Tan Kin Lian's Blog: Understand your biggest risk

Saturday, December 25, 2010

Understand your biggest risk

Your biggest risk is NOT premature death. It is NOT critical illness. It is earning a poor yield due to the bad life insurance products sold to you by an insurance agent (who wants to earn a fat commission from selling the product). By earning a poor yield, you will not have sufficient savings for retirement, even though you have been frugal and have saved as much as you can during your working life.

Your priority is to get a good yield on your investment, at least 2% higher than inflation. You should avoid life insurance products that take away 40% or more of your accumulated savings. You can buy term insurance for 25 years to cover premature death and earn a good yield by investing in a ETF. It is explained in my book, Practical Guide on Financial Planning. You can also read this article.

Tan Kin Lian

8 comments:

zhummmeng said...: I advise investors to earn at least double the inflation rate of return otherwise no decent wealth is created assuming the long term rate of inflation is 3-3.5%( conservative estimate). Some may need higher. Is it difficult? no, not difficult if you are follow an investment plan with discipline.
Please, don't put your hard earned money in life insurance products.They lose the money for you.They make you poorer.
Have you wondered why the man in the street average Singaporeans can't retire? the insurance agents screwed them up. Please, don't ask the baby boomers about this because their blood pressure will shoot up.; December 25, 2010 11:56 PM
Carrot Cake said...: Mr Tan... there is a lot of ETF available on the local stock exchange. But many are derivative-based ETF that carries a lot of counterparty risk (think Lehman Brothers). You should try to alert readers that not all ETF are good.; December 26, 2010 10:12 AM
zhummmeng said...: Your greatest risk is having a dishonest and unqualified salesman. You are doomed from the start because he or she isn't interested in your financial goals but their own.
How to spot it?
1. the salesman will show or pitch you the product up front.
2.it is usually a whole life, endowment, anticipated endowment or regular ILP.
3.ask you your budget
4. use trial closing from time to time like
asking for your NRIC or
*ask closed end question like "is $50K ok with you?" or
*ask open end one like "how much sum assured you need?" or
*shall I show you the BI? (from the computer)
*show you the cash value at the 30th year.
If you succumb to all the steps you are finished. You should have terminated the meeting at the first step when the salesman shows you the product.
This is a salesman in disguise and not the financial consultant as in the name card.; December 26, 2010 5:45 PM
Tan Kin Lian said...: Reply to Happychicken
In my book and my FAQ, I advice people to invest in the STI EFT (from Statestreet or DBS).

There is no need to consider the other ETF that are not really indexed funds - as they have synthetic structure. These ETF are created to make money for the creators and should be avoided.; December 26, 2010 8:22 PM
rex said...: rex comments as follows,
i have not invested in ETF before so i am trying to learn more about this thingy. I am surprised that not all ETF are good, indeed, it is an eye opener now that i hear that some ETF are bad.
Other than DBS ETF, which other ETF are :not created to make money for the creaters: ?
Another question, how certain can the investor be that a good ETF will give dividend of 4 % or higher at year end... is it 100% certainty, or, say, 50% cerainty...

hope to learn more about the above ..

thanks!
REX; December 27, 2010 6:40 AM
Tan Kin Lian said...: Reply to Rex
It is all right for the financial institution to have a margin to cover its expenses and to make a fair profit.

The problem is when the financial institution is greedy and want to make a large profit. This is where the product can be risky through the use of derivatives and leverage.

By increasing the risk and profit potential, the financial institution can cream off a larger proportion during good times, but leave the investors to take the loss during bad times.

Both DBS and StateSTreet have ETF that charge 0.3% in annual fee and have no leverage or derivatives. They are suitable for long term investors. There is no need to look beyond these two ETFs.

Some of the other ETFs claim to allow the investor to diversify beyond Singapore. There is no need for this diversification, as the component stocks of the STI ETF have businesses that go beyond Singapore, e.g. SingTel, SIA, DBS, etc.; December 27, 2010 7:08 AM
Tan Kin Lian said...: For other questions on ETF, such as dividend yield, etc. do attend the talk by FISCA on "Invest in stocks, ETS and REITS. see www.fisca.sg; December 27, 2010 7:09 AM
Vincent Sear said...: There's no guarantee that index-linked is a sure way to 4 or 6% or more even over long term. The Japanese index has been stagnant over 20 years and the US index has been stagnant over 10 years.

In making such an advice to advicee, this must be made clear. But of course, from investment point of view, insurance is even worse as it's more or less 70% bonds and 30% indexed equities.

With big market country indices, most US market gains has been neutralised by it's currency losses and most Japanese currency gains has been neutralised by its market losses. That's generally documented experience over past 2 decades. It's a natural market mechansism that even the likes of Warren Buffett and George Soro couldn't figure out for sure.

With local index, there's no currency risk except for a few foreign currency denominated stocks, usually in US$. However, being small and interloculatedly driven by foreign trade and investment will have its effect on the local market and index.

Any advisor should make this clear and understood to every advisee too. There's no magic formula for making or growing money. It's still work, save, be prudent with budget and investment decision. Anything that comes along with excessive promise or guarantee, be very very cautious. These always sound too good to be true and irrestibly tempting but too late when found out it couldn't be true.; December 29, 2010 6:21 PM