Saturday, August 18, 2007

Capital protection for Life annuity

Dear Mr Tan,

Does a life annuity allow the buyer to avoid losing the capital, if he dies at an early age?


You can buy a capital protection for the life annuity. In the event of death during the early years, there is a refund of the balance of the capital (after deducting the annuity payments that have been received.

If you buy a capital protected annuity, you will receive a lower monthly payment. For a male at age 60, the difference is about 12 percent, i.e.

Monthy annuity for $100,000 of capital invested:
- with capital protection: $429
- no capital protection: $488

If the total paid out under the annuity exceeds the invested capital, there is no refund. This will occur after 19 years, in the above example. However, if the payment is increased due to bonus, the duration will be shortened.

You can read this FAQ for more details.

Friday, August 17, 2007

Havoc caused by the hedge funds

When an investor has a certain position in the market, he puts a stop loss order to protect that position, in case the market moves against him.

During a period of market weakness, most of the buyers stay away from the market. Those holding stop orders are "exposed" in a thin market.

The hedge funds goes around to knock down the stop loss orders, even though they are placed at a large distance from the current market level. This caused the market to swing widely. This caused the extreme volatility.

Somehow, the hedge funds are able to make a lot of profit through the high volality in the market. They know how to trade in this thin market, to their advantage.

Lesson: If you have a sound position and you are not leveraged or on margin, you should hold the position. Do not place any stop loss orders. Do not panic when the market swings wildly. Stay calm. Stay invested.

How to pick the right stocks

Dear Mr Tan,

With all the stock market indices dropping by quite a lot. When it recovers, what is the best way to ride on the rise as there are so many stocks to choose from ?


I suggest that you invest in the STI Trakker Fund. It is a ETF or exchange traded fund. It is a large, diversified, low cost fund. It is invested in blue chips, to track the STI index.

Thursday, August 16, 2007

Is it time to liquidate?

Dear Mr Tan

Stock market is down by a lot, is it adviseable to liquidate and switch to fixed depost?


I prefer to find the right time to make further investment in the stock market for the long term. The drop in the stockmarket make the shares more attractive.

Sharp drop in Singapore market


Why does the Singapore market drop so much in two days, when the economic fundamental is still sound?


This is due mainly to the outflow of foreign funds. When they wish to liquidate, they will sell at any price. The investors dare not buy. So, the drop is very sharp.

This has happened many times before. When the selling by the foreign funds stops, the market will rebound sharply.

High flying stocks drop more

Here are the prices of the blue chips in Singapore and the market indices.

Stock Peak Current Drop
S Land 12.10 8.20 32%
City Dev 17.90 13.10 27%
CapitaLand 8.75 6.60 25%
DBS 25.00 19.20 23%
Keppel 14.40 11.10 23%
Sembcorp 6.30 4.84 23%
UOB 24.20 19.90 18%
SIA 20.10 17.00 16%
SPH 4.76 4.22 12%

STI ETF 37.30 32.50 13%
Nikkei 18300 15900 13%
HKSI 23500 20570 13%

The market indices dropped by 13%. The high flying stocks dropped by 23% to 32%.

Switch to Global Equity?

Dear Mr Tan,

I have been waiting for your update on the stock market as I respect you as a very disciplined and shrewd investor.

What is your opinion of switching $40,000 worth of my NTUC Balanced Fund to Global Equities Fund?

Thank you for your generous sharing of your investment strategy.


I suggest that you wait for 1 or 2 more weeks. But you can monitor the situation and move earlier, if you feel that it is the right time.

Collapse of the stockmarket

I have been waiting for more than six months for the right time to invest in the Singapore stockmarket.

My target entry point is 2,700 on the ST Index (representing a drop of 25% from the peak of 3,600).

It may not reach this level, so I may start to invest in small amounts from the STI level of 3,000. This is likely to occur within a few days time.

I heard that Warren Buffet had started to invest in some banks (with little CDO expsoure). He has decided that the current prices represents good value. Although the market may drop another 10% or so, he has decided that it is time to start accumulating.

My choice of funds are:

* The STI trakker fund in SGX
* The global equity fund managed by NTUC Income

Wednesday, August 15, 2007

Funding for research for young professionals.

Getting funding for research is never an easy task. Dr. and Mrs. Lee Kum Tatt had experienced this in their professions and their careers both as recipients and donors of grants. They share with us their experiences and what they think can be done. Read about this in Lee Kum Tatt’s blog.

Advice for a young person starting a career


I'm a final year under-grad who is finishing up with her studies and is planning to start on her career.

I am interested to start investing for retirement and is also keen to purchase an insurance policy. Is there any advice for a young person starting out?


Please read this FAQ on Financial Planning for the Young. Wish you all the best in your career.

Learn about life annuity

According to a newspaper report, the government is considering to make life annuity compulsory.

You can learn about the life annuity by reading this FAQ.

The CPF now pays an attractive interest of 4% on its retirement account. It is better to keep your money in the retirement account. You can invest in a life annuity with your non-CPF savings.

Tuesday, August 14, 2007

Continue your existing critical illness policy

Hi Mr Tan

In your blog, you said that the premium for a critical illness policy is 10 times of a term insurance policy. I took a critical illness (living) policy two years ago. Do you advise me to cancel it, and change to a term policy?


The living policy combines the coverage and savings for the future. You can get a cash value from the living policy if you terminate it in the future. You can break even, i.e. get back more than the premiums paid after about 15 years. If you keep it longer, you can get a modest return of about 2 to 3% per annum.

If you have already taken a living policy, it is better to continue with you, as you can get a modest return (after 20 or 30 years) and free coverage.

If you terminate the living policy in the early years, you will suffer a loss of about half of the premiums that you have paid. This low payout takes into account the high upfront cost of the policy, which has already been incurred.

My advice of taking a term insurance policy, applies to people who have not yet taken up the critical illness policy.

Collateralized debt obligations

Source: Wikipedia

Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.

CDOs gain exposure to the credit of a portfolio of fixed income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated).

Losses are applied in reverse order of seniority and so junior tranches offer higher coupons to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed income assets.

Market history and growth
First issued in the late 1980s, CDOs emerged a decade later as the fastest growing sector of the asset-backed securities market.

This growth reflects the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles.

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totalled USD $157 billion in 2004, USD $249 billion in 2005, and USD $489 billion in 2006.

Asset backed securities

Asset-backed securities, called ABS, are bonds or notes backed by financial assets.

Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured-housing contracts and home-equity loans.

ABS differ from most other kinds of bonds in that their creditworthiness (which is at the triple-A level for more than 90% of outstanding issues) derives from sources other than the paying ability of the originator of the underlying assets.

Financial institutions that originate loans (including banks, credit card providers, auto finance companies and consumer finance companies) turn their loans into marketable securities through a process known as securitization.

The loan originators are commonly referred to as the issuers of ABS, but in fact they are the sponsors, not the direct issuers, of these securities.

These financial institutions sell pools of loans to a special-purpose vehicle (SPV), whose sole function is to buy such assets in order to securitize them.

The SPV, which is usually a corporation, then sells them to a trust. The trust repackages the loans as interest-bearing securities and actually issues them.

The “true sale” of the loans by the sponsor to the SPV provides “bankruptcy remoteness,” insulating the trust from the sponsor.

The securities, which are sold to investors by the investment banks that underwrite them, are “credit-enhanced” with one or more forms of extra protection — whether internal, external or both.

ABS constitute a relatively new but fast-growing segment of the debt market. The first ABS were issued in 1985; in that year, the market for publicly offered ABS issues was $1.2 billion. In 2003, issuance totaled a new record of $479.4 billion.

It is estimated that a total of over $2.6 trillion of ABS were issued from 1985 through 2003

Monday, August 13, 2007

Structured Products

I have updated my FAQ on structured products. You can read them here. Advice: avoid investing in structured products, as they have high cost and are not likely to give a good return to the investor.

Investment Tips, August 2007

I have updated my FAQ to give my investment tips as at August 2007. You can read them here. Good luck in your investment.

Stock Trading

Larry Haverkamp has written an article on the risk of stock trading. Many people may not realise it, until it is too late. Read it in his blog.

Sunday, August 12, 2007

Build up a nest egg of $1 million

You can build up a nest egg of $1 million by saving only $300 a month over a working career of 40 years.

If you invest this money to earn an average return of 8% per annum, it will accumulate to $970,000 over 40 years.

If you earn 10% per annum, it will accumulate to $1,673,000 over 40 years.

By investing in a large, well diversified fund of equities, the average return over a long period has been around 8% to 10% per annum.

If you invest in a low cost fund, the charge could be as low as 0.5% per annum. This allows you to keep most of the return for yourself.

However, if you invest in a high cost fund that takes away 2% per annum, you may have 30% of the total money disappear.

Promoting cooperative insurance in Singapore

I am invited to Japan to present a paper on my experience in building up NTUC Income. The paper is entitled "promoting cooperative insurance in Singapre.

You can read the paper here.

This paper may be of interest to policyholders to learn about how NTUC Income was able to give a better return to them in past years.

Fixed deposit rates

With the global stockmarket in turmoil, it may be better to keep the money in fixed deposit or the money market fund for the time being.

You can refer to this website for the latest information of the best interest rate offered by the banks. This information is fairly up-to-date, but may get outdated quite quickly, as the rates may changed daily.

It gives you a good idea about what is likely to be available in the market. Before you invest, it is best to re-confirm the latest offers from the top three in the list.

I hope that you find this reference to be useful.

Money market funds

Dear Mr Tan,

Which money market fund gives a better return, NTUC or Lion Capital?


Please read this website for a comparison. Dr Money told me that the information is quite up-to-date.

However, before you finally invest your money, it is better to call the fund manager and check the latest information.

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