Saturday, March 22, 2008

Keep your money in CPF

Hi, Mr. Tan
I need your advice. I have just signed up for a $30,000 Growth policy using my OA. The insurance agent told me that I must sign up before 1 April to beat the deadline. It offers a projected return slightly more than 4%.

My friend told me that this policy locks me up for the period of 20 years. If I need the money to buy a property or to contribute towards the monthly payment (in case I lose my job), I will have to suffer a loss. Is this correct? Can I withdraw from my policy now?

Most people uses the ordinary account to pay the down payment for a property and to service the monthly repayments.

If you invest in the Growth policy, it is locked up for the period of 20 years. If you decide to terminate the policy (e.g. to use the funds for a property), you will have to suffer a loss, as part of your investment is used to pay commission to the insurance agent.

If you keep the money in the ordinary account, you will earn 3.5% (i2. 2.5% plus 1% bonus on $20,000). If you invest in the Growth policy, you will get a return between 2% to 4% (plus) depending on the future rate of bonus. If interest rate remains at a low level (as it has been during the recent years), the return on the Growth policy is likely to be lower than projected.

In my view, it is better to keep your money liquid, rather than be locked up in a long term contract that offers only a marginal increase in yield. If you decide to cancel the policy, you can do it within the 14 day cooling off period, and get a full refund.

More options for low cost funds

Hi Mr. Tan,
I refer to your earlier post on no load financial products. In addition to such products, I think local investors also have an extremely poor choice when it comes to low-cost index funds or ETFs in mid and small cap companies, or in growth and value companies, unlike in the US.

Currently, we only have the STI-ETF which includes big-cap companies and where 40% of the index is already made up by the big 3 local banks.

As you're aware, a good and effective asset allocation plan, involving various asset sub-classes such as big, medium and small companies will help greatly in reducing volatility and increasing an investor's returns. And traditionally, of course, value and growth companies also offer higher returns than big-cap companies, albeit with higher risks.

I hope these products, including also a REIT-index-based product, will be introduced in the market soon, maybe by you? Thanks.

Thank you. I hope that there will be more options for low-cost funds for the public in the near future.-

Immigration Card - Malaysia

Visitors to Malaysia are not required to complete an immigration card. Entry into Malaysia is hassle free. Congratulations to the Malaysian Government for taking this simple and practical step.

I hope that Singapore will adopt this new practice. Do away with the immigration card. There is no need for this card, as the particulars in the passport are scanned into the computer system.

There is also no need to collect tourist statistics. So many people travel today, that the statistics have become meaningless.

I hope that Indonesia will also adopt this new method. Get rid of the immigration card and customs forms. They are a big waste of time, and hassle to the visitors.

When is a good time to enter the market?

Dear Mr. Tan,
I am thinking of investing in the STI ETF. As a beginner to investment, how would I gauge when is a good time to enter the market?

Nobody knows when is a good time.

My guess is that this is now a good time, as the market has corrected and the financial crisis is likely to stablise now. If you are a long term investor, it should be quite safe to invest now.

Wish you all the best.

Bernanke's plan is working

Here is a brief description of the current problem in the US financial system.

a. It started with the subprime mortgages, which saw high default rates

b. The value of the "asset backed securites" and the "collaterialised debt obligations" linked to these mortgages dropped significantly

c. The problem spread to the other sectors. Many "special investment vehicles" and hedge funds had been set up to use borrowed money, i.e. "leveraging", to invest in higher risk assets to earn a margin. These SIV and hedge funds could not refinance their borrowings, as the lenders got scared.

d. Investors starting to withdraw their money from hedge funds, SIV and the investment banks.

This led to the collapse of Bear Stearns. There was fear that they have to sell their illiquid assets at depressed prices, causing a collapse of the entire global financial system.

The US Fed, under the chairman Bernanke, came out with a plan to provide up a 6 months facility for investment banks to allow them to borrow from its "discount window" i.e. at the Fed discount rate, by pledging their illiquid assets.

Some experts believe that this plan is working and that the markets will stabilise and recover from now. This is expected to solve the "liquidity crunch". Let us hope that they are right!

Friday, March 21, 2008

Estate planning

Hi Mr.Tan,

Can you share with me your views on Estate Planning and its implications with the removal of Death Taxes? Is Estate Planning still relevant in Singapore?

I'm just trying to understand how much is left in Estate Planning after the removal of Death Taxes. The text books talk about Estate Preservation, Estate Distribution and Estate Creation in view of succession planning.

While this is all academic, I was hoping you could share some insights into some percularities or blind-sided areas on a more practical front.

The important components of estate planning are:
a. Identify the assets in your estate
b. Buy insurance to provide funds to pay the estate duty (not required now)
c. Decide how the estate is to be distributed on your death (this is done through a will)
d. Appoint the people to manage the estate.

If you estate is substantial, it is better to transfer your assets into a separate trust now, and appoint trustees to manage the trust. You can be one of the trustees. This trust becomes part of the estate on your death.

I will invite my blog readers to share other perspective of estate planning.

Projected return of 4.16%

Hi Mr. Tan,
Recently, I am looking to invest a small sum of money in a low risk product for my children's education. After discussing with my agents, I am thinking of investing the money in a 15 year NTUC's Growth plan policy which provides a projected return of about 4.16% with a guaranteed return of about 2%. I am not looking to invest in a mutual fund because I would like to keep the risk to an acceptable level.
1) What is your view of this product?

2) Do you think my decision is wise?
3) Is there any other product that I should be looking at?

This product is fairly satisfactory. I have also invested my SRS funds in the Growth policy to get the same modest return in the past.

My preference today is to invest in a mutual fund to get a higher return over the future years. Read this FAQ:

Perhaps you can invest in 5,000 shares of the STI ETF. I believe that it should give a better return over the next 15 years.

Blue chip stocks

Dear Mr. Tan,
I read from your blog there we can invest some blue-chips shares for long term. What are the blue chips shares can you lists some? Is F&N consider blue-chip? I think of investing for my children as they are around 13-15 years. Do you think is good? Please kindly give me opinions of what to do. Now the fixed deposit very is very low.

I consider the 30 components stocks of the STI index as blue chips. These component stocks are listed in:
F&N is a component of the index.

Confidence in US financial firms


Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
By Pham-Duy Nguyen

March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.

The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.

"Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''

Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.

"Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets.

"You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''

Investing the CPF ordinary account

Hi Mr. Tan
Due to some personal reasons, my friend would like to divert all her CPF money to other investment, instead of leaving it in her ordinary account. She is not a person good at managing her finances. What are the options available to her?

She just want to make sure the sum of around 30k will be relatively safe and generate a moderate amount of interest or at least same as what CPF board is offering. When the minimum sum kicks in on 1st April 08, is it true that she can't invest all the 30k?

Read this FAQ:

Risk of forex trading

Hi Mr. Tan,
Thank You for your valuable info in your blog. It enriched my financial knowledge.

Now, economy is under unstable condition. My friend recommended me to invest in forex trading. Kindly advise on the risk involved and other factors. I am still quite clueless on it.

Do not engage in forex trading. It is risky. You are likely to lose a lot of money.

It is better to invest for the long term in a low cost, diversified investment fund. Read this FAQ:

Online enquiry form

A friendly online enquiry form ask for only 3 essential information

a) Your name
b) Your e-mail or contact number
c) A text box for you to type your enquiry

Most large organisations have an enquiry form that ask for non-essential information (many of which are mandatory) and ask the customer to select the type of enquiry from a long drop down list. They seem to enjoy making life difficult for their customers.

Of course, they want to collect customer data, but do they have to alienate their customers?

Risk based capital

A financial institution, such as a bank or insurance company, is required by the Monetary Authority of Singapore to have a share capital (i.e. risk-based capital) that reflects its risk profile. The risk profile comes from its invested assets and from its contractual liabilities to its customers.

A financial institition that takes more risk (i.e. asset and liability risk) is required to have more share capital. One that takes less risk is required to have lower share capital.

If the financial instition has more capital, it may appear to be "safer" and "better" for their customers. But this is only one side of the story.

A financial institution with more share capital has to make more profits to satisfy their shareholders. The expected return for shareholder is usually 10% to 15% on their investments. The higher profits is usually taken away from their customers, through excessive charges and other devices to "cream off" the customer.

It may be better for customers to transact with a financial institution that take lower risks and require lower share capital from the shareholders.

When you invest in a low cost, diversified investment fund, you are taking the investment risk. The fund manager does not take the risk, and does not require to have a high capital to provide the guarantee. They are able to give you a higher return.

Read this FAQ on how you can reduce your own risk, and still enjoy the high return:

Risk and return

Is it better to invest in higher risk assets (e.g. equities) or lower risk assets (e.g. bonds)?

Here is my answer:

a) If you wish to get a higher return, you should invest in equity
b) Over the long term, equity gives an annual return of 2% to 4% higher than bonds

You can reduce your risk of investing in equity as follows:

a) Invest in a diversified fund
b) The fund should be invested in only shares of blue chip companies, i.e. the largest companies in the market
c) Choose a low cost fund (i.e. expense ratio less than 1% per annum)
d) Invest for the long term (i.e. 10 years or more), so that you can average out the good and bad years.

Be ready to take "diversified" risk and get a better return. There is no need to invest in highly speculative asssets, such as emerging markets or highly priced commodities, to get a higher return.

No load financial product

I wish to introduce the concept of a "no load" financial product.

Examples of "no load" products are:
a) bank account
b) shares and bonds bought through the stock exchange

Some "no load" products require you to pay a transaction fee (e.g. brokerage) but they are usually less than 0.5% of the invested sum.

Examples of "high load" products are:
a) Life insurance and investment linked policies
b) Structured financial products
c) Time-share properties
d) Land banking products

The "high load" products have high front end charges that may take more than one year of your savings or more than 5% of your invested lump sum. They are used to pay high commission to marketeers to "push" the products to consumers. After paying the high marketing costs, the consumers get a poor deal.

Go for "no load" products.

Websites of large companies

The website of many large companies are a maze. It takes a long time to navigate through the website to find the relevant information.

Quite often, you will need an experience guide (from the helpdesk of the company) to take you through the website.

I wish to ask your your participation. Can you tell me which company has a good website that is easy to navigate?

A complicated feedback form

The express bus company sent me an online feedback form. It contained more than 50 questions for me to complete. I sent this reply by e-mail:

If you wish to ask for my feedback, you have to be considerate and send me a simpler form. Do think about the customer. Do not just think about your own convenience.

Like most other companies, this company is interested only to compile statistics. I do not think that they are genuinely interested to listen to the customer.

I hope that people will think more about the customer.

Poll: measures to cope with cost of living in Singapore

What measures will help most to cope with the cost of living in Singapore? (20 replies, multiple choices are allowed):

75% lower cost of transportation and reduced commuting time
40% higher wages for low income workers
30% higher return on financial products
20% better protection of consumers

Insuring against poverty

Many people buy a large critical illness policy to insure against the risk of 30 critical illness. The chance of it happening during their working life is less than 5%.

There is a bigger risk that they overlook. It is insuring against poverty. The chance of this event is 95%.

Here is a good way to insure against poverty:

a) Save 10% to 15% of your monthly salary
b) Invest in a low cost, diversified fund to earn a good return over the future

Many advisers do not recommend this approach. They introduce high cost products to consumers, as these products provide an attractive commission to the adviser. The consumer gets a poor return. They face a conflict of interest

I hope that more advisers will come forward to give the proper advice that are good for consumers. They can earn a fair rate of commission, but at least they know that they are acting fairly and honestly.

Orderly transition in five state governments in Malaysia

A reader wrote to the Star paper in Malaysia. He congratulated Prime Minister Abdullah Badawi for the peaceful and orderly transfer of power to the new governments in five states in Malaysia. He described the Prime Minister as a gentlemen.

He mentioned about the experience in several other countries, where the opposition party faced obstacles in the election and after being elected.

Travelling to Kuala Lumpur by bus

I took an express bus from Singapore to Kuala Lumpur. It is the first time that I took a bus to visit Kuala Lumpur. Previously, I have always taken the plane.

The journey took 5 hours. It was comfortable. I arrived in Petaling Jaya at 1 pm. If I have taken the plane, the journey would have taken the same travelling time.

I was able to have a nice discussion with another traveller on the journey. I could also do some work on the bus. I shall be travelling on this mode more often in the future.

Thursday, March 20, 2008

1,004 visitors to my blog

1,004 people visited my blog on Wednesday 19 March 2008. This is the first time that it exceeded 1,000 visitors.

Impact of new CPF rule on dollar cost averaging

Dear Mr. Tan,
From April 1, 2008, CPF requires a member to keep a minimum of $20,000 in the ordinary account. I am surprised to find out that this applies also to existing policies with regular recurring premiums using CPFOA.

Now we have 2 choices:
1. Keep the minimum in OA and use the excess to fund our investments
2. Terminate plans to avoid agent bank charges

I invested my CPF savings by recurring regular premium on dollar cost averging. With the market down, I am now forced to terminate my plan. I have to stop investing even if I am making losses now.

Is this a fair practice to investors? Who regulates CPF Board? Can MAS look into this matter?
What is your opinion?


I believe that this is decided at the highest level of Government. There are good reasons for the Government to implement this requirement to keep a minimum of $20,000 in OA.

I agree that the timing is unfortunate, as it deprive you of the chance to average down on your investment. I hope that you can have some other savings to do this averaging down (and not depend on the CPF savings). Wish you all the best.

Wednesday, March 19, 2008

Low cost insurance and funds

Hi Mr. Tan,
I read from your blog that there are a few NTUC Income advisers who have agreed to offer only the low cost insurance and funds. I would like to get the email addresses and contact nos. of them.

If you wish to buy low cost insurace, I suggest that you contact NTUC Income's business center

Lyxor ETFs

Dear Mr. Tan,
I want so seek your advice on Lyxor ETF. It seems to track the index in several Asian countries. Can I buy it directly through stock broker like purchasing of STI ETF?

I am not familiar with the Lyxor ETFs but I guess that they should be quite well diversified and low cost. You buy them through a stockbroker, like a share. (Note: my earlier comment about buying through an internet platform was wrong).

The world will learn from the financial crisis in USA

Dear Mr. Tan,

With the Global uncertainties in finance, is it risky to invest in STI ETF now? It seems America is in a hot soup in managaing their monetary assets. What precautions you could advise our singaporeans, young and old not to fall into this mess in the next 5 or 10 years? Where should I go to invest the 1000 shares with STI ETF?

Pardon me, I am learning more about investments from your blog. I want to thank you that I truly enjoy reading your blog daily because I believe theory without practical approach is of no value.


You buy the ETF through a stockbroker, just like you buy a share. If you are investing for the next 10 years, it is all right to invest in the ETF, as the financial mess will be cleared up by that time.

I believe that America will learn the lesson from this financial mess, and will sort them out to avoid similar problems in the future. The rest of the world, including Singapore, will learn from it as well. In the future, the world will be much less leveraged on debts.


Cost of Living: Lessons from the Malaysian election


The election result in Malaysia is a big surprise, not only to the ruling Barisan National but to the opposition parties and the voters as well.

A key issue appears to be the high cost of living. It is not sufficient for a Government to say that they are due to external factors. The people expect the Government to find effective ways to deal with this challenge. This is what they elect the Government to do.

This election result has lessons for Singapore. What can the Government do about the high cost of living in Singapore?


I wish to identify factors that make it difficult for many people to cope with the cost of living in Singapore:

1. Financial Products. Many people earn a low rate of interest on bank deposits. It is insufficient to cover the rate of inflation. If they invest in other financial products, they have to pay high charges and get a poor yield. They buy unnecessary and high cost insurance. They pay high interest charges on their borrowing. Financial institutions and intermediaries make good profits and earnings at the expense of consumers.

2. Transportation. They pay high cost for their transportation due to inefficiency of the system. One obvious example is our taxi service.

3. Commuting. Many people take one hour or more to get to their place of work and incur quite high travellng cost. The journey is uncomfortable and over-crowded.

4. High Government charges, such as ERP, GST, etc.

5. Business tie-ups. There are many tie-ups that work to the disadvantage of consumers. An example is the tie-up between motor dealers, banks and insurance companies on the purchase of a car.


Here are my suggestions on how to reduce the wastage, improve efficiency and help people to cope with the cost of living in Singapore.

1. Financial Products. We have to give people a fair return on their investments. Financial and insurance products that have excessive charges and offer unfair terms to consumers should be disallowed. They should not be allowed to design complex products that skim off the consumers. Financial institutions can compete to provide products to consumers on the basis of their efficiency and quality of service.

2. Transportation. We should bring down the cost of public transportation. They are a necessity for daily living, similar to fresh air. People do not consumer transportation unnecessary. The transportation cost can be reduced to the marginal operating cost. ERP charges, road tax and other levies on public transport can be waived.

3. Commuting. We should reduce the need for commuting. People should be encouraged to find work near their homes, or to move their homes to their place of work. Students should attend a school near their homes. Apart from reducing the transportation cost, it saves travelling time and improves the quality of life. This can be achieved by reducing the transaction cost in selling and buying a property to live in. Stamp duty can be abolished. Lawyers and broker fees can be reduced by simplifying the work and creating a more efficient system.

4. Consumer Education. We need a more active body to educate the consumers and protect their interest. This body should be given a stronger voice. It is necessary to balance the interest of consumers with the interest of business. We have to strike a fair balance. This body should also acti vigilently against tie-ups between businesses that restrict the choice and fair dealing for consumers.

5. Adequate wages. Workers in the lower income groups need adequate wages to meet the cost of living and save for their retirement. The current wages are depressed due to the available supply of foreign workers from low cost countries. If it is not possible to raise the wages of the local workers earning below the adequate level, they should be given a supplement through an adequate top-up to their CPF accounts.


There are already many existing measures taken to address these issues. We need to simplify the existing measures and make them more impactful to help the people.

We have to consider additional measures to help people to cope with the cost of living in Singapore.

Tan Kin Lian

Mid Valley Mall in Malaysia

I am now staying in a hotel in Mid Valley, outside of Kuala Lumpur in Malaysia. It has a large shopping mall and several hotels in the complex. I shall be updating my blog less frequently for the next three days.

Tuesday, March 18, 2008

Invest to earn more than 2.6%

Dear Mr. Tan,
I currently have a housing loan with HDB. Is it a good idea to pay off as much of the loan as early as possible? I have heard different views regarding this issue. Some people say it's better to use the money in the ordinary account to invest and earn more returns. Others say paying the loan earlier will help to reduce the interest amount. What is your advice?

Interest charge on the HDB loan is 2.6%. You should be able to earn a better return over the long term from a low cost investment fund.

If you are willing to take some risk and invest for the long term, it is better to keep the loan and invest your savings. Read the following:

Difference: Singapore EQuity fund and STI ETF

Dear Mr. Tan,
What is the different of buying STI EFT and investing in Singapore Equity form NTUC?

Both funds are invested mainly in equities.
The difference is in the upfront charges:
NTUC fund 3.5%
STI ETF 0.3%

The annual fee is also different:
NTUC fund - 0.65%
STI ETF 0.3%

You need $3,200 to buy 1,000 shares of STI ETF. You can buy the Singapore Equity fund for $100.

Trials & Tribulations of A Science Career

Our own home grown scientist Dr. Lee Kum Tatt has shared with us on many occasions the fun and glory of a science and research career.

The question that is sometimes asked “ Hasn’t he got some bad times doing science and what did he do about them”? His wife, Mrs. Engeline Lee has persuaded him to share with us some of the trials and tribulations of a science career and research worker’s life.

You can read about his comments in his blog

Poll: LRT in CBD

Is it useful to have a LRT system within the Central Business District? (25 replies)

28% strongly support
44% can consider
4% neutral
24% not feasible

Strange. The results are exactly the same as poll on retirement housing!!

Travelling within the Central Business District

There is unhappiness over the new LTA rules that require taxis to pick up and drop passengers at designated stops. The LTA will make some changes to address these complaints.

Over the longer term, we need to improve the transport system within the Central Business District.

I suggest that an overhead light rail transport (LRT) be build. This will run along the major roads. It allows passengers to travel within the CBD or to connect to the MRT stations. Travel within the CBD can usually be done on one train or one change of train. Many buildings can have walkways to connect to the nearby LRT station.

We now have a LRT system in three towns in Singapore. The usage of the trains is low, due to the small population catchment and other factors. I expect that the LRT within the CBD will be more successful.

If more passengers uses the LRT to travel within the CBD, there will be less need for taxis.

Life assurance policies give poor return

Dear Mr. Tan
I have the following life insurance policies:

Plan: Life Plus
Sum Assured $100,000
Yearly premium $1,282
Insured for last 10 years
Cash value now: $10,300

Plan: Dynamic Prolife
Sum Assured: $50,000
Yearly Premium 1,519
Insured for last 10 years
Cash value now: $12,000

Should I keep the insurance or should I switch to low cost fund and term insurance? Based on my calculation, if I keep the cash value and subsequent premium in low cost fund, I can get a better return. If I keep the policies, I will have to wait for another 6 to 9 years for my cash value to breakeven. Pls advise.


Please read this FAQ:

I hope that you find it useful for your decision.

Simpler way to address a letter?

I have to send a letter to CPF. They asked me to mail it to the following address:

CPF Minimum Sum Topping-up Scheme (Retirement Services Dept)
CPF Board
79 Robinson Road
CPF Building
Singapore 068897

Here is a shorter way to address the letter:

CPF Retirement Services Dept
Singapore 068897

I wonder if my letter will arrive there?

I shall try to post a letter to myself as follows:

Tan Kin Lian
Singapore 809744

Poll: Retirement Housing in Singapre

Do you like the concept of retirement housing in Singapore, as described in my blog? (25 replies)

24% strongly support
44% worth considering
4% neutral
28% not feasible

Retirement Housing in Singapore

1. Someone wrote to the Straits Times Forum proposing the development of retirement housing in nearby countries, where the cost of land is lower.

2. It is economically feasible to build the retirement housing in Singapore. The cost of land can be reduced by better utilisation of land. Here is my concept of a future retirement town to be build in Singapore.

a) Located in a corner of Singapore, say in Lim Chu Kang.
b) Comprise of 100 blocks of 100 units, i.e. total of 10,000 units
c) All internal transport by light rail transport (LRT) and personal automated transport (PAT)
d) LRT to connect to a nearby MRT station
e) Large car parks to be located outside of the town, for use by residentials and visitors
f) Medical facilities operated by private clinics to serve the residetials
g) Housing units to be owned by a residential REIT and rented to residents
g) Residents can invest their retirement savings in the residential REIT
g) Covered walkways to connect to parks, sports facilities, social clubs and food outlets
h) Easy for children to visit the elderly from other parts of Singapore and vice versa
i) Some blocks to be rented to foreigners interested in this lifestyle
j) Employment opportunities for the residents
h) The residential units and public areas are designed to be friendly to the elderly.

3. Employment opportunities. The residents can work in the social clubs, food outlets, care centers, call centers and remote work offices in the town to earn a supplementary income.

4. Residential REIT. The residents can invest a large part of their retirement savings in the residential REIT. The dividends from the REIT can be used to offset their rental payments, and leave a balance for their living expenses. They can also encash their units in the REIT gradually, during their lifetime, to provide a supplementary income.

5. The residents are encouraged to join a social club to meet friends, take part in social activities and also have their meals. This is similar to the lifestyle of the posh social club in London, but can be operated at low cost.

6. I hope that this idea will be taken up by the Government or a private consortium of sector sector developers.

Advice to young people

If you have recently started work, here are a few tips:

a) Set aside 15% to 20% of your monthly income as your savings
b) The balance is to be used to meet your personal expenses, including contribution to your parents
c) Avoid buying a car, as it is too expensive and take away too much of your income
d) Do not borrow on credit card
e) Let your savings accumulate in your savings account to earn 1% interest
f) Later, Invest your savings in a low cost investment fund or the STI exchange traded fund.
g) Do not buy a high cost life insurance policy (as it gives a poor return).
h) Buy low cost term or accident insurance to cover your income.

Your savings will accumulate to a large sum over 5, 10 or more years. You may need it for your major financial commitments, e.g. wedding, buying a home, education and retirement. If you do not take a loan, you can save on the interest payments!

Read these FAQs:

Insurance premium for off-peak car

A blog reader called several insurance companies and obtained the following quote for his motor insurance:

Type: Off-peak car, after 20% NCD and excess $500:

India International: $599
Income: $618
China Insurance: $647
AIG: $889
AXA: $948

Call direct:

Residential REIT

I wish to explain the concept of investing and living in a residential REIT:

a) As you investor, you own investment units in the residential REIT
b) You receive an annual dividend based on the net income of the REIT
c) You pay a rental for the use of a housing unit in the REIT

If you stay in the same size of housing unit as your invested sum, the net income should be slightly smaller than the rental, as there is a management charge of (say) 5%. You will benefit from the following:

a) It gives you the flexibility to rent a smaller housing unit (relative to your investment) and keep the excess income
b) You have the choice to sell off some investment units monthly to meet your living expenses. This is similar to a draw down annuity or reverse mortgage.
c) You can decide to live elsewhere and enjoy the full dividend from your investment units.

This concept is similar to timeshare, but avoids the high marketing cost, and most of the investors are likely to live in the property. I hope that this idea can be developed by a private sector developer.

Monday, March 17, 2008

Low cost funds

It is important to choose a low cost fund for your investment. If you invest in equities for the long term, you should be able to get an average yield of 3% to 4% above Government bonds. This should give a gross yield of about 6% to 7%.

If the expense ratio of the fund is 2.5% (which is quite typical), you will get a net yield of only 4% (after charges). If the expense ratio is 1%, you get a net yield of 5.5%.

The difference of 1.5% in the yield can amount to more than 15% over 10 years. It is important to invest in a low cost fund, so that you can keep most of the yield.

The experience of most investors is that the speculative funds incur high charges and do not produce a better yield over the long term. In fact, many speculative funds lost money for the investors.

Low cost insurance

Mr. Tan
I am reaching 30. Currently, I have a insurance ijfe plan of the insured amount of about $70,000. I am insured under the Health Shield and get the rider like the Pink Of Health.

I am now paying a premium of about 3% of my monthly income. I am thinking of getting additional cover of critical illness and term plan. What are the options of the insurance that I can choose from?

You can read the FAQs in my website

High charges under ILP policy

Dear Mr. Tan,
I am insured for a sum assured of $100k and critical illness for 180k under a ILP since 2006. The cash value is about $300 now although I have a total premium of $3,600. Is this a good policy?

The cash value is too low, compared to the premium that you have paid. The charges under the ILP policy is excessive and has taken away most of your savings. Read this FAQ:

As you have already incurred most of the upfront charge, it is probably better for you to continue the ILP policy. After the second year, the charges should be quite low.

If you have to increase your savings in the future, do not buy a high cost ILP policy.

You can buy a term insurance policy to cover your protection needs. It is low cost and offers a large coverage. Read this FAQ:

Negative return from unit trusts

Hi Mr. Tan,
Your website is very useful to improve our financial awareness, especially for people living in Singapore. I visit your blog every day.

I read your article about Investing for the Long Term. I look forward to a Unit Trust that offers quite similar feature as ETF.

Currently, I have invested more than 60% of my savings into several unit trusts since mid 2006. (Details of funds removed). So far, my investment showed a loss of 20%. I consider my investment to be for the long term, and have not made any withdrawal.

Do you have any recommendation what I should do in the midst of current credit mess? Should I invest through a personal advisor from financial institution? I have been approached by an adviser who offers advice for an annual cost wrap of about 1%. Is it worth while?

What are the upfront and annual charges of these funds? If you invest in 2006, you should have a period where you made a big gain (i.e. last year) and it should have broken even now, even with the market downturn.

I am surprised that you you have lost 20% of your investment. Perhaps you have invested in the more speculative funds, or the fund charges are too high?-

Motor insurance increase by 20%

Hi, Mr. Tan

I have insured my motor car with NTUC for the past many years, when you were CEO. I just received the renewal notice for my car insurance. Guess what! The premium increased by more than 20%.

I did not make any claim and have been enjoying 50% discount. Why should the premium increase by so much? Should I stay with NTUC?

I recall that the motor insurance has lost money during the past year. But I agree that an increase of 20% is excessive, especially as you did not make any claim last year.

Perhaps you should call a few insurance companies and check their premium for your car. The telephone numbers are shown here:

Let me know the results of your survey.

Oil product

Dear Mr. Tan,
Is it safe to invest in oil product? It has a ROI of more than 8%.

I am not familiar with investing in this product. I advise you to avoid investing in a product that you are not familiar with.

UK Traded Endowments


Dear Mr. Tan,

Recently, I was engaged in an online discussion about UK Traded Endowments. The other party suggested investing in UK Traded Endowments, which was able to give a better return than money market fund.

Are you familiar with this type of investment? What is your opinion?


The fund manager buys the endowment policies from the customers and pay the premiums till maturity to collect the proceeds. You have to rely on the ability of the fund manager to manage the situation.

I do not know what charges are being taken away by the fund manager as their fees and expenses, and whether the remainder is a fair rate of return to the investor for the risk.

You have to study the following:

1. What is the underlying rate of return to the investor from the traded endowments?
2. What are the factors that could impact on the underlying return, e.g. reduction in bonus rates?
3. What are the fees taken away by the fund manager?
4. What is the net return to the investor?
5. What is the financial standing of the fund manager?

Keep the money in CPF retirement account

Dear Sir,
I am asking this on behalf of my mother. She has $60K in her retirement account. She is thinking of transfering the entire sum to the NTUC annuity. Is it wise?

It is better to keep the money in the CPF retirement account and earn an return of 4%plus 1% bonus (on $40,000).

Your mother should buy the life annuity with savings that are outside of CPF.

Exchange Traded Endowments

Dear Mr. Tan,
I've never heard you mention about Traded Endowment Policies (TEP). Well, I might have overlooked your articles. Is it true that TEPs are safe even when the market's down because they claim that one can still get average returns of 6-8% during times of uncertainty.

Here's the link.
Your thoughts please

I have written about traded endowment policies in my blog. You can search my blog for my articles.

I advise against investing in these products as the intermediary, who arranges the investment, takes a fee (which is usually not transparent). As the investor, you carry the risk.

Bear Stearns

Dear Mr. Tan,
Did the Singapore Government invest in Bear Stearns?

I recall that GIC and Temasek invested in UBS, Citigroup and Merrill Lynch. I do not recall that they invested in Bear Stearns.

Sunday, March 16, 2008

Hedge Funds

Hedge funds take money from investors and make risky investments. They magnify the risk by borrowing short term funds. Some hedge funds borrow 20 times of their capital. This high leveraging is dangerous.

When their risky investments turn bad, they lost most of their investor's capital. They are not able to refinance the borrowings and had to repay them at short notice. They are required to liquidate their assets at depressed prices.

A few hedge funds had failed in this manner in recent months. This has caused the turmoil in the markets. It has become a financial crisis.

Lesson: Expect some regulatory controls over the use of leveraging by hedge funds in the future. In the meantime, expect the market to go through a lot of further turmoil, until the liquidity crisis is sorted out.

Options to invest retirement savings

1. If you have to invest your retirement savings, the following options are available:

a) Retirement account of CPF - 4% plus 1%
b) Government bonds - 3%
c) Bank deposits - 1.5%
d) Life Annuity -5% plus bonus
e) Unit trust - 5% (average for long term)
f) Foreign currency - 4% with currency risk

2. If you have limited savings, say less than $500,000, you should invest as follows:

a) Keep the maximum allowed in CPF (say $150,000 at 65)
b) Use $200,000 to buy a life annuity at 65 to pay about $900 plus bonus each month
c) Invest the balance in government bonds or a unit trust

Use the monthly income from CPF and the annuity to meet your regular expenses. You can draw down on your other investments for emergency cash needs, e.g. large medical bills or education expenses.

If the monthly income is not sufficient for your expenses, you can do part-time work basis to earn a supplementary income.

If the monthly income is more than sufficent for your expenses, you can save and re-invest the balance.

Lesson: choose investments that have low expense charges, so that you can keep most of the yield (instead of giving it away to the intermediary or financial institutions).

Investing for the long term

If you are investing your savings for your retirement, you should look for the following:

a) A diversified fund
b) Blue chip investments, i.e. non-speculative
c) Low cost, i.e. less than 1% per annum
d) Low upfront fee, less than 1%

If you invest in equities for the long term, you should be able to get an average yield (net of expenses) of 2% to 3% above Government bonds. This should give a net yield of about 5% to 6%.
It is important to invest in a low cost fund, so that you can keep most of the yield.

Investing in equity has its risk. You will get a high yield in some years, and a low or negative yield in other years. If you invest for many years, you will average out the good and bad years and get an average yield that is better than Government bonds.

Currently, you can achieve this goal by investing in the STI exchange traded fund managed by StateStreet. I will try to look for a unit trust that offers similar features.

Blog Archive