National Day is coming soon.
How about trying to solve a Sudoku puzzle (Logic9) with the letters S,I,N,G,A,P,O,R,E instead of the usual numbers 1 to 9.
Go to this website. Click PLAY. Select the symbols - CHARACTERS. Choose the level (from very easy to complex). Enjoy.
Sunday, July 15, 2007
Saturday, July 14, 2007
Insurance company should set a good example
I had an interesting conversation with an adviser from a large life insurance company. Here are his comments about his company's business practice:
* their top management is measured by head office, mainly on new business
* a significant part of the new business comes from getting their customers to terminate their existing policy, and buy a new policy
* this is bad for the customer, as they lose on the heavy charges
* but it is good for the company's profits and the agent's commission.
The adviser felt bad about this practice and was not willing to take advantage of his customers. He is not active in sales now.
I commend this adviser for his ethical approach. It is important for the insurance company to set a good example, so that the advisers can emulate it.
* their top management is measured by head office, mainly on new business
* a significant part of the new business comes from getting their customers to terminate their existing policy, and buy a new policy
* this is bad for the customer, as they lose on the heavy charges
* but it is good for the company's profits and the agent's commission.
The adviser felt bad about this practice and was not willing to take advantage of his customers. He is not active in sales now.
I commend this adviser for his ethical approach. It is important for the insurance company to set a good example, so that the advisers can emulate it.
Private medical practice
Someone said, " The consumer (patient) goes to the doctor with total trust, submits to the various procedures recommended and seldom questions the fees that are being charged".
As private medical practice is so lucrative, it is difficult to keep good doctors in the public sector.
What is the underlying problem?
* we allow medical practice to be a business
* we leave to the free market
* the consumers are at a disadvantage
* the doctors have a conflict of interest
What is a better solution?
* medicine should be a profession (not a business)
* doctors should operate on a code of ethics (i.e. look after the patient's interest)
* consumers need access to impartial, independent advice
* some suitable body (the government?) should monitor the conduct of doctors
* the interest of consumers should be better protected
My remark applies to many other services, including the marketing of financial services.
As private medical practice is so lucrative, it is difficult to keep good doctors in the public sector.
What is the underlying problem?
* we allow medical practice to be a business
* we leave to the free market
* the consumers are at a disadvantage
* the doctors have a conflict of interest
What is a better solution?
* medicine should be a profession (not a business)
* doctors should operate on a code of ethics (i.e. look after the patient's interest)
* consumers need access to impartial, independent advice
* some suitable body (the government?) should monitor the conduct of doctors
* the interest of consumers should be better protected
My remark applies to many other services, including the marketing of financial services.
Difficult to find a good law minister?
Today paper had an editorial about the difficulty of finding a good law minister in Singapore. The underlying problems, and possible solutions, are explained in detail in the article.
My view?
The root cause is our system of selecting ministers. They have to be selected from among the elected members of parliament. This reduces the pool of potential candidates considerably. (We follow the British system).
What is the alternative?
We can consider the American system. The citizens elect their members of Congress (ie Parliament) and a President.
The President picks his ministers (i.e secretary of the various departments) from the entire population. The nominated perons have to be approved by the Congress.
Many other countries also follow the American system. It gives a wider choice of suitable people.
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My view?
The root cause is our system of selecting ministers. They have to be selected from among the elected members of parliament. This reduces the pool of potential candidates considerably. (We follow the British system).
What is the alternative?
We can consider the American system. The citizens elect their members of Congress (ie Parliament) and a President.
The President picks his ministers (i.e secretary of the various departments) from the entire population. The nominated perons have to be approved by the Congress.
Many other countries also follow the American system. It gives a wider choice of suitable people.
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Singapore system - good, bad and ugly
My friend has been invited to speak on several occasions at international conferences. His topic? The Singapore system - good, bad and ugly.
I asked him:
* what is good about the Singapore system?
* what is bad?
He shared his views with me. (But, I do not wish to quote him, without his permission.)
Here are my views about what is good with the Singapore system:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
What is bad about the Singapore system?
I shall share my views in a few days time!
I asked him:
* what is good about the Singapore system?
* what is bad?
He shared his views with me. (But, I do not wish to quote him, without his permission.)
Here are my views about what is good with the Singapore system:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
What is bad about the Singapore system?
I shall share my views in a few days time!
Cycling on pedestrain walks
There is some debate on whether cyclists should be allowed to ride on pedestrain walks.
Let us look at the underlying problems:
* there is insufficient bicycle paths
* cyclists cannot ride on the roads (as it is dangerous)
* so, they ride on pedestrain paths (which is harmful to pedestrains).
Can bicycle be used for local transport?
* it is not practical, due to our weather
* there is a need for storage space at MRT or bus stops
The solution?
* have low cost, feeder service for local transport.
Let us look at the underlying problems:
* there is insufficient bicycle paths
* cyclists cannot ride on the roads (as it is dangerous)
* so, they ride on pedestrain paths (which is harmful to pedestrains).
Can bicycle be used for local transport?
* it is not practical, due to our weather
* there is a need for storage space at MRT or bus stops
The solution?
* have low cost, feeder service for local transport.
Fuel economy
Here is the key points of a survey report of car owners, as reported in the newspaper.
* Only 1% of Singaporeans bother to learn about fuel economy of their car, ie how many kilos can be driven for 1 litre of petrol. This is among the lowest in the countries surveyed.
* Only 25% of Singaporeans bother about the impact of cars on the environment, compared to 60% in the other countries.
Lesson: After paying so much for the upfront cost of owning a car, Singaporeans are more concerned about the convenience of using the car. They do not bother about fuel economy. Maybe it does not make much difference, after paying for the ERP charges?
* Only 1% of Singaporeans bother to learn about fuel economy of their car, ie how many kilos can be driven for 1 litre of petrol. This is among the lowest in the countries surveyed.
* Only 25% of Singaporeans bother about the impact of cars on the environment, compared to 60% in the other countries.
Lesson: After paying so much for the upfront cost of owning a car, Singaporeans are more concerned about the convenience of using the car. They do not bother about fuel economy. Maybe it does not make much difference, after paying for the ERP charges?
Adviser gave misleading information
My friend and I visited an insurance booth at an exhibition. The insurance adviser promoted "buy term and invest the difference" (Good!).
They have good marketing materials. The adviser showed the performance of the different funds, and how they fit into the different risk profile. (Good!)
My friend asked about the cost of the funds. The brochure showed an upfront cost of 3% and an annual fee of slightly less than 1%. (Good!)
My friend asked, "What about the distribution cost?" The adviser pretended to be ignorant, and pointed to the investing cost shown in the brochure (ie 3% and 1%).
I asked, "what percentage of the regular premium is allocated for investment?"
The adviser reluctantly brought up another thick booklet (also nicely printed), turned to a page. It showed that 20% was invested in the first year, and other percentages were invested the next few years. The total deduction is more than 150% for the initial years. It is a costly product.
Lesson: It is quite sad that insurance companies design costly products and train their advisers to hide the fact. Indeed, the adviser give a misleading impression and show only part of the total cost.
Who is the blame? The insurance company? The adviser? The marketing system? The regulators?
They have good marketing materials. The adviser showed the performance of the different funds, and how they fit into the different risk profile. (Good!)
My friend asked about the cost of the funds. The brochure showed an upfront cost of 3% and an annual fee of slightly less than 1%. (Good!)
My friend asked, "What about the distribution cost?" The adviser pretended to be ignorant, and pointed to the investing cost shown in the brochure (ie 3% and 1%).
I asked, "what percentage of the regular premium is allocated for investment?"
The adviser reluctantly brought up another thick booklet (also nicely printed), turned to a page. It showed that 20% was invested in the first year, and other percentages were invested the next few years. The total deduction is more than 150% for the initial years. It is a costly product.
Lesson: It is quite sad that insurance companies design costly products and train their advisers to hide the fact. Indeed, the adviser give a misleading impression and show only part of the total cost.
Who is the blame? The insurance company? The adviser? The marketing system? The regulators?
Friday, July 13, 2007
Consumer information - from Australia
I found the website of the Online magazine produced by the Australian consumer association. It is impressive. Take a look at it.
Reduce offer for Excess and Loss of Use
Hi Mr Tan
I see from your blog that you are answering reader's doubt on insurance issue. I like to get your advice on a case involving our company lorry.
Our lorry was travelling straight along Rochor Road. a car suddenly turn left from the extreme lane and hit our lorry's door.
Both vehicles are insured with X. The own damage claim (before GST) was settled.
There is a claim for loss damages and expenses. X gave us a release form to accept this as a full and final settlement, and we did.
X's lawyer later called for a mediation meeting between the drivers, and offered a lower sum to close the case.
We follow up with X's claims officer and were told when lawyer is involved, we can make a counter offer, but to insist on the full sum may mean incurring expenses to hire our own lawyer.
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REPLY:
The items that you are claiming fall under the category of "third party claim". You are making a third party claim against the other party on the basis that they are entirely at fault.
If there is no dispute on the fault, then the insurer should pay for this claim in full, and not try to negotiate a lower sum.
I suggest that you talk to the lawyer and ask for the reason for the reduced offer. You can also approach your insurer for their advice and assistance. They should render this assistance as part of their customer service.
If your insurer does not provide good service, you should look for a new insurer on your next renewal.
You also have the right to make a complaint against your insurer. The body to receive your claimant is the FiDREC (Financial Industry Dispute Resolution Center). Here is their website.
I see from your blog that you are answering reader's doubt on insurance issue. I like to get your advice on a case involving our company lorry.
Our lorry was travelling straight along Rochor Road. a car suddenly turn left from the extreme lane and hit our lorry's door.
Both vehicles are insured with X. The own damage claim (before GST) was settled.
There is a claim for loss damages and expenses. X gave us a release form to accept this as a full and final settlement, and we did.
X's lawyer later called for a mediation meeting between the drivers, and offered a lower sum to close the case.
We follow up with X's claims officer and were told when lawyer is involved, we can make a counter offer, but to insist on the full sum may mean incurring expenses to hire our own lawyer.
-----------------------
REPLY:
The items that you are claiming fall under the category of "third party claim". You are making a third party claim against the other party on the basis that they are entirely at fault.
If there is no dispute on the fault, then the insurer should pay for this claim in full, and not try to negotiate a lower sum.
I suggest that you talk to the lawyer and ask for the reason for the reduced offer. You can also approach your insurer for their advice and assistance. They should render this assistance as part of their customer service.
If your insurer does not provide good service, you should look for a new insurer on your next renewal.
You also have the right to make a complaint against your insurer. The body to receive your claimant is the FiDREC (Financial Industry Dispute Resolution Center). Here is their website.
Profession or business?
Law, medicine and education were the hallmarks of the professions.
The professionals act honestly in the interest of their client, are trusted by them, and receive a good income for their expertise. However, they do not receive the exceptional profits of businesses.
In recent years (especially in the developed countries), many of these professions are being converted into businesses. As a business, they aim to make a big profit - the bigger the better.
Business pressures may force these professionals to cut corners and (in order to survive), they may resort to "cheating" the clients.
I hope that the professions continue to be practised on ethics, fairness and high standards. They should not be turned into businesses.
The professionals act honestly in the interest of their client, are trusted by them, and receive a good income for their expertise. However, they do not receive the exceptional profits of businesses.
In recent years (especially in the developed countries), many of these professions are being converted into businesses. As a business, they aim to make a big profit - the bigger the better.
Business pressures may force these professionals to cut corners and (in order to survive), they may resort to "cheating" the clients.
I hope that the professions continue to be practised on ethics, fairness and high standards. They should not be turned into businesses.
CASE to start a blog?
POSTING IN MY BLOG (BY WILLIAM)
As a consumer, I detest this opt-out scheme and also telemarketers who somehow have your mobile number making sales pitch at you.
Hmm.. Mr Tan, maybe you should consider running for President of CASE. I think you are quite suitable for that position. :) Or maybe CASE should start a blog to communicate with their intended audience, the consumers, on decisions that affect their everyday life.
This is my 1st post here but I must say I have enjoyed reading your posts.
On an unrelated topic, it goes to show that Passion wins over $$. You are not paid to blog but you blog because you want to share your passion of insurance and finance.
Hmmm..Wait.. I think you can even run for President next time round. ;) Jazz up our Presidential election a little.
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REPLY:
Thank you for your nice words.
I don't think that I am suitable as President of CASE or President of Singapore. They are too many people who dislike me.
I have been using some materials from the Consumer Magazine (produced by CASE) for my blog. I simplifed the materials, so that the key message comes across. For those who are interested in the magazine, you can pay a subscription to CASE.
As a consumer, I detest this opt-out scheme and also telemarketers who somehow have your mobile number making sales pitch at you.
Hmm.. Mr Tan, maybe you should consider running for President of CASE. I think you are quite suitable for that position. :) Or maybe CASE should start a blog to communicate with their intended audience, the consumers, on decisions that affect their everyday life.
This is my 1st post here but I must say I have enjoyed reading your posts.
On an unrelated topic, it goes to show that Passion wins over $$. You are not paid to blog but you blog because you want to share your passion of insurance and finance.
Hmmm..Wait.. I think you can even run for President next time round. ;) Jazz up our Presidential election a little.
-------------------------------------------
REPLY:
Thank you for your nice words.
I don't think that I am suitable as President of CASE or President of Singapore. They are too many people who dislike me.
I have been using some materials from the Consumer Magazine (produced by CASE) for my blog. I simplifed the materials, so that the key message comes across. For those who are interested in the magazine, you can pay a subscription to CASE.
Renewal fee on credit cards
Many consumers have several credit cards. We enjoy the waiver of the annual fee on the credit card for the initial few years.
We may not be aware about the expiry of this waiver period. They will renew it automatically and charge an annual fee (which can be quite hefty).
What can we do?
I suggest that you should check the expiry date with the credit card company and put a reminder in your diary or PDA. Prior to the expiry date, you should decide if you wish to renew it. If not, you can tell the bank.
Alternatively, you can write a letter to tell the bank that you do not wish to continue the card on its expiry.
I hope that the authority should require the issuing bank to get specific approval from the customer for introducing an annual fee on the expiry of the initial period. We should encourage fair business practice.
We may not be aware about the expiry of this waiver period. They will renew it automatically and charge an annual fee (which can be quite hefty).
What can we do?
I suggest that you should check the expiry date with the credit card company and put a reminder in your diary or PDA. Prior to the expiry date, you should decide if you wish to renew it. If not, you can tell the bank.
Alternatively, you can write a letter to tell the bank that you do not wish to continue the card on its expiry.
I hope that the authority should require the issuing bank to get specific approval from the customer for introducing an annual fee on the expiry of the initial period. We should encourage fair business practice.
Questionable marketing practice
I read a news report about the following marketing practice:
* the bank sends a letter to offer you a credit line
* if you do not want it, you have to tell the bank
* if you do not opt out, the bank offers it to you
* the charge is waived for the first year
* in subsequent years, the bank automatically add the charge to your account
* it is quite a hassle to remove this unwanted facility
I hope that the authority can act strongly to stop this practice. Here are some of the difficulties faced by the consumer:
* the product brochure sent by the bank is complicated (not easy for consumer to understand)
* the terms may be unfair to the consumer (as it is written on a one-sided basis)
* the consumer may overlook the charge on this statement (for something that is not needed).
I hope that businesses can be runned ethically to serve consumers, and not to make profit at the expense of consumers.
* the bank sends a letter to offer you a credit line
* if you do not want it, you have to tell the bank
* if you do not opt out, the bank offers it to you
* the charge is waived for the first year
* in subsequent years, the bank automatically add the charge to your account
* it is quite a hassle to remove this unwanted facility
I hope that the authority can act strongly to stop this practice. Here are some of the difficulties faced by the consumer:
* the product brochure sent by the bank is complicated (not easy for consumer to understand)
* the terms may be unfair to the consumer (as it is written on a one-sided basis)
* the consumer may overlook the charge on this statement (for something that is not needed).
I hope that businesses can be runned ethically to serve consumers, and not to make profit at the expense of consumers.
Tribute to Dr Goh Keng Swee
THIS WAS FIRST POSTED SIX MONTHS AGO. AS THERE ARE LETTERS IN THE NEWSPAPER ABOUT THE CONTRIBUTION OF DR GOH KENG SEE, I AM RE-POSTING THIS BLOG.
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I wish to pay tribute to one great man, whose vision led to the formation of NTUC Income. He is Dr Goh Keng Swee, finance minister of Singapore in 1970.
After NTUC Income was formed, he served as chairman of the board of trustees for 10 years and provided the strategic direction that led to our success. I met Dr Goh when I joined NTUC Income in 1977 and worked under him for two years.
Dr Goh also served in various capacities in the government, including education minister, defence minister and deputy prime minister. He retired from government service about 15 years ago.
Dr Goh is now over 90 years old. He has not been well for some time. I wish to say a big "thank you" to Dr Goh, on behalf of nearly two million policyholders and their families.
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I wish to pay tribute to one great man, whose vision led to the formation of NTUC Income. He is Dr Goh Keng Swee, finance minister of Singapore in 1970.
After NTUC Income was formed, he served as chairman of the board of trustees for 10 years and provided the strategic direction that led to our success. I met Dr Goh when I joined NTUC Income in 1977 and worked under him for two years.
Dr Goh also served in various capacities in the government, including education minister, defence minister and deputy prime minister. He retired from government service about 15 years ago.
Dr Goh is now over 90 years old. He has not been well for some time. I wish to say a big "thank you" to Dr Goh, on behalf of nearly two million policyholders and their families.
Get good value products from an adviser
A few visitors commented that insurance agents sell products that give them the highest commission. These products many not meet the needs of their clients.
When I was CEO of NTUC Income, I made sure that all the products are designed to meet the following:
* have modest loadings for commission
* offer good value to the customers
The insurance agents (advisers) from NTUC Income are able to recommend suitable products to their clients, with the knowledge that the products give good value and provide a reasonable level of earnings for their sales effort. They earn more, by increasing their sales productivity.
I am happy to recommend the insurance advisers and products from NTUC Income to the general public. I know that the consumers will get a good deal.
If you visit this website, you can compare the front-end load of the endowment and investment-linked products between NTUC Income and the other insurance companies.
A small number of consumers are savvy and can make their investments without the help of an adviser. They do not need to take my advice anyway. My tips are for the general consumers.
When I was CEO of NTUC Income, I made sure that all the products are designed to meet the following:
* have modest loadings for commission
* offer good value to the customers
The insurance agents (advisers) from NTUC Income are able to recommend suitable products to their clients, with the knowledge that the products give good value and provide a reasonable level of earnings for their sales effort. They earn more, by increasing their sales productivity.
I am happy to recommend the insurance advisers and products from NTUC Income to the general public. I know that the consumers will get a good deal.
If you visit this website, you can compare the front-end load of the endowment and investment-linked products between NTUC Income and the other insurance companies.
A small number of consumers are savvy and can make their investments without the help of an adviser. They do not need to take my advice anyway. My tips are for the general consumers.
Thursday, July 12, 2007
Voiding of warranty on car
COMMENT POSTED IN MY BLOG
I wonder how distributor workshop void warranty if car is not repaired in their workshop after an accident. Can warranty on engine be voided when repair is only on bumper? Wonder if any motorist's warranty has been penalised this way so far.
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REPLY:
The distributor state in their warranty, that the warranty is voided if any repair is done by a third party workshop.
I believe that the distributor will not be able to get away with voiding the warranty, when minor repairs are carried out at third party workshop which did not affect the parts of the vehicle that are covered by the warranty.
Although the distributor "threatens" to void the warranty, I believe that they have not done so for minor repairs. They have to act fairly and take care of their customer relations.
I wonder how distributor workshop void warranty if car is not repaired in their workshop after an accident. Can warranty on engine be voided when repair is only on bumper? Wonder if any motorist's warranty has been penalised this way so far.
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REPLY:
The distributor state in their warranty, that the warranty is voided if any repair is done by a third party workshop.
I believe that the distributor will not be able to get away with voiding the warranty, when minor repairs are carried out at third party workshop which did not affect the parts of the vehicle that are covered by the warranty.
Although the distributor "threatens" to void the warranty, I believe that they have not done so for minor repairs. They have to act fairly and take care of their customer relations.
Insurance as a mutual arrangement to pool risk
Many people think of insurance as a legal contract. You enter into a contract with an insurance company. You pay a premium under the contract. The insurance company promises to pay you the specified payments under certain defined conditions. As the contract wordings are usually not clear, a dispute could arise quite often.
In the "old days", insurance was usually operated as a mutual arrangement. A large number of people join the pool. They agree to contribute towards the pool to compensate the members who suffered the defined losses. Usually, all the members are covered under the same benefits, which are generally understood through practice over the years.
The mutual arrangement is usually run as a non-profit. There are many advantages of the mutual arrangement (rather than a commercial contract) to take care of pooling of risks.
In some countries, the mutual arrangement is still strong. In most other countries, insurance are now being operated as "for profit" organisations.
In the "old days", insurance was usually operated as a mutual arrangement. A large number of people join the pool. They agree to contribute towards the pool to compensate the members who suffered the defined losses. Usually, all the members are covered under the same benefits, which are generally understood through practice over the years.
The mutual arrangement is usually run as a non-profit. There are many advantages of the mutual arrangement (rather than a commercial contract) to take care of pooling of risks.
In some countries, the mutual arrangement is still strong. In most other countries, insurance are now being operated as "for profit" organisations.
Invest in a low cost fund
When you buy term insurance, you still have to invest the difference in a suitable fund.
Look for a fund with low upfront fees and annual fees.
This website shows you the fees charged by various insurance companies on their investment-linked products. Most of the fees are far too high.
Look for a fund with low upfront fees and annual fees.
This website shows you the fees charged by various insurance companies on their investment-linked products. Most of the fees are far too high.
Ballet Under The Stars
Singapore Dance Theatre
Ballet Under the Stars
20 to 22 July
Fort Canning Green
Gates open from 5.00pm for picnic
Schools Performances from 6.30pm.
Main Performances from 7.30pm.
Renowned as one of Singapore’s most popular outdoor arts event, Ballet Under The Stars (BUTS) enters its 12th year and has attracted a diverse crowd with its casual, outdoor picnic setting. The informal setting has attracted families, gatherings and company outings to BUTS.
With its wide outreach, BUTS offers the perfect grounds to meet SDT’s objective of reaching out to the general public. SDT is offering schools a platform to showcase their works, thus gaining invaluable experience and exposure.
Find out more.
Ballet Under the Stars
20 to 22 July
Fort Canning Green
Gates open from 5.00pm for picnic
Schools Performances from 6.30pm.
Main Performances from 7.30pm.
Renowned as one of Singapore’s most popular outdoor arts event, Ballet Under The Stars (BUTS) enters its 12th year and has attracted a diverse crowd with its casual, outdoor picnic setting. The informal setting has attracted families, gatherings and company outings to BUTS.
With its wide outreach, BUTS offers the perfect grounds to meet SDT’s objective of reaching out to the general public. SDT is offering schools a platform to showcase their works, thus gaining invaluable experience and exposure.
Find out more.
Wednesday, July 11, 2007
Buy a low cost product
Hi Mr Tan,
Why do you advocate "buy term and invest the difference" and, at the same time, advise people to buy life insurance products? Are you contradicting yourself?
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REPLY:
There are two separate markets:
1. Those who are financially savvy can "buy term and invest the difference". They know how to select the right fund that have low cost.
2. For most ordinary people, they will find it more convenient to invest in a endowment or whole life policy. I advise them to buy a low cost policy (ie with a low margin for commission), rather than a high cost policy.
Lesson: Buy a low cost product.
Why do you advocate "buy term and invest the difference" and, at the same time, advise people to buy life insurance products? Are you contradicting yourself?
--------------------
REPLY:
There are two separate markets:
1. Those who are financially savvy can "buy term and invest the difference". They know how to select the right fund that have low cost.
2. For most ordinary people, they will find it more convenient to invest in a endowment or whole life policy. I advise them to buy a low cost policy (ie with a low margin for commission), rather than a high cost policy.
Lesson: Buy a low cost product.
Liquidate 50% of your investments
Dear Mr Tan,
I have invested quite a bit in all the funds of Ntuc Income, mostly in Growth and Balanced Fund. All are showing positive gains.
If the market gain another 10%, I plan to liquidate all and wait out for the next down cycle, if it happens.
What is your advice?
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REPLY:
I suggest that you keep the investment in the Growth fund (as you invested at a low price). If you really wish to realise some cash, perhaps you can liquidate 50% and keep the remaining 50% in Growth Fund. This is what I did for my own investments.
I have invested quite a bit in all the funds of Ntuc Income, mostly in Growth and Balanced Fund. All are showing positive gains.
If the market gain another 10%, I plan to liquidate all and wait out for the next down cycle, if it happens.
What is your advice?
------------------------
REPLY:
I suggest that you keep the investment in the Growth fund (as you invested at a low price). If you really wish to realise some cash, perhaps you can liquidate 50% and keep the remaining 50% in Growth Fund. This is what I did for my own investments.
Higher interest rate in the future?
We have gone through several years of low interest rate. This has produced the following:
* high stock prices
* high property prices
* high bond prices
Interest rate is expected to increase globally, due to inflation. When it happens, you can expect the following:
* drop in asset prices (stock, property, bonds)
* higher interest on bank deposits and money market funds
Lesson: do not lock your investments in high asset prices, if possible. Have some money in short term deposits, so that you can benefit from the increase in interest rate (if and when it happens).
* high stock prices
* high property prices
* high bond prices
Interest rate is expected to increase globally, due to inflation. When it happens, you can expect the following:
* drop in asset prices (stock, property, bonds)
* higher interest on bank deposits and money market funds
Lesson: do not lock your investments in high asset prices, if possible. Have some money in short term deposits, so that you can benefit from the increase in interest rate (if and when it happens).
Generic drugs
Extracted from Consumer Magazine
The discover of a new drug is given a patent for 20 years. After expiry, other manufacturers can make the same drug under a different brand name. If you know the generic name of the drug, you can buy the generic brand (instead of the original brand) at a lower cost.
The discover of a new drug is given a patent for 20 years. After expiry, other manufacturers can make the same drug under a different brand name. If you know the generic name of the drug, you can buy the generic brand (instead of the original brand) at a lower cost.
Generic name Proprietary name General use
Paracetamol Panadol pain and fever
Diclofenac sodium Voltaren pain and swelling
Mefenamic acid Ponstan "
Chlorphenamine Piriton runny nose, rashes, itch, allergy
Loratadine Clarityne "
Cetirizine Zyrtec "
Cimetidine Tagamet gastric, heartburn, stomach ulcer
Omeprazole Losec "
Glocosamine Viartril-S joint supplement
Amoxicillin Augmentin antibiotic
Isotretinoin Roaccutane acne
Atenolol Tenormin high blood pressure
Prazosin Minipress "
Nifedipine Adalat LA high blood pressure, angina
Frusemide Lasix diuretic
Simvastatin Zocor cholesterol
Different types of Fat (in food)
Summary of article "The FAT Truth" in Consumer Magazine.
Fat helps the body to absorb vitamin A, D, E and K. Fat provides essential fatty acids to control blood clot and inflammation.
Monounsaturated fats: found in vegetable oils (olive, peanut, avocdo, canola) and nuts (cashew, almond, peanuts). Lower LDL (bad cholesterol).
Polyunsaturated fats: found in vegetable oils (corn, sunflower, soybeans, safflower) and nuts (walnut). Lower LDL (bad cholesterol) and HDL (good cholesterol).
Omega 3 fats: found in fish (salmon,tuna, mackerel, sardine, trout). Reduce blood clotting and lower risk of blockage, heart attack, stroke.
Trans fat: food manufacturers use a process to turn liquid fat into trans fat, to increase the shelf life of food. Increase LDL and lower HDL.
Best type of fat: monounsaturatedm, omega 3.
Worse type: trans fat.
Fat helps the body to absorb vitamin A, D, E and K. Fat provides essential fatty acids to control blood clot and inflammation.
Monounsaturated fats: found in vegetable oils (olive, peanut, avocdo, canola) and nuts (cashew, almond, peanuts). Lower LDL (bad cholesterol).
Polyunsaturated fats: found in vegetable oils (corn, sunflower, soybeans, safflower) and nuts (walnut). Lower LDL (bad cholesterol) and HDL (good cholesterol).
Omega 3 fats: found in fish (salmon,tuna, mackerel, sardine, trout). Reduce blood clotting and lower risk of blockage, heart attack, stroke.
Trans fat: food manufacturers use a process to turn liquid fat into trans fat, to increase the shelf life of food. Increase LDL and lower HDL.
Best type of fat: monounsaturatedm, omega 3.
Worse type: trans fat.
High distribution cost
Larry Haverkamp wrote an article entitled "Not Everyone Needs Life Insurance" in the Consumer Magazine, a publication of the Consumer Association.
He has this joke: "High distribution costs are needed to compensate agents for the difficult job of selling insurance with high distribution costs". (This is a vicious cycle).
My view: It is possible to sell life insurance with lower distribution cost, and reduce the premium for consumers. This will lead to more sales for the agents.
He has this joke: "High distribution costs are needed to compensate agents for the difficult job of selling insurance with high distribution costs". (This is a vicious cycle).
My view: It is possible to sell life insurance with lower distribution cost, and reduce the premium for consumers. This will lead to more sales for the agents.
Structured products in a bear market?
Dear Mr Tan,
I have read your negative comments on structured products. Are these products suitable in a bear market? It offers protection against losses, and the chance to make a gain.
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REPLY:
If you do not wish to take risk in a bear market, you should invest in government bonds and earn about 3% per year. You can get 15% in 5 years.
If you invest in a structured product, you will get less than 15%, because the expenses to design and market the product can take away about 10% of the capital. This will leave you with a net gain of 5%. As you are speculating on this product, your real gain can be from 0% to perhaps 20% (but the chance of getting a high gain is small).
I am not aware of any situation (including a bear market) where a costly structured product gives value to the investor.
I have read your negative comments on structured products. Are these products suitable in a bear market? It offers protection against losses, and the chance to make a gain.
---------------------
REPLY:
If you do not wish to take risk in a bear market, you should invest in government bonds and earn about 3% per year. You can get 15% in 5 years.
If you invest in a structured product, you will get less than 15%, because the expenses to design and market the product can take away about 10% of the capital. This will leave you with a net gain of 5%. As you are speculating on this product, your real gain can be from 0% to perhaps 20% (but the chance of getting a high gain is small).
I am not aware of any situation (including a bear market) where a costly structured product gives value to the investor.
Computing a claim on a hospital bill
Hi Mr Tan,
What is the deductible under a medical insurance plan? Why are there so many items deducted from my hospital bill? The amount that I can claim is only a part of the full bill?
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REPLY:
The amount that can be claimed may (depending on your insurance plan), be subject to the following limits:
* limit based on the specific item, such as surgery fees or each day of stay in hospital
* deductible, i.e. the first part of the bill that is paid by you (before you can claim on the difference)
* co-insurance, i.e. the portion of the bill (in excess of the deductible) that you have to bear.
Most Shield plans have a deductible (the amount depends on the class of ward) and a co-insurance of 10% or 15%. These requirements are required by the Ministry of Health and is intended to require the consumer to share in part of the bill (so that they can play a part to minimise the hospital bill).
This is how a hospital bill is calculated, to arrive at the claimable amount.
1. First, the individual items are scrutinised to remove any excess over the specific limit (e.g. for surgery or hospital services) or items that are not covered
2. Next, the deductible is taken away
3. Finally, the co-insurance is taken away from the rest of the bill
Here is an example:
Hospital bill: $6,500
Non claimable items: $500
Deductible: $1,000
Co-insurance: 10%
Claimable amount (before co-insurance) = $6,500 - $500 - $1,000 = $5,000
Claimable amount (after co-insurance) = $5,000 less 10% = $4,500
Many consumers find it the calculation to be too complicated. I agree with this view. It will be better for the claim to be simplified.
What is the deductible under a medical insurance plan? Why are there so many items deducted from my hospital bill? The amount that I can claim is only a part of the full bill?
-----------------------------------------------------
REPLY:
The amount that can be claimed may (depending on your insurance plan), be subject to the following limits:
* limit based on the specific item, such as surgery fees or each day of stay in hospital
* deductible, i.e. the first part of the bill that is paid by you (before you can claim on the difference)
* co-insurance, i.e. the portion of the bill (in excess of the deductible) that you have to bear.
Most Shield plans have a deductible (the amount depends on the class of ward) and a co-insurance of 10% or 15%. These requirements are required by the Ministry of Health and is intended to require the consumer to share in part of the bill (so that they can play a part to minimise the hospital bill).
This is how a hospital bill is calculated, to arrive at the claimable amount.
1. First, the individual items are scrutinised to remove any excess over the specific limit (e.g. for surgery or hospital services) or items that are not covered
2. Next, the deductible is taken away
3. Finally, the co-insurance is taken away from the rest of the bill
Here is an example:
Hospital bill: $6,500
Non claimable items: $500
Deductible: $1,000
Co-insurance: 10%
Claimable amount (before co-insurance) = $6,500 - $500 - $1,000 = $5,000
Claimable amount (after co-insurance) = $5,000 less 10% = $4,500
Many consumers find it the calculation to be too complicated. I agree with this view. It will be better for the claim to be simplified.
Tuesday, July 10, 2007
Guaranteed renewable health insurance
Dear Mr Tan,
If I buy a health insurance policy, and I made a few claims, can the insurance company refuse to renew my policy at the end of the year?
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REPLY:
If the policy is a yearly renewable policy, the insurance company can refuse to renew your policy at the end of the period of insurance (ie one year), if you have made a few claims and is suffering from a chronic illness.
If you have a policy which guarantees renewal (regardless of your health condition), than the insurance company has to honour this promise. On renewal, you will not be loaded due to your health condition, but you may have to pay a higher premium based on your age.
Most of the shield plans in the market have this guaranteed renewability feature. However, the premium rate is higher than a policy does not provide this guarantee (i.e. insurance company can refuse to renew it).
For peace of mind, you should buy a policy that is "guaranteed renewable" up to a certain age, or for a lifetime.
If I buy a health insurance policy, and I made a few claims, can the insurance company refuse to renew my policy at the end of the year?
---------------------------
REPLY:
If the policy is a yearly renewable policy, the insurance company can refuse to renew your policy at the end of the period of insurance (ie one year), if you have made a few claims and is suffering from a chronic illness.
If you have a policy which guarantees renewal (regardless of your health condition), than the insurance company has to honour this promise. On renewal, you will not be loaded due to your health condition, but you may have to pay a higher premium based on your age.
Most of the shield plans in the market have this guaranteed renewability feature. However, the premium rate is higher than a policy does not provide this guarantee (i.e. insurance company can refuse to renew it).
For peace of mind, you should buy a policy that is "guaranteed renewable" up to a certain age, or for a lifetime.
Poor return on capital guaranteed products
Dear Mr Tan
It seems that most of the capital guaranteed product has given a poor return to their investors. Why is this the case?
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REPLY:
Due to the low interest rate, a risk free product earns about 3% per annum. To give a capital guarantee, the product issuer (ie bank) has to invest about 85% of the capital to provide the principal at the end of 5 years.
Of the remaining 15%, the marketing expenses and fees taken by the banks probably amount to 10%. This leaves only 5% to be invested in options or stock indices to give the return.
There is very little return that you can expect from an investment of about 5%. Sometimes, the option expired without any return. Sometimes, it gives a modest return, maybe 10% or 15% in total for 5 year. The chance of getting a high return (more than 15%) is small.
It seems that most of the capital guaranteed product has given a poor return to their investors. Why is this the case?
--------------------------------------------
REPLY:
Due to the low interest rate, a risk free product earns about 3% per annum. To give a capital guarantee, the product issuer (ie bank) has to invest about 85% of the capital to provide the principal at the end of 5 years.
Of the remaining 15%, the marketing expenses and fees taken by the banks probably amount to 10%. This leaves only 5% to be invested in options or stock indices to give the return.
There is very little return that you can expect from an investment of about 5%. Sometimes, the option expired without any return. Sometimes, it gives a modest return, maybe 10% or 15% in total for 5 year. The chance of getting a high return (more than 15%) is small.
Give good value to customers
I have decided to remove the name of the bank that issued or marketed a specific structured product that has proved to be unsatisfactory for their customers. I do not give any negative connotation to the reputation of the banks. (So far, they have not taken up any issue with me on this matter.)
I wish to highlight the bad experience, so that the public can be educated about the unsatisfactory features of most structured products. I want to educate them to invest in straight forward financial products.
I hope that the financial institutions (ie banks and insurance companies) will also learn from the experience and offer good value products to their customers.
I wish to highlight the bad experience, so that the public can be educated about the unsatisfactory features of most structured products. I want to educate them to invest in straight forward financial products.
I hope that the financial institutions (ie banks and insurance companies) will also learn from the experience and offer good value products to their customers.
Interest rate linked structured deposit
Dear Mr. Tan,
I learn a lot of finance knowledge from your website. I wish to share my experience on the following structured product:
Name of product: Interest Rate-Linked Structured Deposit (10yrs-2yrs SWAP rate >0.8 based)
Amount invested: SGD 20000
Period of investment: 5 years
What is your return on maturity? Only 3.2% for the first year, then zero return for the following years.
Why was this product unsatisfactory?
The salesman told me that at least get 3.2% yearly. (Originally, we wanted to open a fixed deposit at about 2%). He said that the bank will return the principal between 2 – 3 years. When we asked to withdraw after 6 months, they told me there is a penalty above 1%.
When I asked on how to check the swap rate daily, they asked us to call their hotline. We had to wait a long time to get a reply.
------------------------------
REPLY:
Thank you for sharing your experience. It is better to invest in a straight forward fixed deposit, rather than a complicated product.
I learn a lot of finance knowledge from your website. I wish to share my experience on the following structured product:
Name of product: Interest Rate-Linked Structured Deposit (10yrs-2yrs SWAP rate >0.8 based)
Amount invested: SGD 20000
Period of investment: 5 years
What is your return on maturity? Only 3.2% for the first year, then zero return for the following years.
Why was this product unsatisfactory?
The salesman told me that at least get 3.2% yearly. (Originally, we wanted to open a fixed deposit at about 2%). He said that the bank will return the principal between 2 – 3 years. When we asked to withdraw after 6 months, they told me there is a penalty above 1%.
When I asked on how to check the swap rate daily, they asked us to call their hotline. We had to wait a long time to get a reply.
------------------------------
REPLY:
Thank you for sharing your experience. It is better to invest in a straight forward fixed deposit, rather than a complicated product.
Cars under warranty
COMMENT POSTED IN MY BLOG:
My friend was involved in an accident of no fault of hers for her "under warranty car". Her insurance doesn't list her car's authorised dealer as a supported workshop. In the end the repair was not well done and she had to return to the workshop for small fixes. So I think checking the list of motor workshop the insurance covers is important too!
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REPLY:
It is the duty of the insurance company to arrange the repair to an appropriate standard. An unsatisfactory repair of this nature is not common, and may happen with any workshop (including the authorised distributor's workshop).
Many authorised distributor sub-contract the work to a third party workshop anyway, even though they charge high repair cost (of two to three times of the market rate).
To ensure that the premium rates are kept at an affordable rate, we should not allow the distributor to use their warranty clause to charge high repair cost.
My friend was involved in an accident of no fault of hers for her "under warranty car". Her insurance doesn't list her car's authorised dealer as a supported workshop. In the end the repair was not well done and she had to return to the workshop for small fixes. So I think checking the list of motor workshop the insurance covers is important too!
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REPLY:
It is the duty of the insurance company to arrange the repair to an appropriate standard. An unsatisfactory repair of this nature is not common, and may happen with any workshop (including the authorised distributor's workshop).
Many authorised distributor sub-contract the work to a third party workshop anyway, even though they charge high repair cost (of two to three times of the market rate).
To ensure that the premium rates are kept at an affordable rate, we should not allow the distributor to use their warranty clause to charge high repair cost.
Front end charge for regular premium ILP
A visitor to my blog commented that he had to pay 20 months in front end charge on a ILP policy. I do not advocate ILP with such high front end charges.
There are ILPs with lower charges in the market. You can see a listing from Dr Money's website.
The sophisticated investor can adopt the "do it yourself" approach and avoid all front end charge. For the majority who are not so familiar with investment, you can find an ILP product with modest charges, and enjoy the benefit of an adviser.
You can also deal directly with the insurance company. NTUC Income has a business center.
There are ILPs with lower charges in the market. You can see a listing from Dr Money's website.
The sophisticated investor can adopt the "do it yourself" approach and avoid all front end charge. For the majority who are not so familiar with investment, you can find an ILP product with modest charges, and enjoy the benefit of an adviser.
You can also deal directly with the insurance company. NTUC Income has a business center.
How the world has changed in a decade!
Although a decade seems short, so much can happen.
Just 10 years ago it was still possible to imagine a world without Internet access. Just six years ago, it was possible to visit the World Trade Center in New York or board a plane without removing your shoes.
Just 10 years ago it was still possible to imagine a world without Internet access. Just six years ago, it was possible to visit the World Trade Center in New York or board a plane without removing your shoes.
Increase in air fares
I travelled a few times this year and made by own booking through the internet. Recently, I found that the price of the air tickets had gone up, and that the planes are more full.
The increase in air fares is due to two reasons:
* cost of fuel has increased (leading to higher fuel surcharges)
* the airlines had increased their fares due to high demand and lower capacity
The delay in the delivery of air buses had led to a shortage of planes. As travel increased, the planes are getting more passengers. This has given the chance for the airlines to increase their fares.
Lesson: I have decided to reduce my travel this year, due to the high prices. I will do my business by telephone through Skype.
The increase in air fares is due to two reasons:
* cost of fuel has increased (leading to higher fuel surcharges)
* the airlines had increased their fares due to high demand and lower capacity
The delay in the delivery of air buses had led to a shortage of planes. As travel increased, the planes are getting more passengers. This has given the chance for the airlines to increase their fares.
Lesson: I have decided to reduce my travel this year, due to the high prices. I will do my business by telephone through Skype.
Find the right motor insurance
Dear Mr Tan
I own a car and is compulsory to buy motor insurance. Who should I buy the insurance from? Who offers the best rates?
----------------------------
REPLY:
You have the following options:
1. get your insurance agent to find out who offers the best rate on each year's renewal
2. search for the best rate by yourself
3. find a low cost insurer, and stay with them for many years
Many people adopt method 1. The disadvantage is that the agent may find you an insurer that pays them the highest commission. However, if you have a trustworthy agent who can look after your interest, this method is suitable for you.
It is quite troublesome for you to adopt method 2. Apart from finding the lowest rate, you have the trouble of submitting a new application to switch the insurance company. You are also not familiar with their claim practice and service quality.
It is best to adopt method 3. A low cost insurer has the following characteristics:
* sell insurance to you directly (and save on the 15% commission payable to the agent)
* have an effective system to manage the claims (and avoid paying high repair charges)
Usually, the low cost insurer will ask you to allow them to handle the repair of the vehicle. This gives them the ability to avoid paying for inflated charges. By managing the claims well, their can continue to offer competitive rates and benefit all their customers.
A well managed insurer will have have transparent practice on their handling of the claims (to ensure a high quality of repair and customer service). You can read their practice FAQ.
NTUC Income fits into this description. You can contact their business center or see an insurance agent.
I own a car and is compulsory to buy motor insurance. Who should I buy the insurance from? Who offers the best rates?
----------------------------
REPLY:
You have the following options:
1. get your insurance agent to find out who offers the best rate on each year's renewal
2. search for the best rate by yourself
3. find a low cost insurer, and stay with them for many years
Many people adopt method 1. The disadvantage is that the agent may find you an insurer that pays them the highest commission. However, if you have a trustworthy agent who can look after your interest, this method is suitable for you.
It is quite troublesome for you to adopt method 2. Apart from finding the lowest rate, you have the trouble of submitting a new application to switch the insurance company. You are also not familiar with their claim practice and service quality.
It is best to adopt method 3. A low cost insurer has the following characteristics:
* sell insurance to you directly (and save on the 15% commission payable to the agent)
* have an effective system to manage the claims (and avoid paying high repair charges)
Usually, the low cost insurer will ask you to allow them to handle the repair of the vehicle. This gives them the ability to avoid paying for inflated charges. By managing the claims well, their can continue to offer competitive rates and benefit all their customers.
A well managed insurer will have have transparent practice on their handling of the claims (to ensure a high quality of repair and customer service). You can read their practice FAQ.
NTUC Income fits into this description. You can contact their business center or see an insurance agent.
Monday, July 09, 2007
Avoid high front end charge
Hi Mr Tan,
Thanks for sharing your insights in this blog. Your views are valuable for a young man.
I'll wish to seek your thoughts in recommending ILPs to your visitors. For one, I think that they are expensive. I bought one whole life ILP this year, and it has a distribution cost of 20 months premium paid over 3 years.
Should I opt out of the policy due to the high cost? Moreover, the funds to choose from are very limited as compared to what's available on the market.
I'm doing my own investing for my retirement fund, and will think that with persevered learning, I will gain more doing my own investing (ie buy term and invest the rest of my savings).
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REPLY:
I agree that a front end charge of 20 months is far too high. I do not recommend any high cost product.
A similar plan from NTUC Income had a front end charge of about 6 months. This is used to pay commission to the adviser, so that they can advise the client over the years.
If you are knowledgeable about selecting the right fund and does not need an adviser, it is better for you to invest in a unit trust and avoid the front end charge entirely.
For your existing ILP policy, if you have just taken the policy recently, it is better to terminate the policy and save on paying the balance of the front end charge.
Read these FAQs
Financial Planning for the Young
Do I need an Insurance Adviser?
Thanks for sharing your insights in this blog. Your views are valuable for a young man.
I'll wish to seek your thoughts in recommending ILPs to your visitors. For one, I think that they are expensive. I bought one whole life ILP this year, and it has a distribution cost of 20 months premium paid over 3 years.
Should I opt out of the policy due to the high cost? Moreover, the funds to choose from are very limited as compared to what's available on the market.
I'm doing my own investing for my retirement fund, and will think that with persevered learning, I will gain more doing my own investing (ie buy term and invest the rest of my savings).
---------------------
REPLY:
I agree that a front end charge of 20 months is far too high. I do not recommend any high cost product.
A similar plan from NTUC Income had a front end charge of about 6 months. This is used to pay commission to the adviser, so that they can advise the client over the years.
If you are knowledgeable about selecting the right fund and does not need an adviser, it is better for you to invest in a unit trust and avoid the front end charge entirely.
For your existing ILP policy, if you have just taken the policy recently, it is better to terminate the policy and save on paying the balance of the front end charge.
Read these FAQs
Financial Planning for the Young
Do I need an Insurance Adviser?
High expense to treat a premature baby
I know of a recent case. A baby was born premature. The cost of treating the baby in a private hospital is estimated to be $60,000 to $90,000. It is a lot of money.
There is insurance to cover this incident, but the cost is likely to be $500 to $800. Many people feel that they do not need this insurance, until something happens. Then, it becomes a big burden.
I recall that the risk of a premature baby is probably 1%. In some cases, the cost is modest. But, for severe cases, the cost could be as high as indicated above.
Lesson: Buy insurance to cover this risk. Treat it as part of the total cost of having a baby. Add it to the gynaecologist fee and delivery charges.
There is insurance to cover this incident, but the cost is likely to be $500 to $800. Many people feel that they do not need this insurance, until something happens. Then, it becomes a big burden.
I recall that the risk of a premature baby is probably 1%. In some cases, the cost is modest. But, for severe cases, the cost could be as high as indicated above.
Lesson: Buy insurance to cover this risk. Treat it as part of the total cost of having a baby. Add it to the gynaecologist fee and delivery charges.
Cost of insurance
Dear Mr Tan,
How much will it cost, if I insure for $100,000 under a term insurance, and I do not need to have any savings in the policy?
------------------------------
REPLY:
If you buy a term insurance for $100,000 for 20 years, you pay a monthly premium of $5 to $18, depending on your entry age and gender. The premium is lower for a person who starts at a younger age. It is also lower for females.
If you buy a decreasing term insurance, where the sum assured reduces yearly over the term, you get a reduction of between 20% to 40% of the premium.
If you wish to insure for accident only (to cover death and permanent disability), you have to pay a premium of about $7 a month.
You can find out more from this FAQ.
You can shop around and ask for a quote from several insurance companies. You may be able to find a lower premium rate than what was indicated in my FAQ. Always be ready to compare.
How much will it cost, if I insure for $100,000 under a term insurance, and I do not need to have any savings in the policy?
------------------------------
REPLY:
If you buy a term insurance for $100,000 for 20 years, you pay a monthly premium of $5 to $18, depending on your entry age and gender. The premium is lower for a person who starts at a younger age. It is also lower for females.
If you buy a decreasing term insurance, where the sum assured reduces yearly over the term, you get a reduction of between 20% to 40% of the premium.
If you wish to insure for accident only (to cover death and permanent disability), you have to pay a premium of about $7 a month.
You can find out more from this FAQ.
You can shop around and ask for a quote from several insurance companies. You may be able to find a lower premium rate than what was indicated in my FAQ. Always be ready to compare.
Talks and Interviews
If you wish to know more about my ideas, especially during the time that I was with NTUC Income, you can read the following articles. They are short and easy to read.
Buy term and invest the difference
COMMENTS POSTED IN MY BLOG:
Take the advice of Mr. Tan by recommending term plans and invest the rest. This is the way to ensure your clients are adequately covered.
Whole life plan deprives your client of adequate protection.This is what is happening in Singapore. Many deceaseds" family are in financial difficulties because their bread winners didn't leave enough. They left their money with insurance agents.Check with the single parent society and they will you the stories.
The insurance agents have a role to play but their interest often comes first. They are greedy, incompetent, dishonest and unethical; this results in many not properly and adequately covered.
That is why AXA, the world's largest insurer, decided to sell ONLY term plans and investment products. That is their belief that it is the only way to address under coverage and also to remove the conflict of interest.
-------------------------
REPLY:
"Buy term and invest the difference" is suitable for the well educated and financially savvy.
For those who are not so familiar with investments, a low cost traditional product may also be suitable. They will benefit from a low cost product, rather than a high cost product.
Take the advice of Mr. Tan by recommending term plans and invest the rest. This is the way to ensure your clients are adequately covered.
Whole life plan deprives your client of adequate protection.This is what is happening in Singapore. Many deceaseds" family are in financial difficulties because their bread winners didn't leave enough. They left their money with insurance agents.Check with the single parent society and they will you the stories.
The insurance agents have a role to play but their interest often comes first. They are greedy, incompetent, dishonest and unethical; this results in many not properly and adequately covered.
That is why AXA, the world's largest insurer, decided to sell ONLY term plans and investment products. That is their belief that it is the only way to address under coverage and also to remove the conflict of interest.
-------------------------
REPLY:
"Buy term and invest the difference" is suitable for the well educated and financially savvy.
For those who are not so familiar with investments, a low cost traditional product may also be suitable. They will benefit from a low cost product, rather than a high cost product.
Express your views fairly
My blog is written mainly to give tips to consumers on financial products. If you find my views to be useful, you can visit my blog regularly. Do tell your friends to come to my blog.
You are also welcomed to send questions to me (kinlian@gmail.com). I shall try to answer them. If suitable, I shall post the issue in my blog, so that other readers can also learn about it.
If you have a different view, you can send them to me. I shall post your view to give a different angle. Please express your views fairly.
There are a few people who have a different agenda. They indulge in personal attacks against me or other people. I have deleted their postings. If they dislike my views, there is no need for them to visit my blog.
You are also welcomed to send questions to me (kinlian@gmail.com). I shall try to answer them. If suitable, I shall post the issue in my blog, so that other readers can also learn about it.
If you have a different view, you can send them to me. I shall post your view to give a different angle. Please express your views fairly.
There are a few people who have a different agenda. They indulge in personal attacks against me or other people. I have deleted their postings. If they dislike my views, there is no need for them to visit my blog.
Life cycle Fund
Hi Mr Tan,
Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?
--------------------------------------
REPLY:
A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.
During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.
I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.
I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.
Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.
Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?
--------------------------------------
REPLY:
A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.
During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.
I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.
I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.
Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.
The Madness of Crowds
Source: Investopaedia (edited)
Charles Mackay wrote a book entitled "Extraordinary Popular Delusions and the Madness of Crowds".
It tells the story of several market bubbles, starting from the tulip bubble in 17th-century Holland.
All the bubbles have a similar story: an bull market in some commodity, currency or equity leads the general public to believe the trend cannot end. The optimism leads the public to overextend itself in acquiring the object of the mania. Lenders fall over each other to feed the fire.
Eventually, fear arises as investors start to think that the market is not as strong as they assumed. Inevitably, the market collapses, as that fear turns to panic selling, creating a vicious spiral that brings the market to a point lower than it was before the mania started. After that, it will take many years to recover.
The key to this phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by emotion when it appears their peers are behaving in a certain universal manner. The fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out drives the overwhelming power of the crowd.
Another motivating force is our tendency to look for leadership, based on the crowd's opinion (as we think that the majority must be right) or a few key individuals who seem to be driving the crowd's behavior by virtue of their uncanny ability to predict the future.
In times of uncertainty, we look to strong leaders to guide our behavior and provide examples to follow. The market guru is an example of someone who stand as all-knowing leader of the crowd. The façade is the first to crumble when the tides of mania eventually turn.
Charles Mackay wrote a book entitled "Extraordinary Popular Delusions and the Madness of Crowds".
It tells the story of several market bubbles, starting from the tulip bubble in 17th-century Holland.
All the bubbles have a similar story: an bull market in some commodity, currency or equity leads the general public to believe the trend cannot end. The optimism leads the public to overextend itself in acquiring the object of the mania. Lenders fall over each other to feed the fire.
Eventually, fear arises as investors start to think that the market is not as strong as they assumed. Inevitably, the market collapses, as that fear turns to panic selling, creating a vicious spiral that brings the market to a point lower than it was before the mania started. After that, it will take many years to recover.
The key to this phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by emotion when it appears their peers are behaving in a certain universal manner. The fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out drives the overwhelming power of the crowd.
Another motivating force is our tendency to look for leadership, based on the crowd's opinion (as we think that the majority must be right) or a few key individuals who seem to be driving the crowd's behavior by virtue of their uncanny ability to predict the future.
In times of uncertainty, we look to strong leaders to guide our behavior and provide examples to follow. The market guru is an example of someone who stand as all-knowing leader of the crowd. The façade is the first to crumble when the tides of mania eventually turn.
Sunday, July 08, 2007
Expense ratio on long term savings
If you invest regularly for many years, to accumulate savings for your retirement, the amount that you can get on maturity depends on:
* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings
If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).
You have the following options:
* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%
An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.
The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.
This is what you can get, by saving $2,000 yearly for 30 years:
For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).
Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.
* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings
If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).
You have the following options:
* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%
An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.
The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.
This is what you can get, by saving $2,000 yearly for 30 years:
Plan Expense Net Maturity
margin yield amount
Unit trust 1.0% 4.0% $136,200
Low cost Endowment 1.5% 3.5% $105,000
High cost Endowment 2.5% 2.5% $ 89,000
For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).
Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.
Structured Investments
DBS Bank has a good webpage. It shows the structured investments marketed by them over the past years, and are still current. You can find out quite easily the current indicative price of these investments.
The structured investments are listed under the following categories:
Credit linked notes - 5 tranches
Currency linked deposits - 4 tranches
Equity linked deposits - 19 tranches
Index linked deposits - 47 tranches
Interest rate deposits - 76 tranches
Total: 141 tranches
Based on the prices posted in this website, it seems that most of the investments are below par, ie less than 100% in prices. In the worst case, the drop is more than 30%, if the investor cash out now.
There are just a few tranches under "indexed linked deposits" which show an apprecation of up to 24% for the period (about 4 years) that the investments were held. The annual return is about 5-6%.
It seems that most of the structured products performed poorly, and gave a poor return.
The structured investments are listed under the following categories:
Credit linked notes - 5 tranches
Currency linked deposits - 4 tranches
Equity linked deposits - 19 tranches
Index linked deposits - 47 tranches
Interest rate deposits - 76 tranches
Total: 141 tranches
Based on the prices posted in this website, it seems that most of the investments are below par, ie less than 100% in prices. In the worst case, the drop is more than 30%, if the investor cash out now.
There are just a few tranches under "indexed linked deposits" which show an apprecation of up to 24% for the period (about 4 years) that the investments were held. The annual return is about 5-6%.
It seems that most of the structured products performed poorly, and gave a poor return.
Buy from NTUC Income
Dear Mr Tan,
If I like to buy insurance from NTUC Income, who do you recommend? Can I buy directly and enjoy a discount?
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REPLY:
You can approach any of the advisers who are listed in the right panel of my blog. They maintain their own blogs. They are:
Thomas Phua
Alvin Soong
John Low
Glen Toh
You can also call the NTUC Income business center, if you wish to buy directly.
If I like to buy insurance from NTUC Income, who do you recommend? Can I buy directly and enjoy a discount?
------------------------------------------
REPLY:
You can approach any of the advisers who are listed in the right panel of my blog. They maintain their own blogs. They are:
Thomas Phua
Alvin Soong
John Low
Glen Toh
You can also call the NTUC Income business center, if you wish to buy directly.
My approach towards insurance
Mr Tan,
If annuity is so good, how much of it did you buy? Also, how much of regular-premium ILP did you buy? It'll be good to see an insurance expert walking the talk.
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REPLY:
When I was younger, I bought regular premium policies to provide the insurance protection and accumulate some savings. I also bought insurance for my children. I must have more than 10 policies at one stage. I bought the policies from NTUC Income, as the sales charges are modest (and not excessive).
I now have many investment linked policies, invested in the combined fund and the money market fund. They are also with NTUC Income. They are mostly invested with single premiums.
I advise young people to buy a regular premium ILP plan from NTUC Income - as the sales charges are lower than similar plans from the market. You can also buy directly from their business center, and enjoy some incentive.
For those who are able to buy unit trusts directly through the internet, you can do so directly, and save on the adviser fee. But, you have to be careful about the fund that you invest in. Make sure that you are not hit with higher annual fees.
As I have more than sufficient savings, I do not need to participate in the pooling of longevity risks in a life annuity. My savings, which is in the combined fund, will last more than my remaining lifespan. So, I do not have any life annuity at this time. (But, I may change my mind at a later date).
If annuity is so good, how much of it did you buy? Also, how much of regular-premium ILP did you buy? It'll be good to see an insurance expert walking the talk.
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REPLY:
When I was younger, I bought regular premium policies to provide the insurance protection and accumulate some savings. I also bought insurance for my children. I must have more than 10 policies at one stage. I bought the policies from NTUC Income, as the sales charges are modest (and not excessive).
I now have many investment linked policies, invested in the combined fund and the money market fund. They are also with NTUC Income. They are mostly invested with single premiums.
I advise young people to buy a regular premium ILP plan from NTUC Income - as the sales charges are lower than similar plans from the market. You can also buy directly from their business center, and enjoy some incentive.
For those who are able to buy unit trusts directly through the internet, you can do so directly, and save on the adviser fee. But, you have to be careful about the fund that you invest in. Make sure that you are not hit with higher annual fees.
As I have more than sufficient savings, I do not need to participate in the pooling of longevity risks in a life annuity. My savings, which is in the combined fund, will last more than my remaining lifespan. So, I do not have any life annuity at this time. (But, I may change my mind at a later date).
Saturday, July 07, 2007
Life annuity - capital preservation
Dear Mr Tan,
Under a life annuity, the annuitant loses the capital on death. Is there a way to preserve the capital for the children?
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REPLY:
You can preserve the capital if you use only the interest. At present, interest rate is 2% per annum. If your capital is $100,000, you can use only $2,000 a year, ie less than $200 a month. This is not adequate for your needs.
If you spend more than the interest, your capital will be exhausted at some time in the future. For example, if you take out $6,000 a year (ie 6% of the capital sum), the capital may run out completely in about 20 years time, maybe earlier. Beyond that date, you will have nothing left.
When you buy a life annuity, you are pooling the risk with other annuitants. Those who die earlier will leave behind the balance of the capital in the fund, so that it can continue to make the payment to those who live longer, ie beyond the 20 years.
If you have a large capital sum, you can use a portion to buy a life annuity for yourself. You can distribute the balance to your chidren now, or invest it separately to be given to them later.
Under a life annuity, the annuitant loses the capital on death. Is there a way to preserve the capital for the children?
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REPLY:
You can preserve the capital if you use only the interest. At present, interest rate is 2% per annum. If your capital is $100,000, you can use only $2,000 a year, ie less than $200 a month. This is not adequate for your needs.
If you spend more than the interest, your capital will be exhausted at some time in the future. For example, if you take out $6,000 a year (ie 6% of the capital sum), the capital may run out completely in about 20 years time, maybe earlier. Beyond that date, you will have nothing left.
When you buy a life annuity, you are pooling the risk with other annuitants. Those who die earlier will leave behind the balance of the capital in the fund, so that it can continue to make the payment to those who live longer, ie beyond the 20 years.
If you have a large capital sum, you can use a portion to buy a life annuity for yourself. You can distribute the balance to your chidren now, or invest it separately to be given to them later.
Bad experience with structured products
Do you have any bad experience with structured products? Send an e-mail to kinlian@gmail.com, with the following information:
* name of product
* amount that you invested
* period of investment
* what is your return on maturity?
* why was the product unsatisfactory?
I will not use your actual name, but will post the experience to share with other people.
* name of product
* amount that you invested
* period of investment
* what is your return on maturity?
* why was the product unsatisfactory?
I will not use your actual name, but will post the experience to share with other people.
Products that give good value
COMMENTS POSTED IN MY BLOG:
You emphasize to "buy term and invest the best".
The point is: if the Income agents think in the best interest of clients, then they should sell a reducing term instead of a whole life, isn't it? Is a $1,000,000 reducing term enough for 30 yrs?
There are many unit trusts that almost 0% sales charge, why does the agent need to sell a 1.5% sales charge single premium policy? Why?!
Now, you recommended people to buy traditional plan and ILPs ... what good are they? According to you, low returns, low coverage. You are the one who stands for de-coupling insurance and investment, in the first place!
Sometimes you make contradicting remarks. I wonder if you stand for consumers or insurance co.
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REPLY:
A product that is good for consumers have the following characteristics:
* meet their needs (for insurance or protection)
* have a modest charge
* are designed to give good value to the consumers and a fair profit margin.
The following products can quality as "good products"
* term insurance, combined with low cost investment fund
* traditional products, with modest commission charges
There is a broad range of consumers, with different levels of needs and awareness:
* A small percentage are financially savvy and can make their own decision and transact through the internet.
* The majority needs to be advised; and the adviser needs to make a living. They also give good value.
According to my model, there is room for all types of products and services, as long as ethical business principles are observed: give good value to consumers.
You emphasize to "buy term and invest the best".
The point is: if the Income agents think in the best interest of clients, then they should sell a reducing term instead of a whole life, isn't it? Is a $1,000,000 reducing term enough for 30 yrs?
There are many unit trusts that almost 0% sales charge, why does the agent need to sell a 1.5% sales charge single premium policy? Why?!
Now, you recommended people to buy traditional plan and ILPs ... what good are they? According to you, low returns, low coverage. You are the one who stands for de-coupling insurance and investment, in the first place!
Sometimes you make contradicting remarks. I wonder if you stand for consumers or insurance co.
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REPLY:
A product that is good for consumers have the following characteristics:
* meet their needs (for insurance or protection)
* have a modest charge
* are designed to give good value to the consumers and a fair profit margin.
The following products can quality as "good products"
* term insurance, combined with low cost investment fund
* traditional products, with modest commission charges
There is a broad range of consumers, with different levels of needs and awareness:
* A small percentage are financially savvy and can make their own decision and transact through the internet.
* The majority needs to be advised; and the adviser needs to make a living. They also give good value.
According to my model, there is room for all types of products and services, as long as ethical business principles are observed: give good value to consumers.
Friday, July 06, 2007
Limited premium policy
COMMENT POSTED IN MY BLOG:
Mr. Tan
I like you. I realise you are promoting the concept of buying term and invest the rest. You have taken it to the extreme by recommending decreasing term which is good especially for the poor. They are the people who need to stretch their money in order to be adequately covered.
What do you think of limited premium type of plan? I think this is good for agents' pocket at the expense of clients' protection. Only the rich and high income earners can afford this type. Unfortunately the poor are also buying and soon they will become the victims of lapses.
The question of honesty is called in here.
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REPLY:
Limited premium policies are all right, if the commission is kept at a modest level, and the policy is designed to give good value to the customer. Unfortunately, most of the plans sold in the market have expense charges to pay high commission.
Many policyholders like to pay premium for a shorter period (eg during their working life), and to be insured for a lifetime. Each person should buy a policy that they can afford to upkeep. If they wish to have a limited premium policy, they should take a lower sum assured - so that the premium remains affordable.
Mr. Tan
I like you. I realise you are promoting the concept of buying term and invest the rest. You have taken it to the extreme by recommending decreasing term which is good especially for the poor. They are the people who need to stretch their money in order to be adequately covered.
What do you think of limited premium type of plan? I think this is good for agents' pocket at the expense of clients' protection. Only the rich and high income earners can afford this type. Unfortunately the poor are also buying and soon they will become the victims of lapses.
The question of honesty is called in here.
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REPLY:
Limited premium policies are all right, if the commission is kept at a modest level, and the policy is designed to give good value to the customer. Unfortunately, most of the plans sold in the market have expense charges to pay high commission.
Many policyholders like to pay premium for a shorter period (eg during their working life), and to be insured for a lifetime. Each person should buy a policy that they can afford to upkeep. If they wish to have a limited premium policy, they should take a lower sum assured - so that the premium remains affordable.
Vera and her mother
Premium for term insurance
Hi Mr Tan
I am 30 years old with a monthly income of $X. How much life insurance should I buy and what is the premium that I have to pay, if I buy a term insurance plan?
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REPLY
You can read this FAQ on choice of insurance plan. It also gives some examples of the premium rate payable. The premium varies proportionately to the sum insured.
You also have the choice to buy a decreasing term insurance, where you can save about 50% of the premium.
If you have a family, you should be insured for 5 to 10 years of your income. The premium should cost you less than 1% of your monthly income.
I am 30 years old with a monthly income of $X. How much life insurance should I buy and what is the premium that I have to pay, if I buy a term insurance plan?
----------------------
REPLY
You can read this FAQ on choice of insurance plan. It also gives some examples of the premium rate payable. The premium varies proportionately to the sum insured.
You also have the choice to buy a decreasing term insurance, where you can save about 50% of the premium.
If you have a family, you should be insured for 5 to 10 years of your income. The premium should cost you less than 1% of your monthly income.
Low cost product
Some insurance agents, who made comments in my blog, think that low cost products refer only to term insurance and Incomeshield. How can an agent make a living by selling low cost products?
My definition of low cost products include traditional products and investment funds, with a modest commission rate, e.g.
* 30% commission (instead of 100%) to sell a 20 year regular premium policy. (Note: 30% works out to 1.5% per year)
* 1.5% (instead of 5%) to sell a single premium policy.
Under a "low cost" product, the agent can earn $100 to $300 (not $1,000) to sell a life insurance policy. These low cost product offer better value to their customers. The agent can increase the volume of sales, and make a good income.
Several of the products from NTUC Income (eg Ideal, Flexi-link and annuity plans) are already on the low cost model. They offer good value to the customers. I am happy to recommend them.
My definition of low cost products include traditional products and investment funds, with a modest commission rate, e.g.
* 30% commission (instead of 100%) to sell a 20 year regular premium policy. (Note: 30% works out to 1.5% per year)
* 1.5% (instead of 5%) to sell a single premium policy.
Under a "low cost" product, the agent can earn $100 to $300 (not $1,000) to sell a life insurance policy. These low cost product offer better value to their customers. The agent can increase the volume of sales, and make a good income.
Several of the products from NTUC Income (eg Ideal, Flexi-link and annuity plans) are already on the low cost model. They offer good value to the customers. I am happy to recommend them.
Postage increased to 26 cents
I bought many stamp labels for 25 cents (which was the postage previously). With the increase in GST, the postage increased to 26 cents.
I enquired with Singapore Post. What should I do with the current labels?
Their reply: go to a post office, change the labels to 26 cents and pay the difference.
It seems to be quite inconsiderate of Singapore Post. They could have replied, "we will continue to accept the 25 cents label and absorb the difference in GST".
I hope that businesses in Singapore, especially those that are making good profits, can be considerate! Anyway, it probably cost Singapore Post more than 1 cent to replace the labels!
I enquired with Singapore Post. What should I do with the current labels?
Their reply: go to a post office, change the labels to 26 cents and pay the difference.
It seems to be quite inconsiderate of Singapore Post. They could have replied, "we will continue to accept the 25 cents label and absorb the difference in GST".
I hope that businesses in Singapore, especially those that are making good profits, can be considerate! Anyway, it probably cost Singapore Post more than 1 cent to replace the labels!
One Motoring Website
I received a letter from Land Transport Authority asking me to pay a fine of $8.50 for failing to have a cash card for ERP charges. (I think that the cash card was not properly inserted).
I went to the OneMotoring website to pay this fine. I experienced the following difficulty:
* the homepage contained too much information
* difficult to find the link to pay the fine
* finally, I found it under "quick link"
* brought me to another complicated page
* have to read a lot of irrelevant information
* finally, I found the link to "pay fine"
* clicked on the link many times; and stayed at the same page (ie nothing happens)
Finally, I decided to log into my internet banking and paid the fine to LTA.
Suggestion: LTA should have a separate webpage for people to make their payments. This webpage should be listed in their letter.
I went to the OneMotoring website to pay this fine. I experienced the following difficulty:
* the homepage contained too much information
* difficult to find the link to pay the fine
* finally, I found it under "quick link"
* brought me to another complicated page
* have to read a lot of irrelevant information
* finally, I found the link to "pay fine"
* clicked on the link many times; and stayed at the same page (ie nothing happens)
Finally, I decided to log into my internet banking and paid the fine to LTA.
Suggestion: LTA should have a separate webpage for people to make their payments. This webpage should be listed in their letter.
Another Tan Kin Lian
The telephone directory shows only one person with the name of TAN KIN LIAN. There are many pages of other people with slightly different spellings. So, I always thought that there this name is unique to me.
I found the name of TAN KIN LIAN as listed under the "unclaimed money" website. The Central Provident Fund was looking for this person.
I sent an email to CPF. They replied that they are looking for another person with this name (ie not me).
Now, I know that there is another person in Singapore with a name spelled exactly as my name. This person does not have a telephone listed under this name.
I found the name of TAN KIN LIAN as listed under the "unclaimed money" website. The Central Provident Fund was looking for this person.
I sent an email to CPF. They replied that they are looking for another person with this name (ie not me).
Now, I know that there is another person in Singapore with a name spelled exactly as my name. This person does not have a telephone listed under this name.
Early redemption penalty
COMMENT POSTED IN MY BLOG (edited)
I had two tranches (of a structured deposit), deposited in 2004 when interest was low. The bank staff was not honest and forthcoming in telling me the early redemption penalty. I was told that I would get a certain interest rate or higher.
When I tried to pull out last year, I was told penalty is 15%. Well, I was foolish enough to trust the relationship manager in that they are telling lies during signing of the placement.
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REPLY:
You must read the brochure or prospectus carefully and understand the product, before you invest in it. If the material is too difficult, avoid the product. Do not take any verbal assurance. See it in writing.
I had two tranches (of a structured deposit), deposited in 2004 when interest was low. The bank staff was not honest and forthcoming in telling me the early redemption penalty. I was told that I would get a certain interest rate or higher.
When I tried to pull out last year, I was told penalty is 15%. Well, I was foolish enough to trust the relationship manager in that they are telling lies during signing of the placement.
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REPLY:
You must read the brochure or prospectus carefully and understand the product, before you invest in it. If the material is too difficult, avoid the product. Do not take any verbal assurance. See it in writing.
Expense ratio of financial products
Mr Tan,
Can you tell us which of the following financial products has a higher commission/expense ratio – an annuity (which you love so much) or a structured product (which you disdain)? Is it a case of the kettle calling the pot black?
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REPLY:
According to my estimate, the expense ratio of a life annuity is less than half of the expense ratio of a structured product (to cover marketing expense, fees and profit margin).
A life annuity serves a useful function in the polling of longevity risk and achieving a satisfactory long term return for the customer.
A structured product usually produces a poor investment return to the customer (i.e. does a bad job at its primary role). But they do a good job at giving large fees to the financial institutions that design and market the product.
Can you tell us which of the following financial products has a higher commission/expense ratio – an annuity (which you love so much) or a structured product (which you disdain)? Is it a case of the kettle calling the pot black?
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REPLY:
According to my estimate, the expense ratio of a life annuity is less than half of the expense ratio of a structured product (to cover marketing expense, fees and profit margin).
A life annuity serves a useful function in the polling of longevity risk and achieving a satisfactory long term return for the customer.
A structured product usually produces a poor investment return to the customer (i.e. does a bad job at its primary role). But they do a good job at giving large fees to the financial institutions that design and market the product.
More than Insurance
COMMENTS POSTED IN MY BLOG
Very good that the new Income management has closed down the loans unit and some of the other non-core businesses like line dance and snow city. This will allow for better pay to be offered to the rest of the employees.
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Income should close all the non-core businesses and refocus on insurance. This will improve its bottom line. Money saved, use it to improve the skills of its agents who are lacking badly in this area.
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Rubbish, The Income that maintains the loans policies and other value added services was the Income that has a heart! This is very lacking in the society of today.
Nowadays Income spent lots of money advertising full colour full page advertisements that does not add any value to the policyholders at all. As Mr. Tan has said, this takes away money from the Par fund and reduces distributions to policyholders. At least the other services add value to Income policy holders lives and help them in times of need.
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REPLY:
When I was CEO of NTUC Income, the "more than insurance" businesses were run on the following principles:
* they have to give value to the policyholders
* they should be runned on cost recovery, with a margin to meet the expenses
Some of the businesses were successful, including the home services (ie referral of contractors) and car sharing. Others were not successful, and were scaled down or closed down during my time.
Some activities (such as line-dancing) cost very little, and give a lot of awareness and positive pubicity. It is a form of low-cost advertising.
Very good that the new Income management has closed down the loans unit and some of the other non-core businesses like line dance and snow city. This will allow for better pay to be offered to the rest of the employees.
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Income should close all the non-core businesses and refocus on insurance. This will improve its bottom line. Money saved, use it to improve the skills of its agents who are lacking badly in this area.
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Rubbish, The Income that maintains the loans policies and other value added services was the Income that has a heart! This is very lacking in the society of today.
Nowadays Income spent lots of money advertising full colour full page advertisements that does not add any value to the policyholders at all. As Mr. Tan has said, this takes away money from the Par fund and reduces distributions to policyholders. At least the other services add value to Income policy holders lives and help them in times of need.
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REPLY:
When I was CEO of NTUC Income, the "more than insurance" businesses were run on the following principles:
* they have to give value to the policyholders
* they should be runned on cost recovery, with a margin to meet the expenses
Some of the businesses were successful, including the home services (ie referral of contractors) and car sharing. Others were not successful, and were scaled down or closed down during my time.
Some activities (such as line-dancing) cost very little, and give a lot of awareness and positive pubicity. It is a form of low-cost advertising.
Stock and property markets
A few letters were published in the newspaper recently, warning about the high stock and property markets. Government leaders have also expressed a similar view. They warned investors about the over-extended markets.
I wish to add one point point - which has not been covered. The Singapore stockmarket is small, compared to global standards. We are highly dependent on the foreign funds.
When the foreign fund decide to move out of the Singapore market, it will be swift, massive and unexpected. It has happened like this, on several occasions in the past.
If you are invested in the global stockmarket, you will not suffer this kind of volatility. But, if you are in a small market, including Singapore, you will be exposed to this risk.
We do not know when this may happen, and what may trigger this. Do be careful.
I wish to add one point point - which has not been covered. The Singapore stockmarket is small, compared to global standards. We are highly dependent on the foreign funds.
When the foreign fund decide to move out of the Singapore market, it will be swift, massive and unexpected. It has happened like this, on several occasions in the past.
If you are invested in the global stockmarket, you will not suffer this kind of volatility. But, if you are in a small market, including Singapore, you will be exposed to this risk.
We do not know when this may happen, and what may trigger this. Do be careful.
Thursday, July 05, 2007
Simple financial products
COMMENT POSTED IN MY BLOG:
Relationship manager or whatever title they go by is no difference from insurance agents. They are sales persons. They manipulate the sales process. They up play and down play; and non-disclosure and misrepresentation are among tactics they employ.
MAS or CASE should come hard upon these people. This is the high risk group consumers should beware.
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REPLY:
The starting point is for the financial institution (ie insurance company and banks) to offer simple, "honest" products, such as:
* a savings or bank account
* a low cost investment fund (equity, bond or money market)
* government bonds
* insurance products to cover specified risks
Information about these products should be kept simple and made easily accessible to consumers. The consumers should also be educated about these financial products.
The distribution cost can be kept low, as less effort is needed to market the product. For example, there is no need to pay commission to "sell" a saving account.
Preferably, there should be no locked-in period. Alternatively, the penalty for withdrawal should be kept low.
With simple products, there is less opportunity for the consumer to be exploited.
Relationship manager or whatever title they go by is no difference from insurance agents. They are sales persons. They manipulate the sales process. They up play and down play; and non-disclosure and misrepresentation are among tactics they employ.
MAS or CASE should come hard upon these people. This is the high risk group consumers should beware.
-------------------------------------------------
REPLY:
The starting point is for the financial institution (ie insurance company and banks) to offer simple, "honest" products, such as:
* a savings or bank account
* a low cost investment fund (equity, bond or money market)
* government bonds
* insurance products to cover specified risks
Information about these products should be kept simple and made easily accessible to consumers. The consumers should also be educated about these financial products.
The distribution cost can be kept low, as less effort is needed to market the product. For example, there is no need to pay commission to "sell" a saving account.
Preferably, there should be no locked-in period. Alternatively, the penalty for withdrawal should be kept low.
With simple products, there is less opportunity for the consumer to be exploited.
How can Singaporeans be happy?
COMMENT POSTED IN MY BLOG:
In my 9 years here, I've rarely met anyone who's happy about their job. Everyone has grouses ... and why?
Mostly due to Money. Let's all admit it, isn't this society driven by monetary excellence? What else? High expectations has been drilled since we are young. High expectations of your maid, the guy at the front bank desk, your colleagues.
Everything is speed, accuracy, and excellence. Would anyone dare fail? What's this all boils down to? Higher stress ---> Grouses??
Is this only happening in Singapore? I don't think so. Maybe it's more evident here? Possibly?
So therefore, your statement may have to evolve to 'how can Singaporeans be happy?'
Mr. Tan sir, please share some thoughts.
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REPLY:
I like to invite other readers to share their thoughts.
Here are some of my suggestions:
* live within our income
* save 15% for our future needs
* do not spend unnecessary (to keep up with other people)
* avoid borrowing on credit card
* do not envy other people; live our own life
* look for the things that are inexpensive or free in Singapore; they are plenty
* do not waste our time doing the unnecessary work
* talk to friends and colleagues
* have an inexpensive hobby
* spend time to be nice to other people
* think of others; not just ourself
I hope to get more views from other people.
In my 9 years here, I've rarely met anyone who's happy about their job. Everyone has grouses ... and why?
Mostly due to Money. Let's all admit it, isn't this society driven by monetary excellence? What else? High expectations has been drilled since we are young. High expectations of your maid, the guy at the front bank desk, your colleagues.
Everything is speed, accuracy, and excellence. Would anyone dare fail? What's this all boils down to? Higher stress ---> Grouses??
Is this only happening in Singapore? I don't think so. Maybe it's more evident here? Possibly?
So therefore, your statement may have to evolve to 'how can Singaporeans be happy?'
Mr. Tan sir, please share some thoughts.
----------------------------------------------
REPLY:
I like to invite other readers to share their thoughts.
Here are some of my suggestions:
* live within our income
* save 15% for our future needs
* do not spend unnecessary (to keep up with other people)
* avoid borrowing on credit card
* do not envy other people; live our own life
* look for the things that are inexpensive or free in Singapore; they are plenty
* do not waste our time doing the unnecessary work
* talk to friends and colleagues
* have an inexpensive hobby
* spend time to be nice to other people
* think of others; not just ourself
I hope to get more views from other people.
Surf Deposit 20
Dear Mr Tan
I am stuck in a Surf Deposit 20 - Tranche A structured product which I invested in November 2003. It will mature in 2008. So far, I have received only 2 payout, totaling 4.25% in 2004. The total payout is 5.75% on maturity if I stay invested for the full 5 years.
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REPLY:
I saw a notice in the website for investors of another tranche, ie Surf Deposit 21 (10 year SGD Tranche A). In their case, the investment had an early redemption after 3.5 years and they earned a total return of 11.6% (or 3.2% p.a.).
It seems that the investors in most of the tranches are stuck, like you, and have to wait until maturity to get a low rate of return. If they cash out earlier, they will make a loss.
Lesson: It is better to avoid structured products
I am stuck in a Surf Deposit 20 - Tranche A structured product which I invested in November 2003. It will mature in 2008. So far, I have received only 2 payout, totaling 4.25% in 2004. The total payout is 5.75% on maturity if I stay invested for the full 5 years.
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REPLY:
I saw a notice in the website for investors of another tranche, ie Surf Deposit 21 (10 year SGD Tranche A). In their case, the investment had an early redemption after 3.5 years and they earned a total return of 11.6% (or 3.2% p.a.).
It seems that the investors in most of the tranches are stuck, like you, and have to wait until maturity to get a low rate of return. If they cash out earlier, they will make a loss.
Lesson: It is better to avoid structured products
Pay less for your home loan
If you have an existing home loan, or is thinking of taking a new loan, I advise you to read the 14 tips given in Dr Money's website.
Two important tips are:
* selecting the right type of loan, eg variable or fixed, HDB or bank loan
* look into the possibility of refinancing your existing loan, after the lock-in period, to get better terms (e.g. to enjoy attractive offer)
Two important tips are:
* selecting the right type of loan, eg variable or fixed, HDB or bank loan
* look into the possibility of refinancing your existing loan, after the lock-in period, to get better terms (e.g. to enjoy attractive offer)
Star Track II SGD
Dear Mr. Tan,
I invested in this product almost 5 years ago. It will mature in 2008.
Name of product: Star Track II SGD
Amount invested: $5,000
Period of investment: 5 years
Return on maturity: Currently, it is worth only $4,373.80. Guaranteed to return back principle invested sum of $5000 on maturity.
Why was the product unsatisfactory? It give a worse return compared to savings account.
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REPLY
I found the following information from the website:
Capital protection:
In order to provide investors protection for 100% of the capital invested, DBS Star Track II will invest a substantial portion of its net assets in a combination of debt securities issued by corporations, governments, government agencies or supranationals.
Participation in the upside of equity stocks:
To give investors the opportunity to obtain capital appreciation at
maturity on 5 November 2008, the remaining net assets of the Fund will be invested in an option (the "Option"), linked to the performance of a basket of equity stocks.
The selection of 3 top performing stocks will be done after the 1st anniversary of the Fund to form a "star" basket, another selection of 3 top performing stocks will be done on the 3rd anniversary.
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REMARKS: Apparently, the options did not produce any return. Hence, the investor obtained only the return of capital (from the debt instruments). The fund has an annual fee of 1% (which eats away from the return).
I invested in this product almost 5 years ago. It will mature in 2008.
Name of product: Star Track II SGD
Amount invested: $5,000
Period of investment: 5 years
Return on maturity: Currently, it is worth only $4,373.80. Guaranteed to return back principle invested sum of $5000 on maturity.
Why was the product unsatisfactory? It give a worse return compared to savings account.
--------------------------------------------------------
REPLY
I found the following information from the website:
Capital protection:
In order to provide investors protection for 100% of the capital invested, DBS Star Track II will invest a substantial portion of its net assets in a combination of debt securities issued by corporations, governments, government agencies or supranationals.
Participation in the upside of equity stocks:
To give investors the opportunity to obtain capital appreciation at
maturity on 5 November 2008, the remaining net assets of the Fund will be invested in an option (the "Option"), linked to the performance of a basket of equity stocks.
The selection of 3 top performing stocks will be done after the 1st anniversary of the Fund to form a "star" basket, another selection of 3 top performing stocks will be done on the 3rd anniversary.
-------------------------------
REMARKS: Apparently, the options did not produce any return. Hence, the investor obtained only the return of capital (from the debt instruments). The fund has an annual fee of 1% (which eats away from the return).
The real winners in structured products
I saw an article in a newspaper, written in November 2006. A summary of the key points:
* structured products have taken Asia by storm
* retail and private banks collected millions of dollars in embedded fees
* more Asians bought these products, compared to Europeans and Americans
* some fundamental questions of the nature of these products are not answered
* the risks are not clearly explained
* prospectuses are couched in financial jargon and are of little help
* most products have a fairly lengthy lock-in
* the sure winners are the investment banks and distributors who always collect a spread, whether the investor wins or loses.
* structured products have taken Asia by storm
* retail and private banks collected millions of dollars in embedded fees
* more Asians bought these products, compared to Europeans and Americans
* some fundamental questions of the nature of these products are not answered
* the risks are not clearly explained
* prospectuses are couched in financial jargon and are of little help
* most products have a fairly lengthy lock-in
* the sure winners are the investment banks and distributors who always collect a spread, whether the investor wins or loses.
Measure yield on money market fund
Dear Mr Tan,
It seems those who bought the above at $1.065 in May 07 are now getting a very bad yield of less than 1 % annualised, which is much worse than even short term (1 to 3 mth) Bank Fixed Deposit rates for amounts >$50K.
The trend (over 30 to 40 days) worsen in June 07. Is the duration enough to make any judgement? Should they hold or cut their losses (relative to FD) ?
-----------------------
REPLY:
You should measure the yield over 1 OR 2 months, and not just on a few past days (as it may be affected by temporary fluctuations.
I believe that the current yield is about 2% per annum (based on the underlying investments). It is better to stay invested in the money market fund (unless you have specific use for the money).
It seems those who bought the above at $1.065 in May 07 are now getting a very bad yield of less than 1 % annualised, which is much worse than even short term (1 to 3 mth) Bank Fixed Deposit rates for amounts >$50K.
The trend (over 30 to 40 days) worsen in June 07. Is the duration enough to make any judgement? Should they hold or cut their losses (relative to FD) ?
-----------------------
REPLY:
You should measure the yield over 1 OR 2 months, and not just on a few past days (as it may be affected by temporary fluctuations.
I believe that the current yield is about 2% per annum (based on the underlying investments). It is better to stay invested in the money market fund (unless you have specific use for the money).
Wednesday, July 04, 2007
Any good structured products?
I have taken the position that structured products are bad for consumers. They have high charges and marketing expenses, that eat away the return to the investor.
Someone made a statement that I am not familiar with structured products: they guarantee no capital loss, and allow the investor to make a good gain. He said that it is a "free lunch".
This is how the products were marketed. In think that the actual experience over the past years had been unsatisfactory. In spite of the strong stockmarket, the return on most structured products have been disappointing.
I am not aware about any structured product that have produced a good outcome for the investor.
Do you have any past experience of the structured products? Were you happy or unhappy with your investment? Please send an e-mail to me, at kinlian@gmail.com.
Someone made a statement that I am not familiar with structured products: they guarantee no capital loss, and allow the investor to make a good gain. He said that it is a "free lunch".
This is how the products were marketed. In think that the actual experience over the past years had been unsatisfactory. In spite of the strong stockmarket, the return on most structured products have been disappointing.
I am not aware about any structured product that have produced a good outcome for the investor.
Do you have any past experience of the structured products? Were you happy or unhappy with your investment? Please send an e-mail to me, at kinlian@gmail.com.
Wisdom of Crowds
This is the title of a book written by James Surowiecki and first published in 2004.
The author said many examples where the decision of a group is often better than could have been made by any single member of the group (including an expert). These examples are taken from several fields, primarily economics and psychology.
The opening story was about a crowd in a county fair who were asked to guess the "slaughtered and dressed" weight of an ox. The median weight of the individual guesses was closest to the ox's true weight than the estimates of most individual members, including the estimates made by cattle experts.
This theory refers to decisions of independently-deciding individuals, and is not the same as crowd psychology (where most people blindly follow the crowd).
The author said many examples where the decision of a group is often better than could have been made by any single member of the group (including an expert). These examples are taken from several fields, primarily economics and psychology.
The opening story was about a crowd in a county fair who were asked to guess the "slaughtered and dressed" weight of an ox. The median weight of the individual guesses was closest to the ox's true weight than the estimates of most individual members, including the estimates made by cattle experts.
This theory refers to decisions of independently-deciding individuals, and is not the same as crowd psychology (where most people blindly follow the crowd).
Flexible terms for your mortgage loan
If you take a mortgage loan, try to ask for the following flexibility:
* to keep the same monthly repayment, i.e. do not adjust with the interest rate
* to increase the monthly repayment (e.g. to pay more if your earnings increase
* to make partial lump sum repayment
* to make additional withdrawals, so long as it can be covered by the value of your property.
* to keep the same monthly repayment, i.e. do not adjust with the interest rate
* to increase the monthly repayment (e.g. to pay more if your earnings increase
* to make partial lump sum repayment
* to make additional withdrawals, so long as it can be covered by the value of your property.
Fixed monthly repayment on mortgage loan
Dear Mr Tan,
If I take a mortgage loan with a variable interest rate, do I have to pay a higher repayment if the interest rate goes up? How often is this rate adjusted?
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REPLY:
I am not sure about the practice of the lender. I believe that, in most cases, they will allow you to keep the same monthly repayment.
When I took a morgage loan previously, I keep to the same monthly repayment, even though the interest rate changes. I get a statement each year showing my balance, the interest charged for the year, and the repayment made during the year.
If I take a mortgage loan with a variable interest rate, do I have to pay a higher repayment if the interest rate goes up? How often is this rate adjusted?
-------------------------
REPLY:
I am not sure about the practice of the lender. I believe that, in most cases, they will allow you to keep the same monthly repayment.
When I took a morgage loan previously, I keep to the same monthly repayment, even though the interest rate changes. I get a statement each year showing my balance, the interest charged for the year, and the repayment made during the year.
Commission paid on life insurance
Dear Mr Tan
In your blog, you said that an insurance agent earns an average of $1,000 for selling a life insurance policy? Is this cost charged to the policyholder in the premium? It is a lot of money. Why should the insurance be so costly?
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REPLY:
The actual commission depends on the size of the policy and the type and duration of the policy. It may also vary by insurance company. I have made an estimate of the average commission based on the policies sold in the market.
The agent needs to be paid this level of commission, as it takes a lot of time to look for a customer, to explain the product and to convince the customer to buy the insurance policy.
Some companies pay lower commission to the agent, and reduces the premium paid by the customer.
You can find out what is being charged from the sales illustration given to you at the point of sale.
Some insurance companies are reducing the commission for new products that are being introduced through new channels (such as the internet or directly from their office.
In your blog, you said that an insurance agent earns an average of $1,000 for selling a life insurance policy? Is this cost charged to the policyholder in the premium? It is a lot of money. Why should the insurance be so costly?
-----------------------------
REPLY:
The actual commission depends on the size of the policy and the type and duration of the policy. It may also vary by insurance company. I have made an estimate of the average commission based on the policies sold in the market.
The agent needs to be paid this level of commission, as it takes a lot of time to look for a customer, to explain the product and to convince the customer to buy the insurance policy.
Some companies pay lower commission to the agent, and reduces the premium paid by the customer.
You can find out what is being charged from the sales illustration given to you at the point of sale.
Some insurance companies are reducing the commission for new products that are being introduced through new channels (such as the internet or directly from their office.
Return from a life annuity
I said that the return from a life annuity from NTUC Income is likely to be 4-5% per annum.
This comprises of the following:
* guaranteed rate of 2.5% used to calculate the basic amount of the annuity
* an average bonus of 1.5% to 2.5% added to the annuity yearly (based on past records)
* total is 4-5% per annum.
The life annuity has an element of pooling of risk. Those who live longer will get a better return. Those who die younger will get a lower return.
This comprises of the following:
* guaranteed rate of 2.5% used to calculate the basic amount of the annuity
* an average bonus of 1.5% to 2.5% added to the annuity yearly (based on past records)
* total is 4-5% per annum.
The life annuity has an element of pooling of risk. Those who live longer will get a better return. Those who die younger will get a lower return.
Tuesday, July 03, 2007
Sell low cost policy
Mr Tan
How many low cost policies must I sell a day, to earn an decent income?
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REPLY:
If a life insurance agent sells an average of 1 policy a week, he needs to earn $1,000 per policy, to achieve a monthly income of $4,000.
If the agent sells 1 policy a day, he only needs to earn $200 per policy to achieve the same income. This is lower cost to the customer.
If the agent sells 4 low-cost policies a day, he only needs to earn $50 per policy. This will make the product more affordable to the customer.
You can sell 4 low cost policies a day, if you get the customer to come to you (eg visit your office). They will do so, if you offer simple, good value products.
Many people buy shares by telephoning the stockbroker. The stockbroker does not have to visit the customer!
Lesson: To make life insurance more affordable to customers, we need to develop a new and more productive way of selling the "good value" products.
How many low cost policies must I sell a day, to earn an decent income?
-----------------------------------------
REPLY:
If a life insurance agent sells an average of 1 policy a week, he needs to earn $1,000 per policy, to achieve a monthly income of $4,000.
If the agent sells 1 policy a day, he only needs to earn $200 per policy to achieve the same income. This is lower cost to the customer.
If the agent sells 4 low-cost policies a day, he only needs to earn $50 per policy. This will make the product more affordable to the customer.
You can sell 4 low cost policies a day, if you get the customer to come to you (eg visit your office). They will do so, if you offer simple, good value products.
Many people buy shares by telephoning the stockbroker. The stockbroker does not have to visit the customer!
Lesson: To make life insurance more affordable to customers, we need to develop a new and more productive way of selling the "good value" products.
Low cost product
COMMENT POSTED IN MY BLOG:
Agents who sell low-cost product obviously won’t earn much. They’re honest, but, definitely not Million-Dollar-Round-Table stuff. Smart, ambitious advisors won’t go around selling term insurance for long. The best protection for a client is still to educate himself.
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REPLY:
An adviser (agent) who sell low cost product can still earn a modest rate of commission. By increasing the volume of sales, the adviser can earn an adequate leve of earnings. If the adviser sells good products (ie good value for customers), the future customers will come to them (usually referred by existing customers).
This is a better business model. Many other businesses are successful in applying this model. It can work for financial services as well.
I agree that the best protection is an eduated customer.
Agents who sell low-cost product obviously won’t earn much. They’re honest, but, definitely not Million-Dollar-Round-Table stuff. Smart, ambitious advisors won’t go around selling term insurance for long. The best protection for a client is still to educate himself.
-----------------------------
REPLY:
An adviser (agent) who sell low cost product can still earn a modest rate of commission. By increasing the volume of sales, the adviser can earn an adequate leve of earnings. If the adviser sells good products (ie good value for customers), the future customers will come to them (usually referred by existing customers).
This is a better business model. Many other businesses are successful in applying this model. It can work for financial services as well.
I agree that the best protection is an eduated customer.
Fixed or floating rate for your mortgage?
Dear Mr Tan,
Is it better to take a mortgage on a fixed rate, or a floating rate?
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REPLY:
It depends on the terms that are offered to you. Normally, the interest rate should be pegged to a market benchmark plus a margin.
For example, the interest rate on 10 year government bond is now at 3% p.a. A fixed rate mortgage should be at 3% plus a margin of say 1%, ie 4% p.a. It should be fixed for the full term.
The floating rate should be based on the current rate of (say) 2% plus the margin of 1%, ie 3%. This interest rate should be reset every 6 to 12 months, based on the movement of the market benchmark.
At the current time, when interest rate is at a historically low level, it is better to take a fixed rate loan and pay 4% p.a (say) for the next 10 years. You do not have to worry about future changes in the interest rate, as this rate is "locked in".
Apart from any special reason (eg lock in the current interest rate), I generally prefer a floating rate. This gives the greatest flexibilty for you to re-finance the loan, to repay the loan early (when you sell the property) or to change your repayment schedule.
Is it better to take a mortgage on a fixed rate, or a floating rate?
----------------------------
REPLY:
It depends on the terms that are offered to you. Normally, the interest rate should be pegged to a market benchmark plus a margin.
For example, the interest rate on 10 year government bond is now at 3% p.a. A fixed rate mortgage should be at 3% plus a margin of say 1%, ie 4% p.a. It should be fixed for the full term.
The floating rate should be based on the current rate of (say) 2% plus the margin of 1%, ie 3%. This interest rate should be reset every 6 to 12 months, based on the movement of the market benchmark.
At the current time, when interest rate is at a historically low level, it is better to take a fixed rate loan and pay 4% p.a (say) for the next 10 years. You do not have to worry about future changes in the interest rate, as this rate is "locked in".
Apart from any special reason (eg lock in the current interest rate), I generally prefer a floating rate. This gives the greatest flexibilty for you to re-finance the loan, to repay the loan early (when you sell the property) or to change your repayment schedule.
Different types of mortgages
Source: Wikipedia
1. Adjustable rate mortgage (ARM). The interest rate on the loan is periodically adjusted based on an index. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. The borrower benefits if the interest rate falls and loses out if interest rates rise. Adjustable rate mortgages are characterized by their index and limitations on charges (caps).
2. Graduated payment mortage (GPM). It has low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future.
3. Interest only mortgage. During the agreed term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the term the borrower may enter an interest-only mortgage, pay the principal, or convert the loan to a principal and interest payment (or amortized) loan.
4. Fixed rate mortgage(FRM). The interest rate on the loan remains the same through the term of the loan. Fixed rate mortgages are characterized by their interest rate, amount of loan, and term of the mortgage.
5. Negative amortization mortgage. The borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed in advance, to avoid default on payment.
6. Balloon payment mortgage. This mortgage does not fully amortize over the term, leaving a balance due at maturity. The final payment is called a balloon payment. This mortgage may have a fixed or a floating interest rate.
A "two-step" mortgage plan may be used with balloon payment mortgage. Under this plan, sometimes referred to as "reset option", the mortgage "resets" using current market rates and using a fully-amortizing payment schedule. If there is not reset option, the borrower is expected to sell the property or refinanced the loan.
1. Adjustable rate mortgage (ARM). The interest rate on the loan is periodically adjusted based on an index. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. The borrower benefits if the interest rate falls and loses out if interest rates rise. Adjustable rate mortgages are characterized by their index and limitations on charges (caps).
2. Graduated payment mortage (GPM). It has low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future.
3. Interest only mortgage. During the agreed term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the term the borrower may enter an interest-only mortgage, pay the principal, or convert the loan to a principal and interest payment (or amortized) loan.
4. Fixed rate mortgage(FRM). The interest rate on the loan remains the same through the term of the loan. Fixed rate mortgages are characterized by their interest rate, amount of loan, and term of the mortgage.
5. Negative amortization mortgage. The borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed in advance, to avoid default on payment.
6. Balloon payment mortgage. This mortgage does not fully amortize over the term, leaving a balance due at maturity. The final payment is called a balloon payment. This mortgage may have a fixed or a floating interest rate.
A "two-step" mortgage plan may be used with balloon payment mortgage. Under this plan, sometimes referred to as "reset option", the mortgage "resets" using current market rates and using a fully-amortizing payment schedule. If there is not reset option, the borrower is expected to sell the property or refinanced the loan.
Adjustible Rate Mortgage
Source: About.com
An adjustable rate mortgage (ARM for short), is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
Index
An index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index.
Margin
Think of the margin as the lender's markup. It is an interest rate that represents the lender's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of your home loan.
Adjustment Period
The adjustment period is the period between potential interest rate adjustments.
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NOTE:
Most of the mortgages in Singapore have adjustible rate. However, in the past, they are based on the board rate decided by the lender. Recently, some lenders have introduced loans with rates that are linked to a market benchmark (ie similar to the ARM in America).
An adjustable rate mortgage (ARM for short), is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
Index
An index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index.
Margin
Think of the margin as the lender's markup. It is an interest rate that represents the lender's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of your home loan.
Adjustment Period
The adjustment period is the period between potential interest rate adjustments.
---------------------
NOTE:
Most of the mortgages in Singapore have adjustible rate. However, in the past, they are based on the board rate decided by the lender. Recently, some lenders have introduced loans with rates that are linked to a market benchmark (ie similar to the ARM in America).
Look for good advisers
COMMENT POSTED IN MY BLOG:
I would like to add that the agents sell what pays them the most commissions besides what is hot (typically what is bad for the investor).
Most are driven by sales commissions. If the client so happens to buy something good for themselves, it is just pure luck.
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REPLY:
There are advisers (agents) who sell low cost products that are good for the investors. They get a modest commission and provide good service to their clients.
I would like to add that the agents sell what pays them the most commissions besides what is hot (typically what is bad for the investor).
Most are driven by sales commissions. If the client so happens to buy something good for themselves, it is just pure luck.
------------------------
REPLY:
There are advisers (agents) who sell low cost products that are good for the investors. They get a modest commission and provide good service to their clients.
Monday, July 02, 2007
Lorenzo de Medici
I watched an interesting documentary about Lorenzo de Medici in the History Channel 8 on Starhub. I searched Wikipedia and found the following:
Lorenzo de' Medici (January 1, 1449 – 9 April 1492) was an Italian statesman and ruler of the Florentine Republic during the Italian Renaissance.
Known as Lorenzo the Magnificent (Lorenzo il Magnifico) by contemporary Florentines, he was the most remarkable public figure of his time. Not only a wily diplomat and politician, he headed a brilliant group of scholars, artists, and poets. He was charismatic, tough, passionate, and energetic, equally devoted to his city, his family, the church, and the pursuit of art and learning.
His life coincided with the high point of the early Italian Renaissance; his death marked the end of the Golden Age of Florence.
The fragile peace that he helped to maintain between the various Italian states collapsed with his death; and two years later the French invasion of 1494 began nearly 400 years of foreign occupation of the Italian peninsula.
Though the Medici remained in power in Florence for several centuries, producing three popes and two queens of France, none of his successors approached Lorenzo's range of interests and accomplishments or the generosity of his vision.
Tip: Watch Starhub Channel 8 (History Channel). It is quite interesting.
Lorenzo de' Medici (January 1, 1449 – 9 April 1492) was an Italian statesman and ruler of the Florentine Republic during the Italian Renaissance.
Known as Lorenzo the Magnificent (Lorenzo il Magnifico) by contemporary Florentines, he was the most remarkable public figure of his time. Not only a wily diplomat and politician, he headed a brilliant group of scholars, artists, and poets. He was charismatic, tough, passionate, and energetic, equally devoted to his city, his family, the church, and the pursuit of art and learning.
His life coincided with the high point of the early Italian Renaissance; his death marked the end of the Golden Age of Florence.
The fragile peace that he helped to maintain between the various Italian states collapsed with his death; and two years later the French invasion of 1494 began nearly 400 years of foreign occupation of the Italian peninsula.
Though the Medici remained in power in Florence for several centuries, producing three popes and two queens of France, none of his successors approached Lorenzo's range of interests and accomplishments or the generosity of his vision.
Tip: Watch Starhub Channel 8 (History Channel). It is quite interesting.
Life cycle funds
Source: Investopedia
Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
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Example of asset allocation (Vanguard)
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!
Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
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Example of asset allocation (Vanguard)
Target Equity Bond
maturity
2025 59% 41%
2015 51% 49%
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!
Investment Funds
What is the different between a mutual fund and an exchange traded fund (ETF)?
REPLY:
In a mutual fund (i.e. unit trust in Singapore), the transactions are priced based on the closing price of the underlying investment at the end of the trading day. If you transact, you will only know the price on the following day.
In a ETF, you can decide on the price to transact for this fund. Your transaction is carried out in the stock exchange. You have to find another party who is willing to trade with you based on that price. Usually, the price will follow the net asset value of the fund.
For investors who like to trade, a ETF is more suitable. For long term investors, a mutual fund is probably better (as the cost is lower).
REPLY:
In a mutual fund (i.e. unit trust in Singapore), the transactions are priced based on the closing price of the underlying investment at the end of the trading day. If you transact, you will only know the price on the following day.
In a ETF, you can decide on the price to transact for this fund. Your transaction is carried out in the stock exchange. You have to find another party who is willing to trade with you based on that price. Usually, the price will follow the net asset value of the fund.
For investors who like to trade, a ETF is more suitable. For long term investors, a mutual fund is probably better (as the cost is lower).
Vanguard Funds
I visited the Vanguard website. Here are the performance of their funds, measured in USD:
Vanguard advertised that they have low expense ratio, ie low cost funds. Most of their funds are invested to follow an index. The other funds in the industry are mostly actively managed.
The difference in expense ratio is about 0.8% for one year. If you invest in an actively managed fund, you need to find a manager who is able to earn higher than the market average to cover the higher expense ratio. This is usually quite difficult.
Lesson: Invest in a low cost, well diversified fund.
1 yr Expense Industry
return ratio average
Prime Money Market 5.22% 0.29%
Short Term Inv Grade 5.73% 0.21% 0.97%
Total Bond Market 6.07% 0.20% 1.02%
Balanced Indexed 14.44% 0.20% 1.10%
Total Stockmarket Ind 20.20% 0.19% 1.14%
Diversifed Stock 20.19% 0.43% 1.14%
Total International St 29.42% 0.32% 1.49%
Vanguard advertised that they have low expense ratio, ie low cost funds. Most of their funds are invested to follow an index. The other funds in the industry are mostly actively managed.
The difference in expense ratio is about 0.8% for one year. If you invest in an actively managed fund, you need to find a manager who is able to earn higher than the market average to cover the higher expense ratio. This is usually quite difficult.
Lesson: Invest in a low cost, well diversified fund.
How Vanguard markets its funds
I visited Vanguard in Philadelphia a month ago. Here are my key observations:
* they offer a wide range of funds, at extremely low fees
* the annual fee for their indexed fund is less than 0.2% p.a.
* they offer no-load funds (ie without initial sales charge).
* a large proportion of their investors buy directly through the internet
* they can get information from various sources, including the Vanguard website
Vanguard is now among the top two in the fund management industry. They are able to tap a large and growing market of investors who are interested in low-cost funds and are willing to buy directly (without paying high sales charges to the adviser).
* they offer a wide range of funds, at extremely low fees
* the annual fee for their indexed fund is less than 0.2% p.a.
* they offer no-load funds (ie without initial sales charge).
* a large proportion of their investors buy directly through the internet
* they can get information from various sources, including the Vanguard website
Vanguard is now among the top two in the fund management industry. They are able to tap a large and growing market of investors who are interested in low-cost funds and are willing to buy directly (without paying high sales charges to the adviser).
Risk and return
There are some articles in the newspaper recently commenting that investors are taking high risks and are not getting an adequate return for the risk. What does this mean?
REPLY:
Interest rate globally (and especially in Singapore) is at a low level. To earn a higher return, many investors are buying stocks and properties with low yields, and this cause the prices to go up.
When interest rate increases globally, there is the risk that the investors will move out of the stocks and properties and re-invest in bonds or fixed income. This will cause the stock market to correct severely.
For example, if long term interest rate in Singapore, currently at 3% p.a., were to increase to 5% p.a., there is the potential for the stockmarket to drop by 40%. This risk has not been factored in.
During a recession, the yield expected on risky assets will increase sharply. They will cause a sharper drop in the prices of these assets. This factor has not been taken into account now (as investors are quite complacent about it).
REPLY:
Interest rate globally (and especially in Singapore) is at a low level. To earn a higher return, many investors are buying stocks and properties with low yields, and this cause the prices to go up.
When interest rate increases globally, there is the risk that the investors will move out of the stocks and properties and re-invest in bonds or fixed income. This will cause the stock market to correct severely.
For example, if long term interest rate in Singapore, currently at 3% p.a., were to increase to 5% p.a., there is the potential for the stockmarket to drop by 40%. This risk has not been factored in.
During a recession, the yield expected on risky assets will increase sharply. They will cause a sharper drop in the prices of these assets. This factor has not been taken into account now (as investors are quite complacent about it).
BIGe pays 3.5%
Mr. Tan,
I cannot understand how come Aviva BIGe can guaranteed interest of 3.5% without sales charges and withdrawal fees whereas no other institution can offer that. Is there any "catch" that I overlook on this product?
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REPLY:
Aviva only guarantees 3.5% for 3 months. Thereafter, they have the right to reduce the interest rate (subject to a minimum of 2.5%).
Although they have to pay out 3.5%, they are able (at this time) to invest a portion fo the fund in the stockmarket to earn a much higher return. They are taking some risk, but it can be covered by their risk capital.
This is also a good way for them to build up a base of customers for their other products.
I applaud Aviva for a good business strategy.
I cannot understand how come Aviva BIGe can guaranteed interest of 3.5% without sales charges and withdrawal fees whereas no other institution can offer that. Is there any "catch" that I overlook on this product?
-------------------------
REPLY:
Aviva only guarantees 3.5% for 3 months. Thereafter, they have the right to reduce the interest rate (subject to a minimum of 2.5%).
Although they have to pay out 3.5%, they are able (at this time) to invest a portion fo the fund in the stockmarket to earn a much higher return. They are taking some risk, but it can be covered by their risk capital.
This is also a good way for them to build up a base of customers for their other products.
I applaud Aviva for a good business strategy.
OpenID
I have registered for an OpenID at this website, www.myopenid.com. This OpenID can be used at some websites that have implemented this facility. More websites are expected to have this option in the future.
By using an OpenID, I do not have to provide a login name and password to the "relying website". They will accept my OpenID.
Apart from the service provider that I happen to use, there are many other websites a similar facility.
By using an OpenID, I do not have to provide a login name and password to the "relying website". They will accept my OpenID.
Apart from the service provider that I happen to use, there are many other websites a similar facility.
Investing in High Yielding Bonds
I read an interesting paper on the credit spreads from this website.
During a recession, the credit spread for a high yielding bond can widen to 10%. In good times, it can drop to 3%. This is for the US market.
If you buy a high yielding bond when the credit spread is 10%, you will be able to enjoy a 50% appreciation (my estimate) over a few years, when the credit spread narrows to 3%.
There is the risk that some of these bonds will fail. According to the paper, the risk represents only a proportion of the spread.
Conversely, if you buy a high yielding bond now (at a low credit spread), you stand the chance of losing 33% of your investment during a recession (due to the widening of the credit spread).
Lesson 1: The credit spread is too low now. You are not getting a sufficient reward for the risk. It is better to invest in government bonds.
Lesson 2: In a recession, when the credit spread is high, invest in a fund of high yielding bonds. You diversify the risk and enjoy a good yield (and high credit spread).
During a recession, the credit spread for a high yielding bond can widen to 10%. In good times, it can drop to 3%. This is for the US market.
If you buy a high yielding bond when the credit spread is 10%, you will be able to enjoy a 50% appreciation (my estimate) over a few years, when the credit spread narrows to 3%.
There is the risk that some of these bonds will fail. According to the paper, the risk represents only a proportion of the spread.
Conversely, if you buy a high yielding bond now (at a low credit spread), you stand the chance of losing 33% of your investment during a recession (due to the widening of the credit spread).
Lesson 1: The credit spread is too low now. You are not getting a sufficient reward for the risk. It is better to invest in government bonds.
Lesson 2: In a recession, when the credit spread is high, invest in a fund of high yielding bonds. You diversify the risk and enjoy a good yield (and high credit spread).
Difference between ILP and par fund
Hi Mr Tan,
I have read your useful explanation about the par fund. It seems that the policyholder is at the mercy of the insurance company. If the par fund has high expenses or reduces the bonuses, the policyholder has no choice.
Is there a better option for the investor?
--------------------
REPLY:
It is better to invest in an investment linked fund (ILP) or a unit trust. The fund manager can only spend up to the specified charges in the fund. These charges are transparent and have to be reported.
Due to its transparency, the charges have to be reduced (due to competition). This helps the investor to enjoy lower charges and get a better return.
A ILP or unit trust is likely to give a better return to the investor, compared to a par fund.
I have read your useful explanation about the par fund. It seems that the policyholder is at the mercy of the insurance company. If the par fund has high expenses or reduces the bonuses, the policyholder has no choice.
Is there a better option for the investor?
--------------------
REPLY:
It is better to invest in an investment linked fund (ILP) or a unit trust. The fund manager can only spend up to the specified charges in the fund. These charges are transparent and have to be reported.
Due to its transparency, the charges have to be reduced (due to competition). This helps the investor to enjoy lower charges and get a better return.
A ILP or unit trust is likely to give a better return to the investor, compared to a par fund.
Investing your CPF savings
COMMENT IN MY BLOG:
None is safer than leaving your money in the CPF. This has been proven again and again and again.
When CPF opened up for purposes other than its original objectives it was a big mistake. It opened up because members wanted it. Members thought they were savvy and cleverer at investing than the CPF, instead what a mess they have made to their hard earned money. Many today do not have enough to set aside for minimum sum in the retirement account. What do you think are the reasons? Who benefited from all these changes? Definitely not the administrator and the members!
The so called investment advisors; the insurance agents; the stock brokers,the product manufacturers, the market makers etc; for these people CPF is a gold mine. When things go awry there will be a lot of finger pointing, except ourselves. Scapegoats? Maybe CPF when it closes up again in the future.
------------------------------------------------
REPLY:
I agree that the liberalisation of CPF investments had produced poor results for the investors during the earlier years, as the stockmarket performed badly. This is compounded by the high expenses in the products (as you have pointed out).
In recent years, the stockmarket had performed well. It had given a good return to the investors, including those who invested their CPF savings.
The CPF investment scheme allows the members to invest their savings in equity and bond funds, to earn a better return than the interest rate of 2.5% paid by the CPF. You now have the choice of choosing a low cost, well diversified fund.
None is safer than leaving your money in the CPF. This has been proven again and again and again.
When CPF opened up for purposes other than its original objectives it was a big mistake. It opened up because members wanted it. Members thought they were savvy and cleverer at investing than the CPF, instead what a mess they have made to their hard earned money. Many today do not have enough to set aside for minimum sum in the retirement account. What do you think are the reasons? Who benefited from all these changes? Definitely not the administrator and the members!
The so called investment advisors; the insurance agents; the stock brokers,the product manufacturers, the market makers etc; for these people CPF is a gold mine. When things go awry there will be a lot of finger pointing, except ourselves. Scapegoats? Maybe CPF when it closes up again in the future.
------------------------------------------------
REPLY:
I agree that the liberalisation of CPF investments had produced poor results for the investors during the earlier years, as the stockmarket performed badly. This is compounded by the high expenses in the products (as you have pointed out).
In recent years, the stockmarket had performed well. It had given a good return to the investors, including those who invested their CPF savings.
The CPF investment scheme allows the members to invest their savings in equity and bond funds, to earn a better return than the interest rate of 2.5% paid by the CPF. You now have the choice of choosing a low cost, well diversified fund.
Switch to lower level of risk
Dear Sir
I have been investing $200 monthly in NTUC Income Growth fund since 2005. I know that this is a good fund for long term investment. However, I think the world-wide equity market will not do well in 2008.
Should I switch from Growth to Conservative or Singaore Bond or Global bond fund? I do not wish to terminate this investment because a substantial portion of my money goes to the managment fee, early termination will create a hugh lose.
Can bond fund really protect my $ when world-wide equity market doing badly? Or should I just terminate this investment now at a lose?
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REPLY:
It is all right to stay invested. It is all right to switch to the Conservative Fund, Singapore Bond Fund or Global Bond Fund to reduce the level of risk and realise some profit.
I have been investing $200 monthly in NTUC Income Growth fund since 2005. I know that this is a good fund for long term investment. However, I think the world-wide equity market will not do well in 2008.
Should I switch from Growth to Conservative or Singaore Bond or Global bond fund? I do not wish to terminate this investment because a substantial portion of my money goes to the managment fee, early termination will create a hugh lose.
Can bond fund really protect my $ when world-wide equity market doing badly? Or should I just terminate this investment now at a lose?
---------------------
REPLY:
It is all right to stay invested. It is all right to switch to the Conservative Fund, Singapore Bond Fund or Global Bond Fund to reduce the level of risk and realise some profit.
Sunday, July 01, 2007
Monitor bond and money market yields
Do you know how to keep track of the yields on bonds, deposits and the money market?
You can search the Financial database at the the MAS website. The website is well designed. It is easy and fast to navigate.
You can find out the current interest rates, and also the changes during the past months.
You can search the Financial database at the the MAS website. The website is well designed. It is easy and fast to navigate.
You can find out the current interest rates, and also the changes during the past months.
Rating of CPF approved funds
COMMENT POSTED IN MY BLOG
Mr Tan, someone like yourself needs to tell the guys at CPF exactly that a fund is safer than buying a stock.
The guys at CPF are wasting money getting the fund rated by Mercer. This indirectly means that consumers wil end up paying for something that is actually better for the average conservative investor.
It is bizzare that CPF allows someone to buy up to their stock limit in one stock while "worry" about someone buying into a fund.
The CPF guys are either trying to protect themeselves by getting the fund mangement company to pay Mercer so that Mercer can be used as a scapegoat if something goes wrong.
----------------
REPLY:
Not all funds are well diversified and safe. It is necessary for the fund to be rated. This is why CPF appointed Mercer to do the rating.
Mr Tan, someone like yourself needs to tell the guys at CPF exactly that a fund is safer than buying a stock.
The guys at CPF are wasting money getting the fund rated by Mercer. This indirectly means that consumers wil end up paying for something that is actually better for the average conservative investor.
It is bizzare that CPF allows someone to buy up to their stock limit in one stock while "worry" about someone buying into a fund.
The CPF guys are either trying to protect themeselves by getting the fund mangement company to pay Mercer so that Mercer can be used as a scapegoat if something goes wrong.
----------------
REPLY:
Not all funds are well diversified and safe. It is necessary for the fund to be rated. This is why CPF appointed Mercer to do the rating.
Maybank's Regal Structured Deposit
Larry Haverkamp has a new posting on his blog. It talks about the pros and cons of structured deposits. As an example, he looks at a recent one -- Maybank's "Regal Structured Deposit". It links your returns to Palm oil prices which have been booming.
Note: Read Dr Money's conclusion. He said, "if you want a better return (and still safe), you can invest in the money market fund". There is no need to invest in a complicated product.
Note: Read Dr Money's conclusion. He said, "if you want a better return (and still safe), you can invest in the money market fund". There is no need to invest in a complicated product.
Ideal structure of an investment fund
What is the ideal structure of an investment fund for long term investments? Is it an indexed fund?
REPLY:
Here is my concept. The ideal structure has the following features:
* no upfront sales charge (except for a modest transaction fee)
* low fund management fee
* low expense ratio
* preferably an indexed fund, but with a certain margin to deviate from the index
It should be cheaper to invest in a fund, compared to buying a stock on the exchange.
The fund management company can cover its expenses and make a modest profit from the management fee. If the fee is high, the investor has the right to withdraw from the fund and invest elsewhere. This ensures that the fund will always be operated efficiently, for the benefit of its investors.
REPLY:
Here is my concept. The ideal structure has the following features:
* no upfront sales charge (except for a modest transaction fee)
* low fund management fee
* low expense ratio
* preferably an indexed fund, but with a certain margin to deviate from the index
It should be cheaper to invest in a fund, compared to buying a stock on the exchange.
The fund management company can cover its expenses and make a modest profit from the management fee. If the fee is high, the investor has the right to withdraw from the fund and invest elsewhere. This ensures that the fund will always be operated efficiently, for the benefit of its investors.
Fair treatment of policyholders
Hi Mr Tan,
I read your blog about the new regulation on the par fund. How can the policyholder ensure that they are fairly treated? Is it fair for the fund to reduce the bonus in bad times, and take a long time to restore the bonus? Is this fair?
To your credit, NTUC was quite fast to restore its bonus rates when you were there as CEO. Will they continue to treat the policyholders fairly?
--------------------------------
REPLY:
NTUC Income is a cooperative society. When I was the CEO, I ensured the following:
* the fund is invested to earn an attractive return, at an acceptable risk level
* the expenses are kept at a low level
* 98% of the surplus is kept for the policyholder (shareholders take only 2%)
This is why NTUC Income was able to declare better bonus rates compared to other insurance companies. The return is much higher.
Many insurance companies spend too much money on the following:
* paying high commission and sales contests to advisers and agency managers
* advertising their products aggressively
* paying high salaries and other expenses
These expenses come out of the par fund, and will ultimately reduce the return to the policyholders. This is not fair to the policyholders. However, the policyholders do not have much choice, as they are stuck with their contract for many years.
I hope that the new regulations on the par fund will help to reduce this problem. (But, it may take a long time for the results to show).
I read your blog about the new regulation on the par fund. How can the policyholder ensure that they are fairly treated? Is it fair for the fund to reduce the bonus in bad times, and take a long time to restore the bonus? Is this fair?
To your credit, NTUC was quite fast to restore its bonus rates when you were there as CEO. Will they continue to treat the policyholders fairly?
--------------------------------
REPLY:
NTUC Income is a cooperative society. When I was the CEO, I ensured the following:
* the fund is invested to earn an attractive return, at an acceptable risk level
* the expenses are kept at a low level
* 98% of the surplus is kept for the policyholder (shareholders take only 2%)
This is why NTUC Income was able to declare better bonus rates compared to other insurance companies. The return is much higher.
Many insurance companies spend too much money on the following:
* paying high commission and sales contests to advisers and agency managers
* advertising their products aggressively
* paying high salaries and other expenses
These expenses come out of the par fund, and will ultimately reduce the return to the policyholders. This is not fair to the policyholders. However, the policyholders do not have much choice, as they are stuck with their contract for many years.
I hope that the new regulations on the par fund will help to reduce this problem. (But, it may take a long time for the results to show).
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