We look up to them. We hope to become one of them. Spiking features one of them in this blog every week. But what exactly does it take to become a “sophisticated investor”? We’ll take a look at what exactly a sophisticated investor is, and how you can rank among more than 11,000 blue whales at the Singapore Exchange.
Use the Spiking app to follow your favourites among these investing elites, but for now, let’s discover more about what goes into being considered “sophisticated”.
What do we mean by “sophisticated”?
There seems to be no single, “official” definition for the term “sophisticated investor”. The term is often used rather loosely and has different implications in different countries. In Singapore, according to Angelina Fernandez writing for Civil Service College Singapore, a sophisticated investor is someone with total net personal assets exceeding SGD2 million or an annual income of at least SGD300,000.00.
Generally speaking, however, a sophisticated investor is someone who knows enough and has enough experience to be able to weigh the risks and opportunities of a potential investment.
It is interesting to note how the question of how much that someone has in the bank isn’t even in that general definition. Kristen McNamara on Market Watch points out that the idea that someone who has a lot of money must know something about making money, is usually what prevails when it comes to classifying investors.
But someone who is wealthy isn’t necessarily financially savvy, she adds, offering a lottery winner and a multimillionaire heiress as examples. The Financial Review also says as much by saying that current measures of an investor’s level of sophistication refer more to his wealth than his financial IQ. But let’s get down to brass tacks.
The International Financial Law Review quotes Wong Partnership’s Singapore partner as saying that most people would consider a retiree with all his savings invested in structured products as a sophisticated investor. This same majority would regard an economics graduate in his early 20s with zero practical investment experience as “not sophisticated”.
Investopedia’s Brian Bloch adds to the definition of a sophisticated investor by saying that such an investor makes sure that his portfolio is
· Sufficiently diversified (which Spiking has discussed in a previous post: https://spiking.com/blog/unity-diversity-build-diversify-portfolio/)
· Monitored regularly (either by themselves or someone else)
· Always active, meaning buying or selling takes place when market conditions are right
If an investor doesn’t do any of the above, then he is “most certainly not sophisticated”.
Robert Kiyosaki of “Rich Dad, Poor Dad” has his own take on what a sophisticated investor is, saying that such an investor is someone who
· Knows his own financial statement and understands how each financial decision affects it
· Focuses on buying assets that put money in their pockets, instead of liabilities that take money out
· Owns enough of an investment to control management decisions, analyse the effectiveness of the management, and make investment decisions accordingly
· Is familiar enough with tax laws and knows how to leverage them
· Has much of his income from his portfolio and passive sources
· Knows how to make money whether the market is up or down
· Is patient and understands that true financial reward comes after an investment becomes profitable
Why are sophisticated investors singled out?
Classifying investors as sophisticated isn’t (just) done for the sake of compiling a sort of who’s who or top ten ranking like those made in sports or entertainment. It is done because certain investments are only available or offered to sophisticated investors. This is not only because these investors have the requisite resources, but because it is prescribed by law in order to protect regular retail investors.
The International Financial Law Review also quotes Wong Partnership’s Singapore partner as saying that in Singapore, regular retail investors are especially taken care of by requiring listed companies to disclose as much as possible. These disclosures are made available to Spiking app users almost as soon as they are made at the SGX.
Examples of investment products which are only made available to sophisticated investors include subprime-related structured products, higher risk stocks, hedge funds, and synthetic collateralised debt obligations. Apart from requiring significant amounts for investing, these products are also generally more complex or harder to understand for investors with little or no experience.
How can you become a sophisticated investor?
Going by the first definition given above, you would have to accumulate more than SGD2 million in total net personal assets or make at least SGD300,000.00 a year. While that gives you a clear target to set your sights on, Investopedia’s Mr. Bloch offers these practical steps you can take today to help you achieve that goal:
· Read all documents and contracts thoroughly. That sounds obvious, but it’s all too easy to take this bit of advice for granted. More often than not, financial information is hard to understand, and sometimes the provider of the information does that on purpose.
If the documentation of an investment product proves to be beyond you, ask for a clear summary, or better yet, ask a lawyer to explain it to you. If it’s too complex, then it might be better not to invest in that product.
· Stay in the know. It takes a certain amount of discipline to keep up to date with financial news, but it is important to do so. With myriad sources in different media available, pick out what you need, as well as what you have to study in detail and what will be useful to keep tabs on in the future.
It’s also good to remember that the financial industry is interdependent on other fields such as law, politics and technology. You would do well not to confine yourself, therefore, to following financial news alone.
· Get help if you need it. Assess your current situation honestly to see how much time and effort you are willing or able to devote to investing. Staying up to date and studying investment documents is a full-time commitment, so if you feel you’re not equal to the task, ask for professional help.
This means carefully choosing an investment adviser or professional who can help you with your specific needs, as some experts specialise in particular types of investments. This also means meeting with your adviser regularly and keeping communication lines open.
Become sophisticated with Spiking
Let Spiking help you on your way to becoming a sophisticated investor. As keeping track of the activities at the SGX is paramount to making well-informed investment decisions, Spiking makes this easier for you by putting real-time, verified SGX updates in the palm of your hand.
You’ll know which blue whale investors are buying and selling which stocks, and be able to follow them in much the same way you would celebrities in other fields. You can also follow your favourite stocks, see who its significant shareholders are, and see why a stock spiking on the boards is moving the way it is. You can even use the chat function to discuss trades with your fellow investors in private discussion groups.
Download the Spiking app today from iTunes or Google Play and earn your Pioneer Member badge, which is available for a limited time only. Visit the Spiking app homepage now.