Financing Investment Guarantee Group, which is a government-backed credit guarantor. But since earlier this year Hebei Financing has not been honoring its commitments. “Hebei Financing defaulted on us, and we defaulted on our clients,” said a representative of Global Wealth.

CEO Wang wrote a letter to Hebei officials earlier this summer, pointing out that Hebei Financing had not paid off the guarantees on loan defaults by five companies worth 227 million yuan (US $35.8 million,) and that this had impacted 660 investors in Global Wealth products.

High-yielding wealth management products such as the ones offered by Global Wealth have become exceedingly popular in China over the last few years as investors search for lucrative options besides real estate, and the volatile stock market. However with the escalating tensions in China’s financial system, many investors have felt mislead after losing their investments in financial products that had been marked as risk-free with double-digit returns. So far Global Wealth has not been accused of any wrong doings. Phone calls and emails to the firm, however, were not answered on Tuesday.

Doing Your Own Due Diligence

This is why it’s so important for investors to do their own due diligence and manage investment expectations. There shouldn’t be a discrepancy between perceived risk and real risk. Otherwise, investors will inevitably face disappointment sooner or later.

There are always risks involved with investing, including possible loss of principal. The important guideline to remember is if it’s too good to be true, then it probably is. There is no such thing as a guarantee when it comes to the capital markets. If any portfolio manager or financial advisor advertises a risk-free, double digit return then that should immediately raise a red flag.

The best way to protect ourselves from getting potentially duped is to have a clear understanding of the investments we are getting into. Understanding removes uncertainty and creates confidence. This lowers the intrinsic risk of investing. If something doesn’t fit our risk appetite, then we should simply look elsewhere to put our money.