Thursday, December 17, 2009
Economics and financial planning
There are two schools of thought in managing the economy. Some economists believing in managing demand and let supply follow demand. Other economists believe in managing the supply and let demand follow supply.
There is a similar choice in financial planning. Many financial planners believe in getting the client to establish the goals, from which the financial plan can be developed. I find this approach to be not suitable, as the client is likely to set goals that are too high, and will setting aside savings that they cannot afford, based on their earning capacity.
I prefer to work on the earning capacity and allocate the proportion to be used for current expenses and the remainder for the future, which includes the purchase of a residential property for own occupation. Based on my analysis, a typical allocation is 50% for current expenses, 25% for property and 25% for retirement. This benchmark allocation should apply to most working families.
If a family has special needs, they may modify the allocation to suit their own situation, but the starting point should be to consider the financial plan based on this benchmark. For example, a high income earnings may be able to set aside a larger allocation for the future, while a low income earner may have to set aside a bigger allocation for current expenses.
The allocation for the future includes the combined contribution (of employer and employee) to the Central Provident Fund. The current combined contribution is 34.5% for most workers. To achieve the benchmark of 50%, the worker has to set aside 15.5% in a personal savings plan. This concept is explained in my book on financial planning.
Tan Kin Lian
There is a similar choice in financial planning. Many financial planners believe in getting the client to establish the goals, from which the financial plan can be developed. I find this approach to be not suitable, as the client is likely to set goals that are too high, and will setting aside savings that they cannot afford, based on their earning capacity.
I prefer to work on the earning capacity and allocate the proportion to be used for current expenses and the remainder for the future, which includes the purchase of a residential property for own occupation. Based on my analysis, a typical allocation is 50% for current expenses, 25% for property and 25% for retirement. This benchmark allocation should apply to most working families.
If a family has special needs, they may modify the allocation to suit their own situation, but the starting point should be to consider the financial plan based on this benchmark. For example, a high income earnings may be able to set aside a larger allocation for the future, while a low income earner may have to set aside a bigger allocation for current expenses.
The allocation for the future includes the combined contribution (of employer and employee) to the Central Provident Fund. The current combined contribution is 34.5% for most workers. To achieve the benchmark of 50%, the worker has to set aside 15.5% in a personal savings plan. This concept is explained in my book on financial planning.
Tan Kin Lian
Torchlight for travellers
I took the rechargeable torchlight with me for my tour of China. I stayed in 5 hotels over the 8 days. I had to change a hotel almost every day.
The layout of every hotel room is different and the switches are complicated. It is difficult to find the correct switch to turn on at night. The torchlight came in very handy. The locator light help me to find the torchlight in the dark. I use the torchlight to see the labels on the swtiches or to find my watch or other items that I needed.
This torchlight is very useful when you travel.
The layout of every hotel room is different and the switches are complicated. It is difficult to find the correct switch to turn on at night. The torchlight came in very handy. The locator light help me to find the torchlight in the dark. I use the torchlight to see the labels on the swtiches or to find my watch or other items that I needed.
This torchlight is very useful when you travel.
Why big banks are bad for the economy
Read this article. Here are some key points:
a) The big banks want to pay back the bailout money to be free of the pay caps and other restraints.
b) Their profits still come mostly courtesy of taxpayers. Their trading earnings are financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets are collateral.
c) They benefit from immense federal loan guarantees, but they are not lending much. Lending to business is very tight.
d) The whole system has grown more concentrated, as many big banks have taken over other banks. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.
a) The big banks want to pay back the bailout money to be free of the pay caps and other restraints.
b) Their profits still come mostly courtesy of taxpayers. Their trading earnings are financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets are collateral.
c) They benefit from immense federal loan guarantees, but they are not lending much. Lending to business is very tight.
d) The whole system has grown more concentrated, as many big banks have taken over other banks. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.
Future jobs in America
This article explains the future jobs that will grow in America. The industries are:
full service restaurants
local government
employment services
nursing care services
office of physicians
general merchandise stores
computer system services
home health care services
services for elderly and disabled
consulting services.
Many of these trends will apply to Singapore.
full service restaurants
local government
employment services
nursing care services
office of physicians
general merchandise stores
computer system services
home health care services
services for elderly and disabled
consulting services.
Many of these trends will apply to Singapore.
Collapse of Pinnacle Notes Series 3
Hi Mr Tan,
Just when the public thought the toxic structured products saga has been settled, another one of the Morgan Stanley's Pinncale Notes Series has gone into mandatory redemption. Hong Leong Finance, one of 7 distributors of the Series 3 has informed me(see attached)that there is a mandatory redemption event and investors will lose all or substantially all their original principle invested. This happened not because of a reference entity like Lehman has collapsed but simply because the Notes have invested in a lot of unknown companies that have now defaulted.
Many S'pore investors are just being told of this shocking Christmas present and more bad news may come as Series 2 and 6 are also sinking.
Please post this in your blog as the creator and distributor of this product should not be allowed to get away with this. They used big corporate names as Reference entities to misled public into investing the product but actually invested something else!
Just when the public thought the toxic structured products saga has been settled, another one of the Morgan Stanley's Pinncale Notes Series has gone into mandatory redemption. Hong Leong Finance, one of 7 distributors of the Series 3 has informed me(see attached)that there is a mandatory redemption event and investors will lose all or substantially all their original principle invested. This happened not because of a reference entity like Lehman has collapsed but simply because the Notes have invested in a lot of unknown companies that have now defaulted.
Many S'pore investors are just being told of this shocking Christmas present and more bad news may come as Series 2 and 6 are also sinking.
Please post this in your blog as the creator and distributor of this product should not be allowed to get away with this. They used big corporate names as Reference entities to misled public into investing the product but actually invested something else!
Authority has to act to stop investment scams
Mr Tan
I note that in the Madoff case the prosecutors are considering prosecuting the programmers and perhaps the heads of the feeder funds. Presumably this is on the basis that they must have been aware that
something was not right but did nothing about it. They also took huge payments for supporting a scam..
It takes many parties to operate a scam. I am often amazed that when investment schemes fail that the sales people and agents blame the owners. The owners blame the agents and salepeople. All parties claim
complete innocence of any wrong doing. With some of the investment schemes such as land banking plots, various oil Investment schemes, sunshine investments etc it is obvious that many people involved know
that the investment scheme cannot work but choose to be involved anyway.
These people enable the scam and give it credibility by their involvement.
Singapore has a reputation for providing rigourous punishment to a few individuals to discouorage anti-social or criminal behaviour by the rest of the population. As an example:- jail sentences being applied
for using mobile phones while driving.
Perhaps applying very stiff penalties to one or two company directors, sale people and agents for their involvement in fraudulent investment schemes would encourage others to think more carefully about what they
allow themselves to be involved in and earn commission for.
REPLY
I agree with your views. I am unhappy with the passive response of the Authority in Singapore towards these investment scams. I will do my best to argue the case for the Authority to be more actively involved in stopping these scams.
Minimum wage and employment
Paul Krugman argued that cutting the minimum wage will not increase employment. Here are his reasons. I agree with his thinking.
Impact of Sichuan Earthquake in 2008
Sichuan suffered a big drop in tourism revenue for the past 12 months. Tourist visits to Sichuan dropped significantly after the earthquake. It is only starting to recover. My tour guide said that he looked after only three tour groups during the past 12 months.
My group was able to get the top class hotels as pack of the package for an affordable price. It is a good time to visit Sichuan as the cost is still low and the service is excellent. Sichuan has excellent natural landscapes, sceneries, mountains, waterfalls and rivers. Tourism is an important part of its economy.
My group was able to get the top class hotels as pack of the package for an affordable price. It is a good time to visit Sichuan as the cost is still low and the service is excellent. Sichuan has excellent natural landscapes, sceneries, mountains, waterfalls and rivers. Tourism is an important part of its economy.
Visit to Sichuan, China
I visited Sichuan China for the past 10 days from 9 to 16 December. I was not able to update my blog during this period as Blogspot is still blocked in China. I shall be writing about some interesting observations from my visit.
Tuesday, December 08, 2009
Rechargeable torchlight with locator light
Here is a photo of the rechargeable torchlight with the locator light turned on.It is easy to locate the torchlight at night to visit the bathroom or kitchen for a drink of water.
You do not need to turn on the main lights and waste electricity.
In an emergency or power failure, you can find the torchlight easily.
It takes 12 hours to charge the battery and can last for about two weeks, based on light usage.
This special feature of a locator light was designed by me and produced to my specification.
The torchlight sells for $6.50 and can be bought from my office ($5.50 for purchase of 5 or more pieces). Office open Mondays to Fridays, 9 am to 6 pm. (The price will be revised to $8 from 2010 when this is made available at the retail outlets).
Delivery can be made to your address for a delivery charge of $7. You can get several friends to buy the torchlight together and share the delivery cost.
Poor return on special funds
A customer was advised to invest a large single premium in an investment linked product in 2007. He was not clear about the investment. The cash value is now only 55% of the invested sum. I was surprised that the value is so low, as the stock market must have dropped only 20% during this period. I learned later that he was advised to invest in a some special funds.
The public should be careful about these types of special funds, which have high charges and low transparency, and generally perform worse than the broad market. It is better to take the market risk and invest in the STI exchange traded fund.
The public should be careful about these types of special funds, which have high charges and low transparency, and generally perform worse than the broad market. It is better to take the market risk and invest in the STI exchange traded fund.
Lock up for 2 years at low return
Someone asked for my views about a 2 year insurance product that offers a return of 1.5% per annum. I felt that this return was rather low for the investment to be locked up. My preference is to keep the money in cash (earn 0.5% per annum) and wait for better investment opportunities.
Use of Medisave for health screening
Minister for Health Khaw Boon Wan said that the Government is considering to allow Medisave to be used for health screening, but needs some safeguards to be in place to prevent abuses.
A good safeguard is to set a cap on the amount that can be withdrawn for health screening, to be used once every three years. Within this cap, the medical facilities will compete to provide the best packages that is available. Independent experts can comment on the usefulness of these packages. Consumers who wish to spend more can still use their own money, and not draw down on Medisave.
A good safeguard is to set a cap on the amount that can be withdrawn for health screening, to be used once every three years. Within this cap, the medical facilities will compete to provide the best packages that is available. Independent experts can comment on the usefulness of these packages. Consumers who wish to spend more can still use their own money, and not draw down on Medisave.
Temasek 20 and 30 year bonds
Temasek Holdings has issued 20 and 30 year bonds paying a coupon rate of 4% and 4.2% respectively. Based on the issue price (which is slightly below par), the bonds offer a slightly higher yield of 4.149% and 4.37% respectively.
Temasek Holdings has a AAA rating from S&P and Aaa rating from Moody's. These are the highest rating available for bonds. The credit risk is as low as government bonds.
However, there is the risk of a change in interest rate. If a 20 year bond yields 4% and the interest rate for this duration increases to 5%, the prices of the bonds will drop by 8.4% If the interest rate increases to 7% (due to high inflation), the price of the bonds will drop by 28%. When you invest in a long term bond, your return is locked up for this period. You only suffer a capital risk if you decide to sell off the bonds prematurely on the market.
The bonds will refund the principal in full at the maturity date, i.e. the end of the period.
For retirees who wish to have an regular income of a higher yield over 20 and 30 years, this is a good choice. Many insurance companies invest in these type of bonds, but they take away 2% from their policyholders, giving a net yield that is much lower. It is better for the retiree to invest directly in these bonds.
I have asked my bank and stockbroker to tell me how these bonds can be purchased. I will post the findings later.
Tan Kin Lian
Temasek Holdings has a AAA rating from S&P and Aaa rating from Moody's. These are the highest rating available for bonds. The credit risk is as low as government bonds.
However, there is the risk of a change in interest rate. If a 20 year bond yields 4% and the interest rate for this duration increases to 5%, the prices of the bonds will drop by 8.4% If the interest rate increases to 7% (due to high inflation), the price of the bonds will drop by 28%. When you invest in a long term bond, your return is locked up for this period. You only suffer a capital risk if you decide to sell off the bonds prematurely on the market.
The bonds will refund the principal in full at the maturity date, i.e. the end of the period.
For retirees who wish to have an regular income of a higher yield over 20 and 30 years, this is a good choice. Many insurance companies invest in these type of bonds, but they take away 2% from their policyholders, giving a net yield that is much lower. It is better for the retiree to invest directly in these bonds.
I have asked my bank and stockbroker to tell me how these bonds can be purchased. I will post the findings later.
Tan Kin Lian
Poor yield on life insurance policy
A policyholder paid premium for 21 years under a whole life policy and obtained a surrender value that represented a yield of less than 2%. The insurance had advertised an actual yield of more than 5% for other products of similar durations.
The policyholder was unhappy with the poor yield on his policy and asked for an explanation. He was told that it was due to the specific type of product, which provided high coverage. In my view, this should not account for the large difference in the yield.
It is likely that this policy was given a lower yield due to the restructuring of the bonus. As the bonus varies for each policy, it was difficult for the policyholder to know if he had been given a fair rate of return.
The policyholder was unhappy with the poor yield on his policy and asked for an explanation. He was told that it was due to the specific type of product, which provided high coverage. In my view, this should not account for the large difference in the yield.
It is likely that this policy was given a lower yield due to the restructuring of the bonus. As the bonus varies for each policy, it was difficult for the policyholder to know if he had been given a fair rate of return.
Monday, December 07, 2009
Profit of health insurers
A senator in the US wants to cap the profit of health insurers. Read this article.
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