Low risk shares 6

After talking about the pros in the previous 5 posts, it is only fair to also highlight the cons of pref shares. There are always both sides of the coin, and only by understanding both sides of risks vs rewards would we be able to clearly judge whether the investment is suitable for us.

The disadvantages are namely:

1. Pref shares are not capital protected investments and there are inherent risks involved. Hence it is possible even without a doomsdays scenario where the local banks fail, for u to lose part of the capital should u wish to cash out urgently.

During what some experts deem as a once-in-a-lifetime financial crisis 2 yrs ago, the pref shares did lose up to 20% of their offered price. For example OCC5.1% went till as low as $80 (Aug 08). It took almost a year to recover back to $100 in Sep 09, and has since moved upwards to the current price of $103. Hence pref shares should be for long term investments (>1yr). Baring any unforseen financial circumstances which are of the same magnitude of the Lehman Bros crash, there should be little chance of falling below $100 in the next upcoming yr.

2. Low volume or liquidity of the pref shares traded daily in the Singapore stock market. As these are very low risk investments, with almost certain dividend payouts at scheduled times of the year, investors usually park a certain amount of money and forget it for a few months or yrs. Hence people rarely buy or sell these pref shares, unless various individuals require to cash in / out for their personal reasons.

Still the daily volume is a respectable few lots plus and minus. My guess is that we only have enough money to invest in a few lots (few tens of thousands), vs the millions held by various funds. In urgent need of money, i guess just selling one to few lot per day ($10K = 1 lot) should be okay.

3. Bank Interest rates might increase or spike up suddenly. With inflation in the current horizon, banks in India and China have started hiking up their interest rate to cool their hot economy. Singapore could possibly also do so in the next yr, as inflation rises and hot money rushes into Singapore.

Though extremely unlikely, the current 0.1% interest rate might rise to say 6% in months, hence making it more attractive to put money in the bank earning the interest, than in pref shares.