Saturday, June 23, 2007

Global stockmarkets

There are two important developments on Friday on the global stockmarkets:

* The China stockmarket came down 3%, due to fear of new measures by the government authority to cool the market

* The US stockmarket came down by more than 1%, due to worries about the subprime mortgages and Bear Stearnes fund.

Will this be the start of an overdue correction?

For those who invest for the long term, there is no need to worry about this type of market correction (if it comes). However, for those who are investing for the short time, you should pay special attention to the development for the next week.

Financial Adviser in Australia

The financial adviser in Australia play a useful role in helping the client to save money on:

* income tax
* superannuation (ie to save for retirement)

The tax system in Australia is complicated. The adviser help the client to arrange the financial affairs to get the best tax saving. The client his happy to pay for the advice, as it is more than covered by the tax saving.

In Singapore, there is little tax saving for most people. Hence, the financial adviser cannot give this value to Singapore clients.

The adviser can help the client to choose the right product. Unfortunately, the adviser gets a commission that is built into the product. This adds to the cost paid by the client. The value added by the adviser is doubtful, as it is impossible for any expert to advise on the fund or product will perform better in the future.

Lesson: Invest in a low cost fund (where you pay less charges to the fund manager and adviser). Invest for the long term.

Read in this FAQ.

Look after the interest of ordinary people

I watched an interview with a US Senator on television.

He argued the case for a change in some tax code, so that "the tax can be applied fairly to all". He said that it is his duty to reflect the wishes of his constitutents in the legislation that is being passed in Congress.

In the globalised economy, it is important that there should be voices to look after the interest of the ordinary people. The US system of democracy appears to handle this matter quite well. The issues that affect the ordinary people are brought up and aired in the Congress.

Importance of savings - a view from an elderly person

I met an elderly person. He told me about his approach towards financial matters, when he was young. I wish to share his thoughts:

* I realise the importance of savings when I was young
* When my friends spend their money on holidays, I keep them as my savings
* I bought property at that time, when it was cheap
* I own a few properties over the years, which appreciated in value
* The savings give me the confidence to do things on my own
* Many young people over-spend and had debts on their credit cards. It is stressful to be pressed to pay these debts.

Improve the call center of the Telcos

Dear Mr Tan

NTUC Income has a good call center. The customer does not need to push any button to speak to a staff. Why don't you get the call center of Starhub and SingTel to follow this customer friendly approach?



I will be happy to give some suggestions to them, if they are willing to listen.

I know that they have already invested a large sum of money to install their telephone system. But, I have an idea to help them to make a change, with minimal expense.

I believe that the cost of handling a customer enquiry will still be the same under my new approach, and the customer satisfaction level can be improved considerably.

Perhaps, the customers should tell these companies to improve their services.

Improve the public transport now (not later)

There is a letter published in the Straits Times. The writer argued that we should improve the public transport now, rather than later.

I agree. I suggest the following approach:

* get more trains to run on the MRT lines
* provide feeder services to bring people to the MRT stations and bus terminus
* run express bus services (with few stops) between the major towns
* build a second level to the Central Expressway and the Pan Island Expressway
* allow more operators to run the feeder services, using light buses (like Hong Kong)

My basic approach is:

* do the easy things (like what has been suggested)
* do it now

The government decided to improve the road network by building the Kallang Paya Lebar Expressway. But it is taking too long, more than 10 years. It is still not ready.

I guess that it will take 3 to 5 years to build a second level to an existing expressway.

Does Land Transport Authority listen to the public?


Mr Tan,

Any idea what is stopping LTA from implementing those simple ideas you have mentioned. These proven ideas had been urged and discussed by the public 15 years ago, - the efficient light feeder buses in Hk s one of them, the faster MTR in HK is another efficient service. But it seems our LTA always seems ignore pulbic advise. They turn left when you tell them to turn right. They went their own way, and now 15 years later, the transport is not economical anymore, and even worse, not efficient at all.

Like everyone said,- they should Listen to your customers first. They dont have to think so hard as customers feedbacks are enough of solutions to solving the transport woes.

They should not waste anymore time wasting taxpayers money that goes against the feedback of customers.

They should overhaul their internal problems. They should be overhaul to listen and be more responsive to the needs of customers, the commuters.

It is not worth employing high-paying expert who does not live in Singapore nor take a bus at all.

Thursday, June 21, 2007

Invest in a unit trust


The Ideal plan from NTUC Income is a regular-premium ILP. These kinds of products (including the ones from NTUC Income) have extremely high expense ratios compared to Unit Trusts and ETFs.

Before you decide to invest, remember to ask Income to quote you the expense ratio and compare it to a regular-saving Unit Trust.

You can check the FAQ of the Ideal plan. The plan charges 15% of the savings for the first 3 years and that's not including the loads and management expenses.

This is definitely a bad deal compared to a Unit Trust.



If you can find a unit trust that accept regular savings that can be invested in a fund with low initial and annual charge, you can send them to me.

I understand that most unit trust have high annual charges and expense ratios (which include a trailer fee payable to the financial adviser).

But, if there is really a low cost unit trust, it will be great for consumers. And I shall be happy to recommend it.

Invest in an index fund

Hi Mr Tan,

I am 30 years old and I have been searching for investment which suits my risk appetite. I finally found your blog and I am quite impressed with index fund. Could you tell me more about it and how to invest in this fund?

My ideal index fund is
1. Global equity which is well diversified.
2. Low sale and annual charge.
3. Modest dividend


The closest to an index fund that you can invest now is the ST Tracker Fund that you can buy from the stockmarket. The only problem is that the Singapore stockmarket is at a high level now.

You can read my views in this FAQ.

If you are investing your monthly savings for the next 30 years, you can consider the Ideal plan from NTUC Income. You can invest in the Balanced or the Growth fund. Although it is not an index fund, the charges are among the lowest available in Singapore.

I will ask X to advise you.

Difference between Logic9 and Sudoku

Dear Mr Tan

I find that a difficult puzzle in Logic9 is easier to solve, compared to Sudoku, even though the number of initial blanks are about the same. I find Logic9 more enjoyable. Can you explain the difference between Logic9 and Sudoku?



Logic9 follows the same rules as Sudoku. You have to fill in the blanks with the numbers 1 to 9 so that it does not repeat in every row, column or box (3X3 squares). This puzzle is printed daily in Today (as Sudoku Plus) and MyPaper (as Logic9).

When I generate a difficult puzzle, I make sure that it has a unique, logical solution. If you follow the right steps, you will be able to solve any difficult puzzle. This is why my puzzles are quite enjoyable to solve for people who like to think logically.

You can find out more about Logic9 here.

If you buy the Logic9 book, you will get 4 tips on how to solve the puzzles, including the difficult level. The booklets are available from many bookstores listed in the website.

Learn Logic9 (Sudoku) at Prime of Life Exhibition

I shall be demonstrating Logic0 (Sudoku) at the Prime of Life Exhibition to be held at 13 to 15 July at Millenia Walk.

The demonstration will be held in the afternoon of 13 and 14 July and the morning of 15 July.

At the demonstration, I shall be teaching three tips on how to solve the difficult puzzles. This will take 20 minutes. After that, the participants have the chance to take part in a contest to win prizes.

Here are the advantages of learning Logic9:

* it is fun, especially when you know how to solve the puzzle!
* keeps your mind alert (and keep alzheimer away)
* attendees at my past talks enjoyed my tips!

The exibition is targeted at the older people, aged 45 and older. More details will be announced by the organiser in due course. Watch out for the newspaper advertisements.

Travel Insurance Claims

1) Does the insurance company factor in the inflated claims in calculating the premium rate?

Reply: The insurance company uses the claim experience to determine the premium rate. This usually includes a certain proportion of fraudalent claim. If there are more fraudulent claims, the insurance company makes a loss. They will increase the premium rate to cover the loss.

2) Can the insurance company mark a "ceiling" on the claim amount in case of loss of bag during travel, rather than approve the amount submitted by the claimant?

Reply: For some type of loss, there is a limit specified in the policy. Usually this limit is quite high, and there is room for fraudulent claims up to this limit. It can still be quite costly, if many people make fraudlent claims.

Inflated Claims on Travel Insurance

A friend told me that it is now quite common for Singaporeans to make inflated claims on their travel insurance policy. They lose a bag for (say) $200 and they make a claim for $800 on a false invoice.

These claimants do not realise that they are committing a crime of cheating, and can lead to quite severe punishment. It is not worth making such a false claim.

The inflated claims will also cause insurance companies to raise their premium rates for travel insurance. This will not be fair to the honest policyholders who do not make inflated claims.

Target savings at retirement

How much savings do you need at the time of retirement?

Here is my rule of thumb:

* calculate the annual sum that you need to cover your living expenses
* multiply it by 25 times


* you retire today
* you have a fully paid home
* your children are all grown up
* you need $1,000 a month for your living expense
* you will need a capital sum of 25 X 12 X $1,000 = $300,000

You can invest 80% of the capital sum (say $240,000) to buy a life annuity (which is likely to give you $1,000 a month, but it depends on your age) and keep the remaining 20% ($60,000) as a contingency fund.

If you retire in 10 years time, you need to add inflation to the target sum at the rate of (say) 2% per year. If your target sum is $300,000 today, it will have to be $366.000 in 10 year's time.

Read this FAQ on Life Annuity.


Source: Wikipedia

Retirement is the point where a person stops employment completely.

A person may also semi-retire and keep some sort of job, although usually out of choice rather than necessity. This usually happens upon reaching a determined age, when physical conditions don't allow the person to work any more (by illness or accident), or even for personal choice (usually in the presence of an adequate pension or personal savings).

The retirement with a pension is considered a right of the worker in many societies, and hard ideological, social, cultural and political battles have been fought over whether this is a right or not. In many western countries this right is mentioned in national constitutions.

Buy Insurance For A Discount

Dear Mr Tan,

I went to NTUC Income to purchase Enhanced Incomeshield with cash rider for my whole family.

I wanted to purchase the policy directly, instead of going through an agent, and to get a discount. But since you left the organisation, it seem to withdraw this benefit.

After discussion with my wife, we decided to leave the place without purchasing the policy as we find no benefit of purchasing without any discount.

We might as well ask for an agent in case we need service in the future to make a claim. Do you have any good agent to recommend for me who will look after our long term benefit?



I will get X to assist you.

Financial Planning for Teachers

I have been invited to give a talk on financial planning for teachers. For those who are not able to attend my talk, you can read about my tips here

Financial Planning for the Young
Financial Planning for Senior

Hong Kong's public transport system


Hong Kong’s public transport network seems more well-connected and three-dimensional, consisting of railway, MTR, tram cars, bus, minibuses, taxi, ferries, etc; all these are viewed as convenient transportation means for residents. Hong Kong and Beijing' MRT interval seems to be 2 or 3 minutes only. Actually buses carry largest volume of passages in many large cities. "Public transit first" and public bus ways is also common in Hong Kong, Paris and Beijing, etc.

An interesting thing is, Hong Kong people seems more to enjoy the walking, I often see lots of people walking along lanes or walking-skyway in HK island, while Singaporeans seem less willing to walk, with walking-way system everywhere.

What is Research?

This is a hot subject for all those who are involved or want to be involved in Research as their occupation, profession or career. Research is getting very important in our increasingly competitive world.

Dr. Lee Kum Tatt has vast experience in these activities in his life. He is going to share with us his thoughts on this subject using special cases as his illustrations. Read some of the interesting stories of how research has helped him and others.

Difficult life of a taxi driver in Singapore



I refer to the post of your blog regarding grouses of taxi drivers in Singapore.

One thing I understand is that KL taxi drivers actually own the taxi after repaying off the whole amount. And more so happy when they costs the same as a Singapore taxi but in RM$. They do not have to answer to anyone.

In Singapore, a normal taxi costs about $60K+. The hirer has to pay rental of $90 on average everyday. After 2 full years, the costs of the taxi can be recovered back but the poor hirer still continue to pay rental to the company. He does not own the taxi. He is still working for the company. Worse still, there are no benefits like MC, CPF, leave, bonus,etc. & has to work like a slave to earn more than $90 per day so as to make an earning. There is no freedom. If the driver wants to rest by taking offday, he still has to pay rental.

Thus how can the Singaporean taxi driver be happy?

I personally feel taxi drivers in Singapore are a bunch of pitiful people.

Make my blog more interesting

Someone complained that I have censored his comments in my blog. In his case, the statement is not correct. I posted his comment into the main page of my blog and separated a paragraph into two (to make it easier to read). His original comment remained in my blog.

I do have the ability to censor a comment in my blog. I will do it under the following situations:

* where the comment is offensive to another person
* where it is defamatory
* where it has a mischievous intent

So far, I have not found the need to use this censorship power (except for a rare occasion long ago).

I respect the views of other people, even if they differ from my views. I only ask that they express the view in a respectful manner.

When I copy someone's comment into the main page of my blog, I observe the following principles:

* I may edit the comment to be briefer and clearer (only if necessary)
* The original message is kept intact
* I do not quote that person's name (unless I have his or her permission)
* I may change some details to avoid that person being identified by his friends

I hope to receive views and comments from readers for posting into my blog. It becomes more interesting, if it is contributed by several people (and not just my views).

Strange simple English

Someone described my writing as "strange simple English". A few other people told me that they find my views to be easy to understand.

I observe the following:

* use short sentences
* use simple language
* write like I speak
* write in a positive manner

For example, I do not say "not bad". I say "good".

Universal ID - now known as OpenID

I posted a suggestion to create a universal ID. Someone said that this idea is now being worked on, as "OpenID".

Here is the description from Wikipedia:

OpenID is a decentralized single sign-on system. Using OpenID-enabled sites, web users do not need to remember traditional authentication tokens such as username and password. Instead, they only need to be previously registered on a website with an OpenID "identity provider", sometimes called an i-broker. Since OpenID is decentralized, any website can employ OpenID software as a way for users to sign in; OpenID solves the problem without relying on any centralized website to confirm digital identity.

OpenID is increasingly gaining adoption among large sites, with organizations like AOL acting as a provider. In addition, integrated OpenID support has been made a high priority in Firefox 3[1] and Microsoft is working on implementing OpenID 2.0 in Windows Vista

Wednesday, June 20, 2007

Photos of my grand-daughter

You can see more photos of my grand-daughter, Vera. Her mother is my eldest daughter, Su Ling. Her father is Vitali Zagorodnov from Russia.

A piece of inspiration

Do you know who is the winner of the "Britain Got Talent" singing contest? He name is Paul Potts. He is a mobilephone salesman.

You can hear about his inspiring story and his good singing in Su Ling's blog.

Is the stockmarket too highly valued?

Is the stockmarket too highly valued? Is it safe to enter into the stockmarket now?

Some experts look at the price earning ratio of the stocks. This is the current market price divided by the earnings per share. Historically, a ratio of 15 times looks at a fair level. If the P/E ratio is 25 times, it is considered as expensive. If it is less than 10 times, it is cheap.

At the current level of the ST Index of 3,600 for the Singapore market, the P/E ratio is likely to be about 18 times. Some experts argued that it is not too high. So, it is safe (according to this view).

I remember in 2003, the ST Index was at 1,200. If the current P/E ratio is 18 times (ST of 3,600), surely, it must be only 6 times in 2003 (ST of 1,200)?

This was not the case. In 2003, the profits of the companies were about 25% of today. So, the P/E ratio in 2003 was around 24 times. Many experts argued, on the P/E ratio, that you should sell the stocks.

What is the flaw?

It is wrong to calculate the P/E ratio based on the latest year's profit. It is better to use an average of 3 to 5 years to calcuate the P/E ratio, so that the fluctuation in the earnings can be smoothed. Unfortunately, I am not aware of any P/E ratio that is calculated on this smoothing method.

Lesson: Be careful about interpreting the P/E ratio. Try to take the average profit for a few years, so that you are not distored by by extreme results in one year.

Talk on Financial Planning

I received a request from the recreational club of a government department to give a lunch time talk on financial planning to their members.

I asked the participants to read the FAQs here.

Visitors to my blog

I was surprised to see an increase in visitors to my blog during the past two days. It exceeded 600 visits a day. Perhaps my regular visitors are doing me a favour in passing the word around to visit my blog. To my promoters, THANK YOU.

Grouses of taxi drivers

Singapore is well known for our complaining taxi drivers. It seems that they are an unhappy lot and have a lot of things to compaint about.

Do taxi drivers in other parts of the world behave like this? Is this an occupational trait?

Not so! I visited Kuala Lumpur on a few occasions during the past two years and spoke to the taxi drivers. They are generally quite happy with their situation. They like their freedom (as taxi drivers) and are happy with their earnings.

Perhaps, our taxi drivers in Singapore find the life to be too stressful?

Overcrowded Singapore - a comment


The overcrowding will only get worse as our govt is targeting 6.5 million population! I take the MRT daily and I can't see how it can take on additional commuters.

Perhaps our highly paid policy-makers are living in posh neighbourhoods, thus having no clue clue how life is like in the heartland.

I can't help but laugh when our transport minister claimed to check bus-stops and public transports to gauge the situation....although he does NOT take public transport at all.

I would like to tell him that there is a whole world of difference between merely checking as a bystander and actually suffering from overcrowded public transport day-in day-out!!

Bad customer service from Telcos


I really hate all the telcos' customer service. Its one of the worst in Singapore. Once you are subscribed, you are finished.

Its one way all through out. I'm subscribed to Singtel Mobile for the last 7 years, and never in these 7 years I can reach the customer service easily. Its a shame on Singtel.

I like NTUC's call centre and I always recommend it to my friends. Why not telcos listen and use NTUC's model.

Govt promotes service, but what these giants doing are something opposite to customer service. Once we are a customer, its like we have to service them.

I lost hope with them.

Singapore is getting over-crowded

Many of us may not realise it. But the population of Singapore had increased by 60% during the past 16 years. The population in 1990 was 2.7 million. It is now 4.3 million.

This large increase in population is affecting our daily lives in the following ways:

* demand for more hospital beds and doctors
* delayed buses and cramped trains
* congested roads, insufficient parking spaces, too many cars

It looks like the infrastructure has to be expanded considerably to cope with the larger population.

Best Public Service in the World

Here is the rating of the customer service of various governments, as conducted by Accenture.

Singapore 89%
Canada 88%
USA 79%
Denmark 75%
Sweden 74%
Japan 55% (10th)
Malaysia 44% (14th)

Singapore came out top in the survey.

An important contribution for our high ranking is the work of the Infocomm Development Authority in encouraging the use of e-government services.

Congratulations to IDA.

Universal ID for website

I hope, one day, that there is a universal ID and password that can be used for all websites.

At present, we have to provide an ID and password for each website. Here are the problems:

* each website imposes its own non-standard constraints on the ID and password
* some ID cannot be accepted, as it has already been used
* we have to keep a record of all the different IDs and passwords used in the websites.

A few years ago, Microsoft wanted to introduce a "passport" that can solve this problem. This idea did not take off. I hope that Microsoft, Google or Yahoo will try again. Maybe, it will be accepted now.

Feedback on the Telcos


Many organisations have used this press button select options system for many years now. NTUC Income under your leadership was the very few organisations left to use real people to answer calls. Kudos to you.

Starhub's hotline is actually more user friendly and you can get to a courteous operator faster than Singtel.

The designers of these centres are usually technical people who are not able to put themselves into the shoes of the laymen. Also many staff nowadays use the automated system to ward off customers calls and put it into an endless loop where a sweet recorded voice kept telling you how important you are to the company and that you will be attended to shortly and it is actually a real test of patience as your phone bill goes up without any real purpose. So the phone companies get to benefit from these too.

There have been recently the hue and cry over Starhub's increase in fees and the contract that prevents people from cancelling their subscriptions.

Singtel also practices these unfair methods by a three year contract which does not reduce in price when a similar broadband service by the same company is now 20 dollars cheaper. Subscribers cannot cancel unless having to pay a hefty penalty fee but has to continue to pay the old higher subscription fees. How is it that when prices are raised then the contract is not binding in price but when prices are reduced it is binding?

We are now living in a society that cares only for more money, whether in cash or in kind, like all these automated answering services in the name of higher productivity but in actual fact just wants to save money by cutting down on the number of real people manning the phones to give real service.

Tuesday, June 19, 2007

Call centers of our Telcos

I wanted to apply for a fixed line. I called the call center of SingTel and Starhub. It was a frustrating experience.

They asked me to listen to pass a button select an option, and to go through it many times. The trouble is that I do not understand the various services and options.

I hope that the designers of call center system are considerate. They should understand that the ordinary customer does not understand the complications of your business. Why not get the customer to talk to a person on your careline early?

Yield on Money Market Fund

The unit price of the Money Market Fund of NTUC Income increased by 0.2 cents (0.18%) for the past 28 days. This works out to an annualised yield of 2.4%. The yield was 3% previously. It has dropped during the past month.


Someone described me as a "dude". I searched the internet for a definition. I obtained the following from Wikipedia:

The term "dude" is best known as a widely-used English slang word commonly used to informally address or refer to a person of the male sex. The word may also be used in the same manner when speaking to (or about) a person of the female sex.

In informal social situations, it is not uncommon for young men to use the word "dude" to address one another, for example, "Mike Smith is one cool dude", or "Who did that?", "[The] dude with the red shirt did that". (sis).

Visit the financial adviser

When you are sick, you visit a doctor at his clinic. The doctor treat you and charge you for the consultation.

As the doctor sees many patients in a day, the cost of the consultation is relatively low. The doctor makes a good income from the large number of cases treated. This is high productivity.

I hope that insurance can be handled in this manner in the future. If the customer is willing to visit the financial adviser and to pay a fee for the consultation, it will benefit all parties:

* the cost to the consumer will come down, as pay a net price (after removing the commission)
* the adviser can earn a good income by handling many cases each day
* productivity is increased
* the adviser can recommend the right product to serve the best interest of the customer.

Some insurance companies now allow customers to call them directly on the telephone or transact through the internet, and to give a lower cost to the consumer. I hope that this channel will be more popular in the future.

Singapore is 14th most expensive city in the world

Singapore is now the 14th most expensive city to live in the world, according to a report by Mercer Human Resource Consultancy. It has moved 3 rungs from 17th position has year.

This has many disadvantages:

* foreigners will find it unattractive to work in Singapore
* Singaporeans are stuck with higher cost of living, and do not have much choice

According to the same report, Singapore is now more expensive than New York. Considering that wages in Singapore (for most people) are lower than New York, this matter is quite serious.

We need to look for ways to keep our cost of living down. Here are some suggestions:

* Wait for the property prices to come down to a more reasonable level, before you buy it. It will come down. Be patient.

* Take public transport, such as MRT or bus. They are more cheaper, faster and more enjoyable (compared to driving)

* Pay your credit card on time (ie avoid paying interest on credit cards).

* Invest in simple products that gives you a fair rate of return, and low charges. Invest in the money market fund, bond fund or equity fund that have low upfront and annual fees. Avoid complicated financial products.

* Read the FAQs on financial planning.

Tan Kin Lian Has A Blog


Tan Kin Lian has a blog. The dude is the ex-CEO of NTUC Income, which obviously didn’t exactly endear him to me. I knew he had been blogging for quite awhile, but I simply dismissed it as NTUC propaganda. However I had another look today and realized that there were many unbiased financial planning gems written in his strange simple english style. Very highly recommended.

Comments on Dr Lee Kum Tatt's blog

Dr. Lee Kum Tatt has received comments to some of his articles in his blog on “research and its management” and “overcoming the fear factor”. Read his blog for the comments and his candid replies.

Save for an early retirement

Dear Mr Tan,

I wish to save now for an early retirement. I am in my late twenties. How much should I save each month? Should I buy a life insurance policy? What is your advice?



Most life insurance policies has a high upfront charge, that is used to pay commission to the insurance agent. After deducing the charges, the policy will give a negative return for 10 years or longer. After that, you may get a modest return, but it is quite low.

Due to the high upfront cost, you are locked into the policy for many years, even if you are unhappy with the low return. You can only get out of the policy by taking a loss.

It is better for you to save and invest in a fund that has the following features:

* low upfront cost (less than 1.5%)
* low annual fees (less than 1.5%)
* flexibility to change your regular savings
* flexibility to change your fund

You can buy your insurance protection separately through a low cost term insurance.

You can read more about it in the FAQ on this webpage.

Monday, June 18, 2007

Help a friend

Hi Mr Tan

I have just started work. My classmate and a good friend joined a life insurance company. She asked me to take a life insurance policy from her, to help her to meet her sales target. I like to help her, but will this be disadvantageous to me?



You should take care of your own financial future and make sure that you are buying the right product, as you will be committed for many years into the future.

You can read the FAQ on Financial Planning for the Young.

Many young people joined the insurance field for a few years, and moved to another job. Their clients are then passed to another agent. You may not be serviced by your friend a few years later.

Save adequately for your child

Dear Mr Tan,

I have been advised by an agent to save $200,000 for the tertiary education of my child. I find the premium to be too costly. What is your advice?



You can read my FAQ. It explains the amount that is needed. It should fit into your own financial capacity

Sponsored article

Sometimes, a financial or insurance product is covered in a newspaper. It purports to explain the product, and usually highlights its benefits. Most readers may think that the article is written independently by the journalist.

I learned that in some cases, the space for the article is sponsored by the seller of the product. It is really an advertisement (as the seller is paying for the space).

As the sponsor has some say in the way that the article is written, it will usually play down the negative aspects of the product. The consumers may not get a balanced analysis of the product.

In recent years, the frequency of these sponsored articles has increased. The reader should be careful.

Sunday, June 17, 2007

Rating of assets backing financial products

I saw an advertisement that a specific financial product is backed by CDO (collaterialised debt obligations) with at least a rating of AA.

Normally, a AA rating is considered to be strong, in the case of a rated bond or a corporte entity.

I learned that AA rating for a CDO follows a different set of criteria. The AA rating for a CDO is weaker than for a bond. It does not have the same level of financial strength.

If you read a financial product that is backed by AA rated CDO, you have to be aware that it is of lower quality than a AA rated bond.

Government bonds

Dear Mr Tan

You have recommended to invest in government bonds. It now earns less than 3% p.a. and you have to lock it for 5 years or more. I do not find it to be attractive. Is there a better return from other safe investments?



If you wish to have a safe investment, it is better to buy government bonds to earn 3% p.a. for 5 years, or a total of 15%, instead of investing in a financial product that requires you to bet on the outcome of certain stocks.

Many people invested in the financial products during the past years, and obtained a poor return of less than 1% p.a. For example, the Swing fund gave a return of 2% for 5 years, or just 0.4% p.a.

If you do not wish to lock up your money to earn 3% for 5 years, you can invest in a money market fund and earn about 2% p.a. at the current rate. If interest rate goes up, your return will increase, and it changes with the money market.

Fund earned 20% during past 8 months

There is an advertisement showing that a unit trust earned 20% since its launch 8 months ago.

Before you invest in this fund, you have to consider the following:

* many other funds also earned a similar or better return
* the upfront cost of investment is 5% (which is high)
* the stockmarket is now at a high level and is risky

If you invest in the stockmarket now, you should be prepared to suffer a correction (ie drop in prices), if it happens.

Do you want to take the risk?

Cost of betting on a financial product

Dear Mr Tan,

If I invest in a financial product that guarantees a return of my principal, I know that I will not lose out. At least, I will get back my investment. If the stocks meet the target, I will get a good return. What are your views?



You should look at the opportunity cost. For example, instead of investing your money for 5 years in a financial product, you could have bought government bonds to earn 3% p.a. for 5 years, or 15% in total.

If you invest $20,000 in a financial product, you are actually spending $3,000 on the bet, ie 15% for 5 years.

In thecase of the Swing fund, you got back only 2% after 5 years, or $400. This is a poor bet, compared to the cost of $3,000. Your payback is less than 15% of what you betted (ie $3,000). This is a poor return, considering that the stockmarket performed extremely well during the past 5 years.

Lesson: Do not bet on a financial product, as the odds are designed to your disadvantage.

Look for Solutions Not Scapegoats

Dr. Lee Kum Tatt is a chemist. Looking at and for solutions has been his profession all his life. Read the article in his blog on how his own quote has given him peace of mind in his life.

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