A Basket of 4 China Oil Stocks
By syw on Jun 21, 2007
I accompanied a friend to a HSBC branch office for some banking business. An eager saleswoman pitched to us an amazing investment product: a basket of 4 China oil stocks.
For the duration of 18 months, I may earn 8% of return on the principal. That slightly better than 2.25% of a typical annual interest rate. For any day that one of those stock's price close lower than 98% of the starting price, I don't earn anything for that day. Since there are 390 trading days in 18 months (so says the brochure), each such day will cost me 0.02% in return.
Therefore, if all 4 stocks stay flat or go up during these 18 months, I get 8% return. If they went downhill from the day I sign up, I get 0%. No matter what, my principal is always safe. The return is always between 0% to 8%, no matter how those stocks perform. Is this a good deal?
Since the return is capped at 8%, the performance of each stock matters less. Even when they fall by less than 2%, the investment still yield 8% in 18 months. The key factor affecting the return of this investment is the fluctuation of each stock. The funny thing is each of the stock can render the day worthless. This violates the 1st rule of investment: diversification will mitigate risk. This basket of stock actually amplifies risk by having more stocks in the basket.