Tuesday, June 14, 2016

Is it better to invest in a REIT?

Dear Mr. Tan
A friend told me that it is better to invest in a REIT, rather than a life insurance policy. He said that the REIT can give a better return. Do you agree with this recommendation?

The short answer is "yes". Here is the reason.

Over the long term, I expect a REIT to give a return of 5% per annum or higher. But you should invest in a few REITS to diversify your risk. You can also get a return of 5% by investing in the STI ETF, which is better diversified.

The life insurance fund can also earn a return of 5% per annum over the long term. But the insurance company takes away a large part of the return through their high expenses. Typically, the policyholder will have to suffer a reduction of 2.5% or higher on the return. If the fund earns 5%, the policyholder will get a return of only 2.5% (or less).

Over a period of 30 years, a reduction of 2.5% in the return will produce a payout that is 35% lower. This is for an annual investment of $X a year.

The "effect of deduction" that is shown in the benefit illustration usually shows a reduction of 40% or higher. This means that the reduction in yield is more than 2.5% p.a.

The life insurance policy gives you a poor return compared to investing in a basket of REITS or in the STI ETF. Any person who knows the fundamentals of investing will avoid the life insurance policy. The culprit is the "effect of deduction".

If you find this to be difficult to understand, I advice you to register for this talk.

1 comment:

Anonymous said...

NTUC Income shamelessly launched a 2 year capital plus which pays 1.88% pa.For what? They expect their salesmen and glib conmen to con the aunties, AhSohs and Ah Peks into buying? Where is the financial planning? For what needs? Obviously the salesmen's needs and companies need for cash.

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