Saturday, December 08, 2007

High Oil Price

The oil price is now above USD 90. It is an increase of 50% compared to two years ago.

The high price will find work its way into the cost of living over the next one or two years.

Some businesses try to absorb the higher cost initally. After a while, they have to increase their prices. This is already happening for taxi fares. More businesses will follow soon.

What can consumers do?

Start looking for ways to reduce your cost of living. Do not wait for the higher prices to strike you. It will come soon. Be prepared early and be ready to adjust your spending habits.

Live near your place of work

I hope that the Government will make it easy for people to move to a new home, to be close to their place of work. This will reduce the cost and time of commuting to work.

How can this be done?

Waive the stamp duty on buying a property to be used for owner occupation. The current stamp duty of 3 percent is too high. It discourages people from moving their home.

If more people live near their place of work, there will be less traffic congesion on the roads or in the public transport.

This proposal does not fit everyone. But, if it fits 30% of the working population, it can reduce the traffic on the road by 30%. It helps a lot. Every measure counts.

Don't Mess Around with Old People

George Phillips on the Gold Coast, Australia was going up to bed when his wife told him that he'd left the light on in the garden shed, which she could see from the bedroom window.

George opened the back door to go turn off the light but saw that there were people in the shed stealing things.

He phoned the police, who asked "Is someone in your house?" and he said "no". Then they said that all patrols were busy, and that he should simply lock his door and an officer would be along when available. George said, "Okay," hung up, counted to 30, and phoned the police again.

"Hello, I just called you a few seconds ago because there were people stealing things from my shed. Well, you don't have to worry about them now because I've just shot them." Then he hung up.

Within five minutes three police cars, an Armed Response Unit, and an ambulance showed up at the Phillips' residence and caught the burglars red-handed.

One of the Policemen said to George: "I thought you said that you'd shot them!"

George said, "I thought you said there was nobody available!"

Lesson: Don't Mess Around with Old People

Alpha (Investment)

Alpha is a risk-adjusted measure of the "excess return" on an investment. It is commonly used to assess an active manager's performance, as it is the return in excess of a benchmark index or "risk-free" investment.

The alpha coefficient (αi) is a parameter in the capital asset pricing model. In an efficient market, the expected value of the alpha coefficient equals the return of the risk free asset: E(αi) = rf.

αi < rf: the manager has destroyed value
αi = rf: the manager has neither created nor destroyed value
αi > rf: the manager has created value

During the mid 20th century, it was observed that around 75 percent of stock investment managers did not make as much money picking investments, compared to simply invested in every stock in proportion to the market capitalization, or indexing.

Many academics felt that this was due to the stock market being "efficient" and that only luck made it possible for one manager to achieve better results than another.

A belief in efficient markets spawned the creation of index funds that seek to replicate the performance of investing in an entire market. The best examples are the S&P 500 and the Wilshire 5000, accounting for approximately over 80% and 99% of the total capitalization of the US market.

Investors now expect the investment manager to make more money than the passive strategy. The additional return above the expected return of the beta adjusted return of the market is called "Alpha".

Medical Insurance

Are you making the right choice on your medical insurance?
Are you paying too much for unnecessary or double insurance?

Read this FAQ:

SuperSIV Bailout Fund

I read this report from the internet.

Three large banks are setting up a SuperSiv fund to bail out short-term debt markets.

The fund is one of two private-sector efforts fostered by the Bush administration to address fallout from subprime-mortgage delinquencies.

The fund will buy assets from structured investment vehicles, or SIVs, which would otherwise be forced to dump their $300 billion of assets to repay debt.

These SIVs sell short-term debt to finance purchases of higher-yielding assets. They were shut out of the commercial paper market on investor concerns that SIV held troubled subprime-related securities.

SIVs borrow in the $836 billion asset-backed commercial paper market and then buy longer-dated bank bonds, mortgage-backed securities and collateralized debt obligations.

Investors are reluctant to deal with SIVs because their holdings are difficult to value now that trading has collapsed in some mortgage debt markets.

Lesson: Apparently, the sub-prime problem is spreading to other markets, including short term commercial paper. This is an effort to limit the damage. Will it work?

Invest in Low Cost Funds

I advocate investing in low cost funds, with an expense ratio of less than 0.7% for an equity fund.

The expense ratio of most funds in the market, including the financial adviser's fee to select and monitor the funds, is between 1.5% to 3%.

Here is the difference based on a net return (after deducting fee) of 5.5% for a low cost fund and 4.5% for a high cost fund.

4.5% 5.5% Diff
$5,000 a year
over 20 years $157,000 $174,000 11%
$5,000 a year
over 30 years $305,000 $362,000 19%
$50,000 single
over 10 years $77,600 $85,400 10%
$50,000 single
over 20 years $121,000 $146,000 21%

Conclusion: The lower charge in a low cost fund can give a return of 10% to 21% higher on your investments.

Decreasing Term Insurance for the Young

Recently, I asked for quotations for Decreasing Term Insurance for my three children. The sum assured is $300,000 decreasing over 30 years, i.e. reduce by $10,000 a year.

The premium rates are quite competitive. Most of them are around the benchmark indicated in this FAQ:

Here are the benchmark premium rates taken from my FAQ and adjusted to show $300,000:

Annual premium to insure $300,000 reducing over 30 years
Age Male Female
25 225 117
30 345 186
35 561 312

The actual quoted for females are higher than my benchmark but below the rates for males of the same age.

Conclusion: If you earn $30,000 a year, you can cover 10 years of salary at a premium of about 1% of your salary.

Friday, December 07, 2007

Financial Planning and Inflation

How does inflation affect your financial plan?

Do you have enough savings for your retirement and future needs, if you take inflation into account? What is the appropriate rate of inflation?

How should you review your savings for your child's education and for your own retirement?

Read this article:

Do you really understand structured products?

By Larry Haverkamp (Doc Money)

IT is almost funny. We have invested billions of dollars in structured products, but no one seems to understand how they work.

Here's how: Equity-linked notes (ELN) promise high returns and are one of the most popular structured products. The most advertised has been Pinnacle Notes. It is similar to other ELNs.

Your earnings are linked to eight well-known local stocks like DBS, UOB, OCBC and Singapore Press Holdings.

If the price of all eight counters declines by no more than five per cent, you earn an annual return of 8.8 per cent. It's good.

If all eight stocks decline no more than ten per cent, you get 4.8 per cent. It's still good.
For the worst case, if even one stock declines more than 10 per cent, your return drops to zero.

Structured products limit both losses and gains. For Pinnacle Notes, these range from 0 to 8.8 per cent per year for four years. It looks fair.

Dig a little deeper, however, and you'll find problems:,4136,137416,00.html?

No Lock-in Period

I advocate financial products with no lock-in period. The customer should be allowed to withdraw the product at any time, based on a fair market price.

What is a fair market price?

If you buy a share or bond, you pay a fair price based on the price that other people are willing to sell to you. If you sell a share or bond, you get a price that other people are willing to buy.

This concept applies to a unit trust. You buy and sell based on the net asset value of the fund, which is compute on its market value of the underlying assets.

If you put your money in a bank account, you can take it out at any time. You only lose on the interest for premature withdrawal.

Some financial products (e.g. endowment, whole life or structured product) lock you for a long period, say 5 years or longer. If you wish to withdraw in the earlier years, you have to suffer a large penalty. This penalty can be up to 10% of a lump sum investment or more than one year of a regular investment.

You should avoid any product that has a high penalty and a long lock-in period.

It is possible to design an endowment or whole life policy that has low distribution cost, small penalty and no lock-in period.

Endowment and whole life products

Endowment and whole life policies are useful financial products. They encourage people to save for the long term in a large, well diversified fund, called the life fund. They provide risk pooling by paying a large benefit on premature death.

The drawback of these products are:

a) The high charges (used to pay commission to the agent)
b) The high penalty on early termination of the policy

When I was chief exective of NTUC Income, I addressed the drawbacks in the following ways:

a) Reduce the commission and other distribution cost, compared to the market
b) Provide higher cash value and shorter breakeven period

I was able to benefit a million policyholders by giving them a higher return, compared to similar products offered in the market.

In recent years, there is a better choice for the consumers - buy Term and invest the difference. Many people are taking this approach by buying Unit Trusts. Many insurance agents have converted to financial advisers to tap this more competitive product.

It is possible for endowment and whole life policies to be made competitive again - to compete with Unit Trusts. The distribution cost has to be reduced. Many people will be attracted to low cost endowment or whole life. Sales productivity can be increased significantly.

Thursday, December 06, 2007

Know what you'll get from your investment

By Larry Haverkamp (Doc Money)


Pay me $200 per month for 20 years, and I will invest it for you. In the first year, all your money will go to me. After that, I'll invest it, but I won't tell you where it is invested, how much I take for expenses or even the rate of return you earn.

Life insurance companies offer this for two popular policies -
(i) endowment, including education and
(ii) whole life.

Sales have been phenomenal. On average, each Singapore household owns $55,000 of these. This makes it the second largest investment after our home, yet these policies are often surrounded by mystery.The key to solving it lies in the benefit illustration which is filled with facts and figures. Let's investigate.

Read the article:,4136,141522,00.html?

Little Red.SG

As we change jobs and email service providers throughout our lifetime, our email addresses will also change. Over time, we tend to loose touch with our friends, business associates, and family as a result. There is now a solution to this problem,

Once registered with LittleRed.SG, all mails sent to your LittleRed.SG address, i.e. AlanTan@LittleRed.SG, will automatically be forwarded to a email address of your choice, i.e. your email address at your new job.

All you have to do is to update your forwarding infomation with the portal and your mails will be automatically re-directed. You save the hassle of having to inform all your family and friends of your new address.

This way, your LittleRed email address remains constant. Friends, business associates, and family will always be able to reach you.

If you sign up today, you will stand a chance to win a iPod 80G, Sony Cybershot Camera and Sony PSP in a draw.

Little Red.SG is an email forwarding service provided FREE to all members and customers of NTUC.

Invest the Difference

I wish to use this example to illustrate the concept of "buy Term and invest the difference".

A female at 25 can buy a 40 year Living Benefit (to cover death and critical illness) to cover $50,000 by paying an annual premium of $190.

To buy the same protection under a Living policy, the policyholder has to pay a premium of $960.

If the difference of $770 is invested to earn 4% per annum, the accumulated sum at the end of 40 years is $73,000. This is higher than the cash value of the Living policy at age 65.

Critical illness premium

A female at 25 has to pay a premium of $190 for a critical illness cover of $50,000 for 40 years. The premium rate works out to 0.38% of the sum assured.

I was told that the average claim rate for working people is around 0.25% to 0.3% The premium rate of 0.38% is quite fair, as it contains a modest margin to cover the expenses and profit margin.

Are you on the sucker's list?

HAVE you fallen for a scam before? Then beware. It is quite likely that you will be targeted again.

A possible reason: There is a 'suckers' list circling the globe. Once you go for a scam, the chances are good your name will be added to the list. And a victim has one chance in three of getting roped into another scam within a year of falling for the first.,4136,141132,00.html?

Wednesday, December 05, 2007

Avoid ILP policy with high charge

Dear Mr. Tan,

I plan to buy insurance for my two boys - 9 and 6 yrs old. My agent recommended me the ILP product.

I learned that ILP is not good as compared to traditional life policy or term insurance. The ILP insurance cost is high when I get older. If the invested funds are not performing, I risk to have negative value in my ILP policy.

I am confused whether to go ahead with ILP or go for term insurance for my boys..


It is best to buy Term Insurance for the life insurance protection and to invest in a low cost investment fund (e.g. unit trust). Read this FAQ:

In selected an investment fund (unit trust or investment linked fund), look for a fund which invest 100% of the savings (i.e. no deduction to pay commission to the adviser) and which has low annual expense ratio.

I understand that the ILP from company X takes away 18 months of your savings to pay commission to the agent. You can check with the agent if this is the case. You should avoid this high charge.

Mud Flood in Indonesia

I was in Surabaya, Indonesia on 28 November. This was my first visit to this city.

I visited the site of the mud flood which was about 1 hour drive outside the city. The mud flood was caused a mining company (Lapindo) which hit into a bad spot while drilling for oil. It caused hot mud (similar to lava) to flow out into a large area of land near the site.

About 6,000 people lost their homes. They received some compensation from the Government and the mining company. I was told that it may take 5 to 10 years for the land to be useable again.

Some of the enterprising residents who lost their homes now make a living by showing tourists (like me) to see the mud flood.

Insurance for a lady

Dear Mr. Tan

I am a female, age 25. I have received the following quotation:

1. Term insurance for $100,000 up to age 65: premium is $150 a year
2. Living benefit for $50,000 up to age 65: premium is $190 a year.

Question: Is the premium rate acceptable?

The premium rates are acceptable. The Term insurance rate is about 15% lower than the indicative rates set out in my webpage: You are getting a good deal. Congratulations.

Question: Should I spend the $190 for the living benefit, as I am also covered under a Enhanced IncomeShield plan.

Decide on what you feel best. The medical expenses can be covered mostly by the Shield plan. There could be some loss of income, during the period of treatment.

Do you wish to get $50,000 in this event? Of course, the chance of it happening is small, maybe 5% to 10% over the next 30 years. If you are willing to spend $190 to have peace of mind, then you can buy the living benefit.

Conclusion: She decided to spend the $190 to get peace of mind. That is a good decision.

Term Insurance is guaranteed for the duration

Dear Mr. Tan

Is Term insurance subject to review on renewal, e.g. for some health condition, they don't insure?


The Term insurance is guaranteed to be renewable at the same premium rate for the entire term, regardless of your future state of health. If you take a Term insurance to age 65, the renewability is guaranteed to 65.

Articles by Dr Money - MUST READ

Larry Haverkamp (Dr Money) wrote many articles that were published in The New Paper over the past years.

Here is a collection of his articles. They cover insurance, investments, loans, CPF and other financial matters that are important for Signaporeans to know. The articles are written in a simple style, and quite fun to read.

Structured Product with Guaranteed Return

Hi Mr. Tan,

Do you know of any financial instituton that offers portfolio management service that guarantees a minimum return like this offer by Bank X to its private banking clients, "The Guaranteed Mandate: Under this mandate, Bank X guarantees a minimum return or income, while still allowing you to benefit from any upward movements in equity markets."

We're looking at a minimum return of 6% per annum, for a capital sum of S$500,000.


If you wish to have a guaranteed return, it is best to buy government bonds. I do not recommend investing in a product that gives a guaranteed return, as it is likely to give a "final return" that is lower than government bonds.

Read this FAQ:

Remain invested until 90 years old

Dear Mr. Tan

I have most of my investments in a large, well diversified equity fund. At what age should I start to realize all my investments, so as not to expose my retirement avings to greater risk of market volatility (even if I do not need the money then)?


I suggest that you remain invested in the equity fund until you are 90 years old or later.

You can make monthly withdrawals from your investment fund, after you retire from work, say at age 65 or 70. Withdraw what you need to meet your monthly expenses, and keep the rest invested in the low cost investment fund. Do not worry about the volatility.

Tips on insurance for a new Graduate

Dear Mr. Tan,

I have been visiting your blog since your retirement as CEO of NTUC Income. It provides clear, objective and unbiased opinions for the general public. I learned a lot about insurance from your blog. Thanks for writing this blog!

You have been emphasizing the concept "separate insurance from investments", i.e. "buy Term and invest the difference".

I will be graduating from a local university next year. I intend to buy Term insurance. During National Service, I bought the SAF Group Insurance which covers death, total permanent disability and accidental death up to age 65. The coverage will still apply even after the insured is no longer with SAF. I pay a monthly premium is $16 for a sum assured of $100,000.

I am also insured under NTUC Dependent Protection Scheme(DPS). I also bought the normal CPF Medishield Plan since last year.

Question: Are these insurances sufficient to meet my medical needs? Do I need to be insured for critical illness? Should I upgrade my CPF Medishield plan to one offered by a private insurance company?

Reply: CPF Medishield covers you for the cost of treatment in B2 ward in restructured hospital. This includes treatment of critical illness. There is no need for you to upgrade to a more expensive plan.

When you start work, your employer is likely to provide medical coverage for you at higher class wards anyway. You should wait and decide later, if you really need to upgrade to an expensive plan. Personally, I think that it is unnecessary.

Life Insurance (i.e SAFRA and Dependent Protection) are Term insurance plans. They pay on death only. They are to provide a lump sum payment to the dependents (and not to cover medical expenses).

Question: If a person buy a Term insurance that covers up to age 65, what happens if he is diagnosed with serious illness? Where can be find the money to pay for the large medical bills?
Some insurance agents often use this reason to persaude people on why they need to get a whole-life, critical illness insurance.

Reply: Your Medisheld plan can cover the cost of treatment for critical illness after age 65. At that time, if you have saved and invested your money wisely, you probably have a large sum of savings (say $500,000 or more) that can meet all of your medical bills and leave a lot behind.

Low cost investment fund

Dear Mr Tan Kin Lian

I have savings invested in a large, well-diversified, (fund of funds) global unit trust for seven years already.

The returns so far have been meagre. I guess that was due to the large allocation of investments in the US market.

Is it better for me to switch to other funds, like the more vibrant and fast moving Asian funds? I am in my mid forties and investing for the long term for my retirement needs.


What is the return that you obtained in USD for this period? Is it an equity fund (i.e. 100% invested in global equity)? Is it a low cost fund?

If you have invested in an indexed fund in the S&P, I think that your return should be quite good.

Read this FAQ:

The benchmark return on global equity (converted from USD to SGD) is 6.5% over the last 5 years and 9.1% over 10 years. If you deduct 0.5% for the management fee, it should be above 6%, Which I consider to be quite attractive.

It is better to invest in a Global Equity fund, rather than a regional fund (i.e. Asia). Over the short term, certain regions will perform better than others, but they will average out over the long term.

If you invest in the S&P, it contains many multi-national companies with global operations. You have exposure to Asian markets through these companies

9 things to ask your insurance adviser

Before you pick your insurance adviser, read Dr Money's article:,4136,110603,00.html?

Visit the Adviser

Here is my message to consumers.

If you wish to enjoy low cost, such as Decreasing Term or low cost investment fund, you should visit the Adviser at his office, or transact over the telephone.

As the Adviser earns a low fee, it is not possible for the Adviser to spend a lot of time to visit you at your home. In fact, you should read the FAQ and other materials before talking to the Adviser.

Lesson: Help the Adviser to help you to enjoy lower cost and get a better return for your savings.

Reduce business costs

Banks in Singapore continue to adopt wasteful practices. When I make a transaction with my bank over the telephone, they insists that I sign a document and mail it to their office. They will not accept a fax. Apparently, it must be some regulation from the Monetary Authority of Singapore.

If you add the mailing and handling cost, this outdated practice must add another $1 to the transaction. The bank need to recover their cost and make a profit, so the bank charges are high.

When I transact shares with an American fund manager, they accept instructions sent through fax. It is not necessary to send the original by post to them.

I hope that the business practice of our banks in Singapore can be updated, to reduce unnecessary expenses.

Get adequate coverage

My insurance friend from Kuala Lumpur was surprised at the low level of life insurance coverage in Singapore. He average death claim was $40,000. This represents only 10% of the amount ($400,000) that was considered to be necessary to provide financial security for a family.

Why is the coverage so low?

I explained that this was caused by the wrong type of life insurance product that was being sold to the public. The insurance agent prefer to sell whole life and endowment plans, to enjoy higher commission rate. As the premium rates are rather high, the death coverage, as most people can only afford to set aside 10% of their income for life insurance.

The consumers can get an adequate coverage (say $300,000 to $400,000) by paying only 1% of their income, if they buy Decreasing Term to cease at age 65. They can use the remaining 9% (or more) to save in a low cost equity fund to get an attractive return.

I hope that more insurance advisers will come forward to promote this solution.

Tuesday, December 04, 2007

Traffic accident - How to lodge a claim

Unlikely to have a traffic accident? Don't panic. It is quite common.

How to lodge a claim? Give a call to the hotline of your insurance company. Most of them have a 24 hour service to guide you.

Don't wait until you have an accident. Give them a call now (i.e. a trial run). See if they can answer you - as if you had a real accident. If their service is poor, change your insurer.

And read this article for the other tips:

Compensation for Injuries in Traffic Accidents

In 2006, about 8,400 accidents happened on Singapore roads involving injuries to people. 190 people died, 104 were seriously injured and 9,600 suffered other injuries.

How do the victims claim for compensation for their medical expenses, loss of wages and permanent disablement?

In most cases, the victim has to look for an lawyer to submit the injury claim. The case can take many years to settle. The legal fees can take away about one third of the total compensation.

Is there a better way to handle these compensation? Read this article:

Motor Insurance Quote

I searched Google and found the following links where you can get a quote for your motor insurnce:

Give them a call and get the best rate.

Try the following:
NTUC Income
Tokio Marine

Discipline of regular savings

Insurance practitioners say that whole life and endowment policies are needed to give people the discipline of regular savings. If the policy is terminated, the owner faces a loss as the cash value is less than the premiums paid. The owner is disciplined to continue the policy until maturity, in order to get a decent return.

Is this compulsion good? Is it fair?

Over the past years, many policyowners have suffered large losses when they lapsed their policies. They were aware about the loss of their savings, but they had no choice. They were over-sold them on life insurance policies that they could not afford to upkeep. Many felt that they were short changed.

Is there another way to encourage people to have the discipline of regular savings?

I believe so. I believe that the best way to encourage people to save regularly is to give them a positive reason to save - an attractive return.

If people know that their money can grow with a good investment, they will want to save more and watch the money grow faster. They will realise that it is much better than spending the money.

Give them the flexibility to withdraw some savings (without penalty) to meet their financial needs for important life events, such as marriage, arrival of a child, sickness or unemployment. This flexibility will encourage them to save more.

Let us give a positive reason for people to save and grow their money. Give them an attractive return and flexibility with the right investment product.

Lesson: Invest your savings in a low cost, well diversifed, equity or balanced fund.

Measures to improve the taxi service

It was reported that taxi drivers are asking for a fare hike to compensate for their higher oeprating cost, due to higher price of diesel and ERP charges.

I sympathesize with the plight of the taxi drivers, as they have to work long hours to make a living.

Apart from higher fares, I suggest that we should look into ways to improve the efficiency of our taxi usage. Some taxi drivers are reluctant to ply in certain areas, in case they are not able to find a passenger to pick up the ERP charges. This is inefficent usage of taxis.

I suggest the following measures:

1. Increase the flag down and distance fare to compensate for the higher operating cost.
2. Reduce the calling fee, to encourage more commuters to call a taxi by telephoneand reduce the need for a taxi to ply the road to look for a passenger.
3. Allow a taxi to pay a flat daily fee, in lieu of ERP charges.

Want to buy life insurance?

Dr Money tells the difference between buying life insurance and unit trust.
He also gives some useful tips to make the right choice.
Read his article in the New Paper:,4136,98765,00.html?

Monday, December 03, 2007

Look after the best interest of policyholders

Dear Mr Tan,

I agree with the comments by Ah Pek (posted under "Are you paying too much for your insurance"). I am an insurance adviser with Income for many years.

The new management encouraged us to sell Revosave, and give higher commission to us. I feel quite bad about selling this new product, as it does not give an attractive return to the policyholder. It is also packaged to be quite confusing. This is against the cooperative principles that you taught to us.

I wish to go back to the old days when I can feel proud that Income products are designed to be best for policyholders. I cannot give my name, and I like to wish you all the best in your blog.


Please continue to serve the best interest of your policyholders. Look after them well, and they will trust you. Wish you all the best.

All you need is $250 a month

Dr Money shows how you can have a comfortable retirement by saving only $250 a month. Read his article in the New Paper:,4136,140851,00.html?

Term to 65

Mr. Tan

You have advised people to buy Term policy rather than Whole Life policy. I am 47 yrs old and have a Whole life policy covering $60,000. I wish to increase it to $100,000. I prefer Whole Life as the Term policy will not cover after 65 yrs old. Is my concern valid ?

Can you tell me the following?


Mr Tan
My feedback is as below.

1. Do you expect to work full time and earn the normal salary beyond age 65? No
2. What are you likely to retire from full time work? Latest, at 65
3. When will all of your children be independent of you? They will be independent when I reach 60

Life insurance is needed to provide protection against loss of income in the event of premature death. Do you have a need for this protection beyond 65? Probably not

Some people buy whole life insurance to provide funds to pay estate duty. Do you fall in this category? No

Seems like I don't need Whole life policy, but a Term will do. I should invest the balance in a saving / investing product?

Secure Portal for Financial Information

I met a friend from Kuala Lumpur. A few months ago, he was involved in a serious accident. He was injured but another person was killed.

After his recovery, my friend reflected on the following:

1. Did he have adequate life insurance?
2. If he had gone, did his family know about his life insurance and other assets?

He decided to double his life insurance and to keep a record of his life insurance and other assets with a few family members.

A year ago, someone wanted to provide a secure portal for people to register their life insurance and other assets, to be accessed by their family members after their death. This is a supplement to a will. So far, he has not found the right approach to provide this service.

Do you think that there is a demand for this type of service?

Flexible Savings Plan

Dear Mr. Tan,

You recommend Term and invest the difference. Some people will not invest the difference and will spend the money away. Surely this is a bad idea? It is better to get them to save in an endowment or whole life policy.


I wish to educate people on the following:

1. Buy Term to get the insurance protection at low cost
2. Invest 10% to 15% of the earnings in a low cost investment fund
3. Invest more, if you can.
4. Be frugal in your expenditure.
5. You can withdraw from your savings to meet important life events

Look for a unit trust that allow you to invest 100% of your savings and have low expense ratio. If the unit trust requires a minimum sum for top-up, you can save in a saving account and invest a bigger sum once or twice a year.

For example, if you wish to invest in the STI exchange traded fund, you have to buy a minimum of 100 shares (about $3,500). If you accumulate this sum over a few months, you can buy 100 units at that time. This ETF has low expense ratio of 0.3% only.

Lesson: Have a flexible savings plan, and the discipline to manage your savings.

Hidden Expenses of Unit Trusts and ILPs

What are the hidden expenses? These are deducted directly from the fund and not disclosed in the expense ratio. Read the explanation from Dr Money at this webpage:,4136,129763,00.html?

Education Fund and Inflation

How does inflation affect your savings for your child's education?

Assume that you wish to save $100,000 for the tertiary education of your child in 20 years time.

If you expect to earn an average return to be 5% a year, you need to save $3,020 a year.

In 20 years time, the cost of education would have increased, due to inflation. At inflation of 2%, the cost would have increased to $148,000, or an increase of 48%.

To get the higher sum of $148,000, you will need to save 48% more, or $4,470. That is a lot of money, especially at the earlier years, when your income is still at a more modest level (i.e. has not reached the peak for your career).

A better approach is to have a saving plan that increases with your salary. If you assume that your saving can increase by 2% per year, you can save a smaller sum of $3,720 during the first year and increase your saving by 2% a year to reach the same target.

Lesson: It is important that you get a high rate of return from your savings. Invest in a low cost equity fund to earn 5% per annum over 20 years. (This is not guaranteed, but it is likely to give a higher return than an Education policy).

Read this FAQ:

Are you paying too much for your insurance?

Read Dr Money's article in,4136,116909,00.html?

Sinking Funds of Town Councils

The government has announced the following measures:

1. Town councils can invest in non-government investment vehicles up to a cap of 35 percent
2. The aim is to strike a balance between getting a good return and not taking unnecessary risks.

Inflation hit a 16-year high recently at 3.6 percent and is expected to hit 4.5 or 5 percent next year. Government bonds and short-term fixed deposits give a return of around 1.5 to 3 percent which is lower than the returns from riskier market investments.

Higher Motor Insurance

Dear Mr. Tan,

I read recently that insurance companies lost a lot of money on motor insurance and will be increasing their premium rates soon. Will this apply to NTUC as well?

I used to enjoy lower premiums from NTUC. Now I am worried that they will be increasing their premium rates, due to the lax claim control and poor management, e.g. the high payout for Jonathan Lock's case.

I understand that all insurance companies will have to increase their premium rates, and this is likely to be the same for NTUC Income. I do not know what is the percentage increase.

If you get the renewal notice, you should compare the rate with the previous year. If the increase is more than 10 percent, you should get a quotation by telephone from a few insurance companies. You may be able to get a better rate, if you call them directly.

Wish you all the best.

Pension in Australia

My friend migrated to Australia about 10 years ago.

He told me that, after living as a permanent resident for 10 years, he is entitled to Old Age pension on reaching age 65. The pension is currently about AUD 1,100 a month for a single person. For a qualifying couple, the pension is AUD 1,800.

The pension is reduced, for a pensioner with income or assets above a certain threshold. Many poor people can qualify for the full pension.

NOTE: The generous pension and other benefits are funded by a high rate of taxation that Australians have to pay. It seems that the majority of Australians think that it is all right to pay higher taxes to take care of the poorer people in the community.

Impact of inflation on financial planning

Some economists forecast the inflation rate to increase to 4% to 5% during the first quarter of 2008. Many people are worried? How does a higher rate of inflation affect their financial planning?

The increase in inflation rate in recent months is due to some temporary factors, such as the increase in Goods and Services Tax and the sharp increase in oil price. The impact is likely to diminish over the next 12 months.

For financial planning, we have to look at inflation rate over the long term. Over the past ten years, the average was less than 1%. Even if we allow for the large increase expected for this and next year, the average is still lower than 2%. In the future years, it is quite adequate to
allow for inflation at average of 2% a year.

Sunday, December 02, 2007

Invest in Gold

Larry Haverkamp wrote this article about investing in gold in October 2006. At that time, the price of gold was USD 580. After 1 year, the price has shot up to USD 850 (increase of 46% in USD). But USD index dropped by 12% during the same period. The net gain is 28%,4136,116119,00.html

As Gold is too expensive now for investment, this is an opporunity to look back at what was written a year ago.

Life in Taipei

My daughter Jamie shares her experience of living and working in Taipei.

My name is Jamie Tan.
I live in Taipei and am currently working as a Regional IT Manager in an insurance company.
At any one point in time, there are many things to be grateful about. So always look on the bright side of life.

The 3 Most Timelss Investment Principles

By Daniel Myers, CFA

Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor he would probably mention one man: his teacher, Benjamin Graham. Graham was an investor and investing mentor who is generally considered to be the father of security analysis and value investing.

Principle No.1:
Always Invest with a Margin of SafetyMargin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities, but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for $0.50. He did this very, very well. To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value.

Principle No.2: Expect Volatility and Profit from It
Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments.

Here are two strategies that Graham suggested to help mitigate the negative effects of market volatility:

Dollar-Cost Averaging
Dollar-cost averaging is achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions.

Investing in Stocks and Bonds Graham recommended distributing one's portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham's philosophy was, first and foremost, to preserve capital, and then to try to make it grow. He suggested having 25-75% of your investments in bonds, and varying this based on market conditions.

Principle No.3: Know What Kind of Investor You Are
Graham advised that investors know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market. Active Vs. PassiveGraham referred to active and passive investors as "enterprising investor" and "defensive investors".

You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return.

If this isn't your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of "risk = return" on its head. For him, "Work = Return". The more work you put into your investments, the higher your return should be.

If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. Graham said that the defensive investor could get an average return by simply buying the 30 stocks of the Dow Jones Industrial Average in equal amounts.

by Daniel Myers, CFA (Email Biography)

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