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?



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, 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.

Products that give good value


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.



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


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.



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

My grand-daughter Vera is changing. Sometimes, she looks like her mother Su Ling (and like me). Sometimes, she looks like her father Vitali.

If you want to see Su Ling's designs, you can visit here.

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?



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.

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!

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.

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.

Early redemption penalty


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.



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?



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


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.


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.


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.



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.

Thursday, July 05, 2007

Simple financial products


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.



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?


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.



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.

Views about entrepreneurship

Here are my views about entrepreneurship.

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.



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)

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.



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.

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) ?



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

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).

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.

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?



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?



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.

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?



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


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.



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?



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.

Adjustible Rate Mortgage


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.

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.

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.



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


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.



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.

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.


Example of asset allocation (Vanguard)

Target Equity Bond
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)?


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:

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).

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?


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?



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 have registered for an OpenID at this website, 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.

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).

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?



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


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.



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?



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.

Rating of CPF approved funds


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.



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.

Ideal structure of an investment fund

What is the ideal structure of an investment fund for long term investments? Is it an indexed fund?


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?



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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