Tan Kin Lian's Blog: Guaranteed products

Sunday, October 18, 2009

Guaranteed products

Some people like to have guaranteed products. They may not realise that these products are "guaranteed to lose".

Suppose you buy a product that is guaranteed to give you a yield of 5% over 20 years. Is this a good product?

If there is high inflation in the future, the value of your investment will drop. You are locked into a product with a low yield, compared to the market rates. The issuer of the product makes a big profit.

If interest rate drops to near zero, like in Japan for many years, will you benefit by getting the guaranteed 5%? Maybe not. If the issuer is not able to meet its obligation, they will declare bankrupcy. You lose again.

Do not buy a guaranteed product unless it is backed by a financially strong institution. Do not buy a "guaranteed product" which may be "guaranteed to lose".

This is why I prefer to buy an exchange traded fund of equities and keep it for the long term. It has liquidity, transparency and diversification. It does not provide any guarantee, but is likely to give a better yield than any guaranteed product.

Note on Exchange Traded Fund (ETF)
There are several ETF available in the Singapore Exchange. The most well known is the STI ETF which is intended to track the performance of the Straits Times Index. It offers diversification into several large stocks and has low annual fee of 0.3%. You have to ask your stockbroker about the ETF or attend a briefing organised by SGX.

11 comments:

Chris Stevens said...: Many high risk financial products such as land banking operate in a closed loop. As long as only a few people make a claim then the company will pay the guarantee.. The returned product is simply sold to other investors at a high price. This gives credibility to both the guarantee scheme and the pricing. If many people make a claim or request for refund the company will close down and all investors will discover that the open market value of their product is much lower than they they paid.; October 18, 2009 2:14 PM
Anonymous said...: Can you elaborate on your term "an exchange traded fund of equities"? Some of us who are not stock savvy may not understand its meaning.; October 18, 2009 2:51 PM
Anonymous said...: Lately many guaranteed lost products were launched into the market by the major insurance companies. The rates of return range from 2.5% for 5 years to 1.4% for 2 years.
All claim to outperform the bank rates.Bank rate of 0.8%? Anyone can see that these companies are out to con the unwary, unsavvy, the kiasu, the kiasi, the uneducated and the ignorant. Is this a niche market where FEAR is the underlying selling point? Yes, if you have a product that preys on FEAR this is the market.And only despicable people like the insurance agents and their predatory companies will exploit.
What are these companies up to?
Surely they know they are NOT wealth accumulator(some shamelessly with the name accumulator)and yet these companies put them up for sales.
From the grapevine, some companies are using them to bolster their sales production to look good and one is desperate to become #1.This dubious dressing up their books is no difference from their salespeople who 'succeed' by fleecing their own trusting clients. I have been saying that the insurance agents and their companies are working hand in glove to rob the consumers and what a clever and sneaky way to rob the very people who trust them as their 'trusted' agents.
Surely the agents as financial practitioners should know by now that guaranteed means guaranteed to lose.
Wealth accumulation? With these products it is accumulating losses.
Is projected 4% a guaranteed loss?It is even worse. Historical returns show that you are doomed to get lesser. But agents are promoting at roadshows such products and misrepresenting them.
MAS must do something about it.

WARNING: You might have a python snake in charge of your chicken pan.

The Watchman; October 18, 2009 6:17 PM
Anonymous said...: I refer to the comment:

"Can you elaborate on your term "an exchange traded fund of equities"? Some of us who are not stock savvy may not understand its meaning."

Respectfully, have you not learnt anything from the mini-bonds saga?
- You have to do your own homework.

Exchange Traded Funds better known as ETFs are arguably the most important financial innovation since unit trusts.

- Google the term "exchange traded funds" and answer your own question.

- You then need to understand ETFs in conjunction with John Bogle's ideas. Here's the hyperlink:
http://en.wikipedia.org/wiki/John_Bogle

Folks. If you are not willing to put in the time to learn these very simple and basic ideas, maybe you really should not be investing at all.

Alternatively, you better get yourself a very good financial advisor. I have met up with 15 advisors over the years. After 20 minutes, I always find that I end up teaching them rather than them advising me.

I can't be sure, but I strongly suspect that financial intermediaries make more money in commissions selling you unit trusts than ETFs.; October 18, 2009 9:48 PM
Anonymous said...: They sell anything that pays high commission... You can forget about ETFs, they get nothing. They may mistake ETFs as Extra Terrestial Funds. They only know wholelife , endowment and cashbacks.
For your family's sake don't deal with insurance agents. They are out to con you.; October 18, 2009 10:19 PM
Khiat Han Hwee Adrian said...: If a product is able to guarantee 5%p.a over 10/20 years and by a respectable insurer or financial institution. In my opinion is quite good. Its better than the CPFOA. I hope such plan exist and I'm sure some people may have the need for it.

Everyone have different risk tolerance, life circumstances and experiences which translate to different willingness to take risk.; October 19, 2009 12:34 AM
Anonymous said...: I refer to Adrian's posting about a guarantee of 5% over 10/20 years.

That is the crux of the problem.

Investors mistakenly think they are being "conservative" or "safe" if they buy "guaranteed" products. And in their quest for safety, they lose even more money.

According to newspapaer reports, Bernie Madoff offered a guarantee of 12% every year. And in the process rich investors and even a few hedge fund managers invested with him.

The point being Madoff was not promising the sky. 12% versus the 5% that Adrian is asking for.

So it seems that even a 12% per annum guarantee is enough to get the rich (presumably since they are rich, they would have access to all kinds of investments and clever advisors) excited enough to invest.

Investment income is irregular income. Some years you win, other years you lose. If you want a regular income, go get a job.

Lastly, a "buy & hold" investment strategy is not the same as a "buy & pray" strategy.

In a "buy & hold" strategy, you do your homework and are very clear on your "path to profitability" - what has to happen in order for you to make money. This applies whether you are buying shares, land banking or insurance products. You also have an exit plan that ideally does not require lawyers or MAS involvement.

I never liked the classification of a "conservative" and a "risk-taking" investor.

Respectfully, just think how much more accurate it would be if investors could fill up their risk assessment forms (prior to purchase) as: I don't understand what I am buying. But I hope to achieve a 5% annual rate of return over a 20 year period by investing only 30 minutes of my time listening to this charming young person.

It probably would make it a lot easier to get your money back.; October 19, 2009 8:03 AM
Anonymous said...: To the Watchman and the wealth accumulator products.

I hope the following would encourage a bit of homework from readers.

"Wealth accumulators" are very similar in nature to the very common practice of selling naked puts in the well developed USA markets.

I would argue that naked puts have the same to lower risks and much better returns. You'll have to google "naked puts" for a detailed explanation.

The point being that if you are going to take on the risks that "wealth accumulators" expose you to, you might as well sell naked puts instead. And the returns are so much better. Also the entire process is transparent, liquid and conducted on regulated exchanges in USA.

Anyhow, suggest you google "naked puts" and its cousin "covered calls".

If you understand the process, you will probably say: Why am I paying retail prices for wealth accumulators and structured products, when I can easily get wholesale prices.

I tried to explain all these to a friend of mine. Unfortunately, he took the less time-consuming route of buying a wealth accumulator instead.

Question:
How do you make a small fortune by investing?

Answer:
Start with a big fortune

If you think education is expensive, try ignorance.; October 19, 2009 8:30 AM
Vincent Sear said...: Mass consumer behaviour is such that two words in marketing attract the most masses: "FREE" and "GUARANTEE". However, usually these turn out to be the most expensive words for them to heed.; October 19, 2009 3:18 PM
Anonymous said...: Hi,
I would rather buy shares myself after learning a bitter lesson of getting a capital guaranteed product from the DBS in 2005. I lost 13k leh! Now every month I earn at least $2,000 form buying shares. Not interested in ILP or Capital Guaranteed Product anymore! In fact, just out of curiosity, how many of you did earn big bucks from the so called conservative products?
I presume most of us here lost money in the above products right? Buy shares lah!; October 20, 2009 1:00 PM
Anonymous said...: Remember that the word "GUARANTEED' is associated with loss and not gain.
All guaranteed products lose money for you in real term.
Beware of these products from GE, PRU, HSBC, TMAsia, NTUC, OAC and AIA.; October 20, 2009 9:27 PM