My blog is written mainly to give tips to consumers on financial products. If you find my views to be useful, you can visit my blog regularly. Do tell your friends to come to my blog.
You are also welcomed to send questions to me (kinlian@gmail.com). I shall try to answer them. If suitable, I shall post the issue in my blog, so that other readers can also learn about it.
If you have a different view, you can send them to me. I shall post your view to give a different angle. Please express your views fairly.
There are a few people who have a different agenda. They indulge in personal attacks against me or other people. I have deleted their postings. If they dislike my views, there is no need for them to visit my blog.
Monday, July 09, 2007
Life cycle Fund
Hi Mr Tan,
Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?
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REPLY:
A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.
During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.
I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.
I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.
Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.
Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?
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REPLY:
A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.
During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.
I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.
I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.
Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.
The Madness of Crowds
Source: Investopaedia (edited)
Charles Mackay wrote a book entitled "Extraordinary Popular Delusions and the Madness of Crowds".
It tells the story of several market bubbles, starting from the tulip bubble in 17th-century Holland.
All the bubbles have a similar story: an bull market in some commodity, currency or equity leads the general public to believe the trend cannot end. The optimism leads the public to overextend itself in acquiring the object of the mania. Lenders fall over each other to feed the fire.
Eventually, fear arises as investors start to think that the market is not as strong as they assumed. Inevitably, the market collapses, as that fear turns to panic selling, creating a vicious spiral that brings the market to a point lower than it was before the mania started. After that, it will take many years to recover.
The key to this phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by emotion when it appears their peers are behaving in a certain universal manner. The fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out drives the overwhelming power of the crowd.
Another motivating force is our tendency to look for leadership, based on the crowd's opinion (as we think that the majority must be right) or a few key individuals who seem to be driving the crowd's behavior by virtue of their uncanny ability to predict the future.
In times of uncertainty, we look to strong leaders to guide our behavior and provide examples to follow. The market guru is an example of someone who stand as all-knowing leader of the crowd. The façade is the first to crumble when the tides of mania eventually turn.
Charles Mackay wrote a book entitled "Extraordinary Popular Delusions and the Madness of Crowds".
It tells the story of several market bubbles, starting from the tulip bubble in 17th-century Holland.
All the bubbles have a similar story: an bull market in some commodity, currency or equity leads the general public to believe the trend cannot end. The optimism leads the public to overextend itself in acquiring the object of the mania. Lenders fall over each other to feed the fire.
Eventually, fear arises as investors start to think that the market is not as strong as they assumed. Inevitably, the market collapses, as that fear turns to panic selling, creating a vicious spiral that brings the market to a point lower than it was before the mania started. After that, it will take many years to recover.
The key to this phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by emotion when it appears their peers are behaving in a certain universal manner. The fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out drives the overwhelming power of the crowd.
Another motivating force is our tendency to look for leadership, based on the crowd's opinion (as we think that the majority must be right) or a few key individuals who seem to be driving the crowd's behavior by virtue of their uncanny ability to predict the future.
In times of uncertainty, we look to strong leaders to guide our behavior and provide examples to follow. The market guru is an example of someone who stand as all-knowing leader of the crowd. The façade is the first to crumble when the tides of mania eventually turn.
Sunday, July 08, 2007
Expense ratio on long term savings
If you invest regularly for many years, to accumulate savings for your retirement, the amount that you can get on maturity depends on:
* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings
If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).
You have the following options:
* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%
An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.
The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.
This is what you can get, by saving $2,000 yearly for 30 years:
For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).
Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.
* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings
If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).
You have the following options:
* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%
An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.
The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.
This is what you can get, by saving $2,000 yearly for 30 years:
Plan Expense Net Maturity
margin yield amount
Unit trust 1.0% 4.0% $136,200
Low cost Endowment 1.5% 3.5% $105,000
High cost Endowment 2.5% 2.5% $ 89,000
For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).
Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.
Structured Investments
DBS Bank has a good webpage. It shows the structured investments marketed by them over the past years, and are still current. You can find out quite easily the current indicative price of these investments.
The structured investments are listed under the following categories:
Credit linked notes - 5 tranches
Currency linked deposits - 4 tranches
Equity linked deposits - 19 tranches
Index linked deposits - 47 tranches
Interest rate deposits - 76 tranches
Total: 141 tranches
Based on the prices posted in this website, it seems that most of the investments are below par, ie less than 100% in prices. In the worst case, the drop is more than 30%, if the investor cash out now.
There are just a few tranches under "indexed linked deposits" which show an apprecation of up to 24% for the period (about 4 years) that the investments were held. The annual return is about 5-6%.
It seems that most of the structured products performed poorly, and gave a poor return.
The structured investments are listed under the following categories:
Credit linked notes - 5 tranches
Currency linked deposits - 4 tranches
Equity linked deposits - 19 tranches
Index linked deposits - 47 tranches
Interest rate deposits - 76 tranches
Total: 141 tranches
Based on the prices posted in this website, it seems that most of the investments are below par, ie less than 100% in prices. In the worst case, the drop is more than 30%, if the investor cash out now.
There are just a few tranches under "indexed linked deposits" which show an apprecation of up to 24% for the period (about 4 years) that the investments were held. The annual return is about 5-6%.
It seems that most of the structured products performed poorly, and gave a poor return.
Buy from NTUC Income
Dear Mr Tan,
If I like to buy insurance from NTUC Income, who do you recommend? Can I buy directly and enjoy a discount?
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REPLY:
You can approach any of the advisers who are listed in the right panel of my blog. They maintain their own blogs. They are:
Thomas Phua
Alvin Soong
John Low
Glen Toh
You can also call the NTUC Income business center, if you wish to buy directly.
If I like to buy insurance from NTUC Income, who do you recommend? Can I buy directly and enjoy a discount?
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REPLY:
You can approach any of the advisers who are listed in the right panel of my blog. They maintain their own blogs. They are:
Thomas Phua
Alvin Soong
John Low
Glen Toh
You can also call the NTUC Income business center, if you wish to buy directly.
My approach towards insurance
Mr Tan,
If annuity is so good, how much of it did you buy? Also, how much of regular-premium ILP did you buy? It'll be good to see an insurance expert walking the talk.
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REPLY:
When I was younger, I bought regular premium policies to provide the insurance protection and accumulate some savings. I also bought insurance for my children. I must have more than 10 policies at one stage. I bought the policies from NTUC Income, as the sales charges are modest (and not excessive).
I now have many investment linked policies, invested in the combined fund and the money market fund. They are also with NTUC Income. They are mostly invested with single premiums.
I advise young people to buy a regular premium ILP plan from NTUC Income - as the sales charges are lower than similar plans from the market. You can also buy directly from their business center, and enjoy some incentive.
For those who are able to buy unit trusts directly through the internet, you can do so directly, and save on the adviser fee. But, you have to be careful about the fund that you invest in. Make sure that you are not hit with higher annual fees.
As I have more than sufficient savings, I do not need to participate in the pooling of longevity risks in a life annuity. My savings, which is in the combined fund, will last more than my remaining lifespan. So, I do not have any life annuity at this time. (But, I may change my mind at a later date).
If annuity is so good, how much of it did you buy? Also, how much of regular-premium ILP did you buy? It'll be good to see an insurance expert walking the talk.
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REPLY:
When I was younger, I bought regular premium policies to provide the insurance protection and accumulate some savings. I also bought insurance for my children. I must have more than 10 policies at one stage. I bought the policies from NTUC Income, as the sales charges are modest (and not excessive).
I now have many investment linked policies, invested in the combined fund and the money market fund. They are also with NTUC Income. They are mostly invested with single premiums.
I advise young people to buy a regular premium ILP plan from NTUC Income - as the sales charges are lower than similar plans from the market. You can also buy directly from their business center, and enjoy some incentive.
For those who are able to buy unit trusts directly through the internet, you can do so directly, and save on the adviser fee. But, you have to be careful about the fund that you invest in. Make sure that you are not hit with higher annual fees.
As I have more than sufficient savings, I do not need to participate in the pooling of longevity risks in a life annuity. My savings, which is in the combined fund, will last more than my remaining lifespan. So, I do not have any life annuity at this time. (But, I may change my mind at a later date).
Saturday, July 07, 2007
Life annuity - capital preservation
Dear Mr Tan,
Under a life annuity, the annuitant loses the capital on death. Is there a way to preserve the capital for the children?
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REPLY:
You can preserve the capital if you use only the interest. At present, interest rate is 2% per annum. If your capital is $100,000, you can use only $2,000 a year, ie less than $200 a month. This is not adequate for your needs.
If you spend more than the interest, your capital will be exhausted at some time in the future. For example, if you take out $6,000 a year (ie 6% of the capital sum), the capital may run out completely in about 20 years time, maybe earlier. Beyond that date, you will have nothing left.
When you buy a life annuity, you are pooling the risk with other annuitants. Those who die earlier will leave behind the balance of the capital in the fund, so that it can continue to make the payment to those who live longer, ie beyond the 20 years.
If you have a large capital sum, you can use a portion to buy a life annuity for yourself. You can distribute the balance to your chidren now, or invest it separately to be given to them later.
Under a life annuity, the annuitant loses the capital on death. Is there a way to preserve the capital for the children?
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REPLY:
You can preserve the capital if you use only the interest. At present, interest rate is 2% per annum. If your capital is $100,000, you can use only $2,000 a year, ie less than $200 a month. This is not adequate for your needs.
If you spend more than the interest, your capital will be exhausted at some time in the future. For example, if you take out $6,000 a year (ie 6% of the capital sum), the capital may run out completely in about 20 years time, maybe earlier. Beyond that date, you will have nothing left.
When you buy a life annuity, you are pooling the risk with other annuitants. Those who die earlier will leave behind the balance of the capital in the fund, so that it can continue to make the payment to those who live longer, ie beyond the 20 years.
If you have a large capital sum, you can use a portion to buy a life annuity for yourself. You can distribute the balance to your chidren now, or invest it separately to be given to them later.
Bad experience with structured products
Do you have any bad experience with structured products? Send an e-mail to kinlian@gmail.com, with the following information:
* name of product
* amount that you invested
* period of investment
* what is your return on maturity?
* why was the product unsatisfactory?
I will not use your actual name, but will post the experience to share with other people.
* name of product
* amount that you invested
* period of investment
* what is your return on maturity?
* why was the product unsatisfactory?
I will not use your actual name, but will post the experience to share with other people.
Products that give good value
COMMENTS POSTED IN MY BLOG:
You emphasize to "buy term and invest the best".
The point is: if the Income agents think in the best interest of clients, then they should sell a reducing term instead of a whole life, isn't it? Is a $1,000,000 reducing term enough for 30 yrs?
There are many unit trusts that almost 0% sales charge, why does the agent need to sell a 1.5% sales charge single premium policy? Why?!
Now, you recommended people to buy traditional plan and ILPs ... what good are they? According to you, low returns, low coverage. You are the one who stands for de-coupling insurance and investment, in the first place!
Sometimes you make contradicting remarks. I wonder if you stand for consumers or insurance co.
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REPLY:
A product that is good for consumers have the following characteristics:
* meet their needs (for insurance or protection)
* have a modest charge
* are designed to give good value to the consumers and a fair profit margin.
The following products can quality as "good products"
* term insurance, combined with low cost investment fund
* traditional products, with modest commission charges
There is a broad range of consumers, with different levels of needs and awareness:
* A small percentage are financially savvy and can make their own decision and transact through the internet.
* The majority needs to be advised; and the adviser needs to make a living. They also give good value.
According to my model, there is room for all types of products and services, as long as ethical business principles are observed: give good value to consumers.
You emphasize to "buy term and invest the best".
The point is: if the Income agents think in the best interest of clients, then they should sell a reducing term instead of a whole life, isn't it? Is a $1,000,000 reducing term enough for 30 yrs?
There are many unit trusts that almost 0% sales charge, why does the agent need to sell a 1.5% sales charge single premium policy? Why?!
Now, you recommended people to buy traditional plan and ILPs ... what good are they? According to you, low returns, low coverage. You are the one who stands for de-coupling insurance and investment, in the first place!
Sometimes you make contradicting remarks. I wonder if you stand for consumers or insurance co.
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REPLY:
A product that is good for consumers have the following characteristics:
* meet their needs (for insurance or protection)
* have a modest charge
* are designed to give good value to the consumers and a fair profit margin.
The following products can quality as "good products"
* term insurance, combined with low cost investment fund
* traditional products, with modest commission charges
There is a broad range of consumers, with different levels of needs and awareness:
* A small percentage are financially savvy and can make their own decision and transact through the internet.
* The majority needs to be advised; and the adviser needs to make a living. They also give good value.
According to my model, there is room for all types of products and services, as long as ethical business principles are observed: give good value to consumers.
Friday, July 06, 2007
Limited premium policy
COMMENT POSTED IN MY BLOG:
Mr. Tan
I like you. I realise you are promoting the concept of buying term and invest the rest. You have taken it to the extreme by recommending decreasing term which is good especially for the poor. They are the people who need to stretch their money in order to be adequately covered.
What do you think of limited premium type of plan? I think this is good for agents' pocket at the expense of clients' protection. Only the rich and high income earners can afford this type. Unfortunately the poor are also buying and soon they will become the victims of lapses.
The question of honesty is called in here.
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REPLY:
Limited premium policies are all right, if the commission is kept at a modest level, and the policy is designed to give good value to the customer. Unfortunately, most of the plans sold in the market have expense charges to pay high commission.
Many policyholders like to pay premium for a shorter period (eg during their working life), and to be insured for a lifetime. Each person should buy a policy that they can afford to upkeep. If they wish to have a limited premium policy, they should take a lower sum assured - so that the premium remains affordable.
Mr. Tan
I like you. I realise you are promoting the concept of buying term and invest the rest. You have taken it to the extreme by recommending decreasing term which is good especially for the poor. They are the people who need to stretch their money in order to be adequately covered.
What do you think of limited premium type of plan? I think this is good for agents' pocket at the expense of clients' protection. Only the rich and high income earners can afford this type. Unfortunately the poor are also buying and soon they will become the victims of lapses.
The question of honesty is called in here.
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REPLY:
Limited premium policies are all right, if the commission is kept at a modest level, and the policy is designed to give good value to the customer. Unfortunately, most of the plans sold in the market have expense charges to pay high commission.
Many policyholders like to pay premium for a shorter period (eg during their working life), and to be insured for a lifetime. Each person should buy a policy that they can afford to upkeep. If they wish to have a limited premium policy, they should take a lower sum assured - so that the premium remains affordable.
Vera and her mother
Premium for term insurance
Hi Mr Tan
I am 30 years old with a monthly income of $X. How much life insurance should I buy and what is the premium that I have to pay, if I buy a term insurance plan?
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REPLY
You can read this FAQ on choice of insurance plan. It also gives some examples of the premium rate payable. The premium varies proportionately to the sum insured.
You also have the choice to buy a decreasing term insurance, where you can save about 50% of the premium.
If you have a family, you should be insured for 5 to 10 years of your income. The premium should cost you less than 1% of your monthly income.
I am 30 years old with a monthly income of $X. How much life insurance should I buy and what is the premium that I have to pay, if I buy a term insurance plan?
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REPLY
You can read this FAQ on choice of insurance plan. It also gives some examples of the premium rate payable. The premium varies proportionately to the sum insured.
You also have the choice to buy a decreasing term insurance, where you can save about 50% of the premium.
If you have a family, you should be insured for 5 to 10 years of your income. The premium should cost you less than 1% of your monthly income.
Low cost product
Some insurance agents, who made comments in my blog, think that low cost products refer only to term insurance and Incomeshield. How can an agent make a living by selling low cost products?
My definition of low cost products include traditional products and investment funds, with a modest commission rate, e.g.
* 30% commission (instead of 100%) to sell a 20 year regular premium policy. (Note: 30% works out to 1.5% per year)
* 1.5% (instead of 5%) to sell a single premium policy.
Under a "low cost" product, the agent can earn $100 to $300 (not $1,000) to sell a life insurance policy. These low cost product offer better value to their customers. The agent can increase the volume of sales, and make a good income.
Several of the products from NTUC Income (eg Ideal, Flexi-link and annuity plans) are already on the low cost model. They offer good value to the customers. I am happy to recommend them.
My definition of low cost products include traditional products and investment funds, with a modest commission rate, e.g.
* 30% commission (instead of 100%) to sell a 20 year regular premium policy. (Note: 30% works out to 1.5% per year)
* 1.5% (instead of 5%) to sell a single premium policy.
Under a "low cost" product, the agent can earn $100 to $300 (not $1,000) to sell a life insurance policy. These low cost product offer better value to their customers. The agent can increase the volume of sales, and make a good income.
Several of the products from NTUC Income (eg Ideal, Flexi-link and annuity plans) are already on the low cost model. They offer good value to the customers. I am happy to recommend them.
Postage increased to 26 cents
I bought many stamp labels for 25 cents (which was the postage previously). With the increase in GST, the postage increased to 26 cents.
I enquired with Singapore Post. What should I do with the current labels?
Their reply: go to a post office, change the labels to 26 cents and pay the difference.
It seems to be quite inconsiderate of Singapore Post. They could have replied, "we will continue to accept the 25 cents label and absorb the difference in GST".
I hope that businesses in Singapore, especially those that are making good profits, can be considerate! Anyway, it probably cost Singapore Post more than 1 cent to replace the labels!
I enquired with Singapore Post. What should I do with the current labels?
Their reply: go to a post office, change the labels to 26 cents and pay the difference.
It seems to be quite inconsiderate of Singapore Post. They could have replied, "we will continue to accept the 25 cents label and absorb the difference in GST".
I hope that businesses in Singapore, especially those that are making good profits, can be considerate! Anyway, it probably cost Singapore Post more than 1 cent to replace the labels!
One Motoring Website
I received a letter from Land Transport Authority asking me to pay a fine of $8.50 for failing to have a cash card for ERP charges. (I think that the cash card was not properly inserted).
I went to the OneMotoring website to pay this fine. I experienced the following difficulty:
* the homepage contained too much information
* difficult to find the link to pay the fine
* finally, I found it under "quick link"
* brought me to another complicated page
* have to read a lot of irrelevant information
* finally, I found the link to "pay fine"
* clicked on the link many times; and stayed at the same page (ie nothing happens)
Finally, I decided to log into my internet banking and paid the fine to LTA.
Suggestion: LTA should have a separate webpage for people to make their payments. This webpage should be listed in their letter.
I went to the OneMotoring website to pay this fine. I experienced the following difficulty:
* the homepage contained too much information
* difficult to find the link to pay the fine
* finally, I found it under "quick link"
* brought me to another complicated page
* have to read a lot of irrelevant information
* finally, I found the link to "pay fine"
* clicked on the link many times; and stayed at the same page (ie nothing happens)
Finally, I decided to log into my internet banking and paid the fine to LTA.
Suggestion: LTA should have a separate webpage for people to make their payments. This webpage should be listed in their letter.
Another Tan Kin Lian
The telephone directory shows only one person with the name of TAN KIN LIAN. There are many pages of other people with slightly different spellings. So, I always thought that there this name is unique to me.
I found the name of TAN KIN LIAN as listed under the "unclaimed money" website. The Central Provident Fund was looking for this person.
I sent an email to CPF. They replied that they are looking for another person with this name (ie not me).
Now, I know that there is another person in Singapore with a name spelled exactly as my name. This person does not have a telephone listed under this name.
I found the name of TAN KIN LIAN as listed under the "unclaimed money" website. The Central Provident Fund was looking for this person.
I sent an email to CPF. They replied that they are looking for another person with this name (ie not me).
Now, I know that there is another person in Singapore with a name spelled exactly as my name. This person does not have a telephone listed under this name.
Early redemption penalty
COMMENT POSTED IN MY BLOG (edited)
I had two tranches (of a structured deposit), deposited in 2004 when interest was low. The bank staff was not honest and forthcoming in telling me the early redemption penalty. I was told that I would get a certain interest rate or higher.
When I tried to pull out last year, I was told penalty is 15%. Well, I was foolish enough to trust the relationship manager in that they are telling lies during signing of the placement.
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REPLY:
You must read the brochure or prospectus carefully and understand the product, before you invest in it. If the material is too difficult, avoid the product. Do not take any verbal assurance. See it in writing.
I had two tranches (of a structured deposit), deposited in 2004 when interest was low. The bank staff was not honest and forthcoming in telling me the early redemption penalty. I was told that I would get a certain interest rate or higher.
When I tried to pull out last year, I was told penalty is 15%. Well, I was foolish enough to trust the relationship manager in that they are telling lies during signing of the placement.
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REPLY:
You must read the brochure or prospectus carefully and understand the product, before you invest in it. If the material is too difficult, avoid the product. Do not take any verbal assurance. See it in writing.
Expense ratio of financial products
Mr Tan,
Can you tell us which of the following financial products has a higher commission/expense ratio – an annuity (which you love so much) or a structured product (which you disdain)? Is it a case of the kettle calling the pot black?
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REPLY:
According to my estimate, the expense ratio of a life annuity is less than half of the expense ratio of a structured product (to cover marketing expense, fees and profit margin).
A life annuity serves a useful function in the polling of longevity risk and achieving a satisfactory long term return for the customer.
A structured product usually produces a poor investment return to the customer (i.e. does a bad job at its primary role). But they do a good job at giving large fees to the financial institutions that design and market the product.
Can you tell us which of the following financial products has a higher commission/expense ratio – an annuity (which you love so much) or a structured product (which you disdain)? Is it a case of the kettle calling the pot black?
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REPLY:
According to my estimate, the expense ratio of a life annuity is less than half of the expense ratio of a structured product (to cover marketing expense, fees and profit margin).
A life annuity serves a useful function in the polling of longevity risk and achieving a satisfactory long term return for the customer.
A structured product usually produces a poor investment return to the customer (i.e. does a bad job at its primary role). But they do a good job at giving large fees to the financial institutions that design and market the product.
More than Insurance
COMMENTS POSTED IN MY BLOG
Very good that the new Income management has closed down the loans unit and some of the other non-core businesses like line dance and snow city. This will allow for better pay to be offered to the rest of the employees.
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Income should close all the non-core businesses and refocus on insurance. This will improve its bottom line. Money saved, use it to improve the skills of its agents who are lacking badly in this area.
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Rubbish, The Income that maintains the loans policies and other value added services was the Income that has a heart! This is very lacking in the society of today.
Nowadays Income spent lots of money advertising full colour full page advertisements that does not add any value to the policyholders at all. As Mr. Tan has said, this takes away money from the Par fund and reduces distributions to policyholders. At least the other services add value to Income policy holders lives and help them in times of need.
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REPLY:
When I was CEO of NTUC Income, the "more than insurance" businesses were run on the following principles:
* they have to give value to the policyholders
* they should be runned on cost recovery, with a margin to meet the expenses
Some of the businesses were successful, including the home services (ie referral of contractors) and car sharing. Others were not successful, and were scaled down or closed down during my time.
Some activities (such as line-dancing) cost very little, and give a lot of awareness and positive pubicity. It is a form of low-cost advertising.
Very good that the new Income management has closed down the loans unit and some of the other non-core businesses like line dance and snow city. This will allow for better pay to be offered to the rest of the employees.
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Income should close all the non-core businesses and refocus on insurance. This will improve its bottom line. Money saved, use it to improve the skills of its agents who are lacking badly in this area.
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Rubbish, The Income that maintains the loans policies and other value added services was the Income that has a heart! This is very lacking in the society of today.
Nowadays Income spent lots of money advertising full colour full page advertisements that does not add any value to the policyholders at all. As Mr. Tan has said, this takes away money from the Par fund and reduces distributions to policyholders. At least the other services add value to Income policy holders lives and help them in times of need.
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REPLY:
When I was CEO of NTUC Income, the "more than insurance" businesses were run on the following principles:
* they have to give value to the policyholders
* they should be runned on cost recovery, with a margin to meet the expenses
Some of the businesses were successful, including the home services (ie referral of contractors) and car sharing. Others were not successful, and were scaled down or closed down during my time.
Some activities (such as line-dancing) cost very little, and give a lot of awareness and positive pubicity. It is a form of low-cost advertising.
Stock and property markets
A few letters were published in the newspaper recently, warning about the high stock and property markets. Government leaders have also expressed a similar view. They warned investors about the over-extended markets.
I wish to add one point point - which has not been covered. The Singapore stockmarket is small, compared to global standards. We are highly dependent on the foreign funds.
When the foreign fund decide to move out of the Singapore market, it will be swift, massive and unexpected. It has happened like this, on several occasions in the past.
If you are invested in the global stockmarket, you will not suffer this kind of volatility. But, if you are in a small market, including Singapore, you will be exposed to this risk.
We do not know when this may happen, and what may trigger this. Do be careful.
I wish to add one point point - which has not been covered. The Singapore stockmarket is small, compared to global standards. We are highly dependent on the foreign funds.
When the foreign fund decide to move out of the Singapore market, it will be swift, massive and unexpected. It has happened like this, on several occasions in the past.
If you are invested in the global stockmarket, you will not suffer this kind of volatility. But, if you are in a small market, including Singapore, you will be exposed to this risk.
We do not know when this may happen, and what may trigger this. Do be careful.
Thursday, July 05, 2007
Simple financial products
COMMENT POSTED IN MY BLOG:
Relationship manager or whatever title they go by is no difference from insurance agents. They are sales persons. They manipulate the sales process. They up play and down play; and non-disclosure and misrepresentation are among tactics they employ.
MAS or CASE should come hard upon these people. This is the high risk group consumers should beware.
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REPLY:
The starting point is for the financial institution (ie insurance company and banks) to offer simple, "honest" products, such as:
* a savings or bank account
* a low cost investment fund (equity, bond or money market)
* government bonds
* insurance products to cover specified risks
Information about these products should be kept simple and made easily accessible to consumers. The consumers should also be educated about these financial products.
The distribution cost can be kept low, as less effort is needed to market the product. For example, there is no need to pay commission to "sell" a saving account.
Preferably, there should be no locked-in period. Alternatively, the penalty for withdrawal should be kept low.
With simple products, there is less opportunity for the consumer to be exploited.
Relationship manager or whatever title they go by is no difference from insurance agents. They are sales persons. They manipulate the sales process. They up play and down play; and non-disclosure and misrepresentation are among tactics they employ.
MAS or CASE should come hard upon these people. This is the high risk group consumers should beware.
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REPLY:
The starting point is for the financial institution (ie insurance company and banks) to offer simple, "honest" products, such as:
* a savings or bank account
* a low cost investment fund (equity, bond or money market)
* government bonds
* insurance products to cover specified risks
Information about these products should be kept simple and made easily accessible to consumers. The consumers should also be educated about these financial products.
The distribution cost can be kept low, as less effort is needed to market the product. For example, there is no need to pay commission to "sell" a saving account.
Preferably, there should be no locked-in period. Alternatively, the penalty for withdrawal should be kept low.
With simple products, there is less opportunity for the consumer to be exploited.
How can Singaporeans be happy?
COMMENT POSTED IN MY BLOG:
In my 9 years here, I've rarely met anyone who's happy about their job. Everyone has grouses ... and why?
Mostly due to Money. Let's all admit it, isn't this society driven by monetary excellence? What else? High expectations has been drilled since we are young. High expectations of your maid, the guy at the front bank desk, your colleagues.
Everything is speed, accuracy, and excellence. Would anyone dare fail? What's this all boils down to? Higher stress ---> Grouses??
Is this only happening in Singapore? I don't think so. Maybe it's more evident here? Possibly?
So therefore, your statement may have to evolve to 'how can Singaporeans be happy?'
Mr. Tan sir, please share some thoughts.
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REPLY:
I like to invite other readers to share their thoughts.
Here are some of my suggestions:
* live within our income
* save 15% for our future needs
* do not spend unnecessary (to keep up with other people)
* avoid borrowing on credit card
* do not envy other people; live our own life
* look for the things that are inexpensive or free in Singapore; they are plenty
* do not waste our time doing the unnecessary work
* talk to friends and colleagues
* have an inexpensive hobby
* spend time to be nice to other people
* think of others; not just ourself
I hope to get more views from other people.
In my 9 years here, I've rarely met anyone who's happy about their job. Everyone has grouses ... and why?
Mostly due to Money. Let's all admit it, isn't this society driven by monetary excellence? What else? High expectations has been drilled since we are young. High expectations of your maid, the guy at the front bank desk, your colleagues.
Everything is speed, accuracy, and excellence. Would anyone dare fail? What's this all boils down to? Higher stress ---> Grouses??
Is this only happening in Singapore? I don't think so. Maybe it's more evident here? Possibly?
So therefore, your statement may have to evolve to 'how can Singaporeans be happy?'
Mr. Tan sir, please share some thoughts.
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REPLY:
I like to invite other readers to share their thoughts.
Here are some of my suggestions:
* live within our income
* save 15% for our future needs
* do not spend unnecessary (to keep up with other people)
* avoid borrowing on credit card
* do not envy other people; live our own life
* look for the things that are inexpensive or free in Singapore; they are plenty
* do not waste our time doing the unnecessary work
* talk to friends and colleagues
* have an inexpensive hobby
* spend time to be nice to other people
* think of others; not just ourself
I hope to get more views from other people.
Surf Deposit 20
Dear Mr Tan
I am stuck in a Surf Deposit 20 - Tranche A structured product which I invested in November 2003. It will mature in 2008. So far, I have received only 2 payout, totaling 4.25% in 2004. The total payout is 5.75% on maturity if I stay invested for the full 5 years.
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REPLY:
I saw a notice in the website for investors of another tranche, ie Surf Deposit 21 (10 year SGD Tranche A). In their case, the investment had an early redemption after 3.5 years and they earned a total return of 11.6% (or 3.2% p.a.).
It seems that the investors in most of the tranches are stuck, like you, and have to wait until maturity to get a low rate of return. If they cash out earlier, they will make a loss.
Lesson: It is better to avoid structured products
I am stuck in a Surf Deposit 20 - Tranche A structured product which I invested in November 2003. It will mature in 2008. So far, I have received only 2 payout, totaling 4.25% in 2004. The total payout is 5.75% on maturity if I stay invested for the full 5 years.
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REPLY:
I saw a notice in the website for investors of another tranche, ie Surf Deposit 21 (10 year SGD Tranche A). In their case, the investment had an early redemption after 3.5 years and they earned a total return of 11.6% (or 3.2% p.a.).
It seems that the investors in most of the tranches are stuck, like you, and have to wait until maturity to get a low rate of return. If they cash out earlier, they will make a loss.
Lesson: It is better to avoid structured products
Pay less for your home loan
If you have an existing home loan, or is thinking of taking a new loan, I advise you to read the 14 tips given in Dr Money's website.
Two important tips are:
* selecting the right type of loan, eg variable or fixed, HDB or bank loan
* look into the possibility of refinancing your existing loan, after the lock-in period, to get better terms (e.g. to enjoy attractive offer)
Two important tips are:
* selecting the right type of loan, eg variable or fixed, HDB or bank loan
* look into the possibility of refinancing your existing loan, after the lock-in period, to get better terms (e.g. to enjoy attractive offer)
Star Track II SGD
Dear Mr. Tan,
I invested in this product almost 5 years ago. It will mature in 2008.
Name of product: Star Track II SGD
Amount invested: $5,000
Period of investment: 5 years
Return on maturity: Currently, it is worth only $4,373.80. Guaranteed to return back principle invested sum of $5000 on maturity.
Why was the product unsatisfactory? It give a worse return compared to savings account.
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REPLY
I found the following information from the website:
Capital protection:
In order to provide investors protection for 100% of the capital invested, DBS Star Track II will invest a substantial portion of its net assets in a combination of debt securities issued by corporations, governments, government agencies or supranationals.
Participation in the upside of equity stocks:
To give investors the opportunity to obtain capital appreciation at
maturity on 5 November 2008, the remaining net assets of the Fund will be invested in an option (the "Option"), linked to the performance of a basket of equity stocks.
The selection of 3 top performing stocks will be done after the 1st anniversary of the Fund to form a "star" basket, another selection of 3 top performing stocks will be done on the 3rd anniversary.
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REMARKS: Apparently, the options did not produce any return. Hence, the investor obtained only the return of capital (from the debt instruments). The fund has an annual fee of 1% (which eats away from the return).
I invested in this product almost 5 years ago. It will mature in 2008.
Name of product: Star Track II SGD
Amount invested: $5,000
Period of investment: 5 years
Return on maturity: Currently, it is worth only $4,373.80. Guaranteed to return back principle invested sum of $5000 on maturity.
Why was the product unsatisfactory? It give a worse return compared to savings account.
--------------------------------------------------------
REPLY
I found the following information from the website:
Capital protection:
In order to provide investors protection for 100% of the capital invested, DBS Star Track II will invest a substantial portion of its net assets in a combination of debt securities issued by corporations, governments, government agencies or supranationals.
Participation in the upside of equity stocks:
To give investors the opportunity to obtain capital appreciation at
maturity on 5 November 2008, the remaining net assets of the Fund will be invested in an option (the "Option"), linked to the performance of a basket of equity stocks.
The selection of 3 top performing stocks will be done after the 1st anniversary of the Fund to form a "star" basket, another selection of 3 top performing stocks will be done on the 3rd anniversary.
-------------------------------
REMARKS: Apparently, the options did not produce any return. Hence, the investor obtained only the return of capital (from the debt instruments). The fund has an annual fee of 1% (which eats away from the return).
The real winners in structured products
I saw an article in a newspaper, written in November 2006. A summary of the key points:
* structured products have taken Asia by storm
* retail and private banks collected millions of dollars in embedded fees
* more Asians bought these products, compared to Europeans and Americans
* some fundamental questions of the nature of these products are not answered
* the risks are not clearly explained
* prospectuses are couched in financial jargon and are of little help
* most products have a fairly lengthy lock-in
* the sure winners are the investment banks and distributors who always collect a spread, whether the investor wins or loses.
* structured products have taken Asia by storm
* retail and private banks collected millions of dollars in embedded fees
* more Asians bought these products, compared to Europeans and Americans
* some fundamental questions of the nature of these products are not answered
* the risks are not clearly explained
* prospectuses are couched in financial jargon and are of little help
* most products have a fairly lengthy lock-in
* the sure winners are the investment banks and distributors who always collect a spread, whether the investor wins or loses.
Measure yield on money market fund
Dear Mr Tan,
It seems those who bought the above at $1.065 in May 07 are now getting a very bad yield of less than 1 % annualised, which is much worse than even short term (1 to 3 mth) Bank Fixed Deposit rates for amounts >$50K.
The trend (over 30 to 40 days) worsen in June 07. Is the duration enough to make any judgement? Should they hold or cut their losses (relative to FD) ?
-----------------------
REPLY:
You should measure the yield over 1 OR 2 months, and not just on a few past days (as it may be affected by temporary fluctuations.
I believe that the current yield is about 2% per annum (based on the underlying investments). It is better to stay invested in the money market fund (unless you have specific use for the money).
It seems those who bought the above at $1.065 in May 07 are now getting a very bad yield of less than 1 % annualised, which is much worse than even short term (1 to 3 mth) Bank Fixed Deposit rates for amounts >$50K.
The trend (over 30 to 40 days) worsen in June 07. Is the duration enough to make any judgement? Should they hold or cut their losses (relative to FD) ?
-----------------------
REPLY:
You should measure the yield over 1 OR 2 months, and not just on a few past days (as it may be affected by temporary fluctuations.
I believe that the current yield is about 2% per annum (based on the underlying investments). It is better to stay invested in the money market fund (unless you have specific use for the money).
Wednesday, July 04, 2007
Any good structured products?
I have taken the position that structured products are bad for consumers. They have high charges and marketing expenses, that eat away the return to the investor.
Someone made a statement that I am not familiar with structured products: they guarantee no capital loss, and allow the investor to make a good gain. He said that it is a "free lunch".
This is how the products were marketed. In think that the actual experience over the past years had been unsatisfactory. In spite of the strong stockmarket, the return on most structured products have been disappointing.
I am not aware about any structured product that have produced a good outcome for the investor.
Do you have any past experience of the structured products? Were you happy or unhappy with your investment? Please send an e-mail to me, at kinlian@gmail.com.
Someone made a statement that I am not familiar with structured products: they guarantee no capital loss, and allow the investor to make a good gain. He said that it is a "free lunch".
This is how the products were marketed. In think that the actual experience over the past years had been unsatisfactory. In spite of the strong stockmarket, the return on most structured products have been disappointing.
I am not aware about any structured product that have produced a good outcome for the investor.
Do you have any past experience of the structured products? Were you happy or unhappy with your investment? Please send an e-mail to me, at kinlian@gmail.com.
Wisdom of Crowds
This is the title of a book written by James Surowiecki and first published in 2004.
The author said many examples where the decision of a group is often better than could have been made by any single member of the group (including an expert). These examples are taken from several fields, primarily economics and psychology.
The opening story was about a crowd in a county fair who were asked to guess the "slaughtered and dressed" weight of an ox. The median weight of the individual guesses was closest to the ox's true weight than the estimates of most individual members, including the estimates made by cattle experts.
This theory refers to decisions of independently-deciding individuals, and is not the same as crowd psychology (where most people blindly follow the crowd).
The author said many examples where the decision of a group is often better than could have been made by any single member of the group (including an expert). These examples are taken from several fields, primarily economics and psychology.
The opening story was about a crowd in a county fair who were asked to guess the "slaughtered and dressed" weight of an ox. The median weight of the individual guesses was closest to the ox's true weight than the estimates of most individual members, including the estimates made by cattle experts.
This theory refers to decisions of independently-deciding individuals, and is not the same as crowd psychology (where most people blindly follow the crowd).
Flexible terms for your mortgage loan
If you take a mortgage loan, try to ask for the following flexibility:
* to keep the same monthly repayment, i.e. do not adjust with the interest rate
* to increase the monthly repayment (e.g. to pay more if your earnings increase
* to make partial lump sum repayment
* to make additional withdrawals, so long as it can be covered by the value of your property.
* to keep the same monthly repayment, i.e. do not adjust with the interest rate
* to increase the monthly repayment (e.g. to pay more if your earnings increase
* to make partial lump sum repayment
* to make additional withdrawals, so long as it can be covered by the value of your property.
Fixed monthly repayment on mortgage loan
Dear Mr Tan,
If I take a mortgage loan with a variable interest rate, do I have to pay a higher repayment if the interest rate goes up? How often is this rate adjusted?
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REPLY:
I am not sure about the practice of the lender. I believe that, in most cases, they will allow you to keep the same monthly repayment.
When I took a morgage loan previously, I keep to the same monthly repayment, even though the interest rate changes. I get a statement each year showing my balance, the interest charged for the year, and the repayment made during the year.
If I take a mortgage loan with a variable interest rate, do I have to pay a higher repayment if the interest rate goes up? How often is this rate adjusted?
-------------------------
REPLY:
I am not sure about the practice of the lender. I believe that, in most cases, they will allow you to keep the same monthly repayment.
When I took a morgage loan previously, I keep to the same monthly repayment, even though the interest rate changes. I get a statement each year showing my balance, the interest charged for the year, and the repayment made during the year.
Commission paid on life insurance
Dear Mr Tan
In your blog, you said that an insurance agent earns an average of $1,000 for selling a life insurance policy? Is this cost charged to the policyholder in the premium? It is a lot of money. Why should the insurance be so costly?
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REPLY:
The actual commission depends on the size of the policy and the type and duration of the policy. It may also vary by insurance company. I have made an estimate of the average commission based on the policies sold in the market.
The agent needs to be paid this level of commission, as it takes a lot of time to look for a customer, to explain the product and to convince the customer to buy the insurance policy.
Some companies pay lower commission to the agent, and reduces the premium paid by the customer.
You can find out what is being charged from the sales illustration given to you at the point of sale.
Some insurance companies are reducing the commission for new products that are being introduced through new channels (such as the internet or directly from their office.
In your blog, you said that an insurance agent earns an average of $1,000 for selling a life insurance policy? Is this cost charged to the policyholder in the premium? It is a lot of money. Why should the insurance be so costly?
-----------------------------
REPLY:
The actual commission depends on the size of the policy and the type and duration of the policy. It may also vary by insurance company. I have made an estimate of the average commission based on the policies sold in the market.
The agent needs to be paid this level of commission, as it takes a lot of time to look for a customer, to explain the product and to convince the customer to buy the insurance policy.
Some companies pay lower commission to the agent, and reduces the premium paid by the customer.
You can find out what is being charged from the sales illustration given to you at the point of sale.
Some insurance companies are reducing the commission for new products that are being introduced through new channels (such as the internet or directly from their office.
Return from a life annuity
I said that the return from a life annuity from NTUC Income is likely to be 4-5% per annum.
This comprises of the following:
* guaranteed rate of 2.5% used to calculate the basic amount of the annuity
* an average bonus of 1.5% to 2.5% added to the annuity yearly (based on past records)
* total is 4-5% per annum.
The life annuity has an element of pooling of risk. Those who live longer will get a better return. Those who die younger will get a lower return.
This comprises of the following:
* guaranteed rate of 2.5% used to calculate the basic amount of the annuity
* an average bonus of 1.5% to 2.5% added to the annuity yearly (based on past records)
* total is 4-5% per annum.
The life annuity has an element of pooling of risk. Those who live longer will get a better return. Those who die younger will get a lower return.
Tuesday, July 03, 2007
Sell low cost policy
Mr Tan
How many low cost policies must I sell a day, to earn an decent income?
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REPLY:
If a life insurance agent sells an average of 1 policy a week, he needs to earn $1,000 per policy, to achieve a monthly income of $4,000.
If the agent sells 1 policy a day, he only needs to earn $200 per policy to achieve the same income. This is lower cost to the customer.
If the agent sells 4 low-cost policies a day, he only needs to earn $50 per policy. This will make the product more affordable to the customer.
You can sell 4 low cost policies a day, if you get the customer to come to you (eg visit your office). They will do so, if you offer simple, good value products.
Many people buy shares by telephoning the stockbroker. The stockbroker does not have to visit the customer!
Lesson: To make life insurance more affordable to customers, we need to develop a new and more productive way of selling the "good value" products.
How many low cost policies must I sell a day, to earn an decent income?
-----------------------------------------
REPLY:
If a life insurance agent sells an average of 1 policy a week, he needs to earn $1,000 per policy, to achieve a monthly income of $4,000.
If the agent sells 1 policy a day, he only needs to earn $200 per policy to achieve the same income. This is lower cost to the customer.
If the agent sells 4 low-cost policies a day, he only needs to earn $50 per policy. This will make the product more affordable to the customer.
You can sell 4 low cost policies a day, if you get the customer to come to you (eg visit your office). They will do so, if you offer simple, good value products.
Many people buy shares by telephoning the stockbroker. The stockbroker does not have to visit the customer!
Lesson: To make life insurance more affordable to customers, we need to develop a new and more productive way of selling the "good value" products.
Low cost product
COMMENT POSTED IN MY BLOG:
Agents who sell low-cost product obviously won’t earn much. They’re honest, but, definitely not Million-Dollar-Round-Table stuff. Smart, ambitious advisors won’t go around selling term insurance for long. The best protection for a client is still to educate himself.
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REPLY:
An adviser (agent) who sell low cost product can still earn a modest rate of commission. By increasing the volume of sales, the adviser can earn an adequate leve of earnings. If the adviser sells good products (ie good value for customers), the future customers will come to them (usually referred by existing customers).
This is a better business model. Many other businesses are successful in applying this model. It can work for financial services as well.
I agree that the best protection is an eduated customer.
Agents who sell low-cost product obviously won’t earn much. They’re honest, but, definitely not Million-Dollar-Round-Table stuff. Smart, ambitious advisors won’t go around selling term insurance for long. The best protection for a client is still to educate himself.
-----------------------------
REPLY:
An adviser (agent) who sell low cost product can still earn a modest rate of commission. By increasing the volume of sales, the adviser can earn an adequate leve of earnings. If the adviser sells good products (ie good value for customers), the future customers will come to them (usually referred by existing customers).
This is a better business model. Many other businesses are successful in applying this model. It can work for financial services as well.
I agree that the best protection is an eduated customer.
Fixed or floating rate for your mortgage?
Dear Mr Tan,
Is it better to take a mortgage on a fixed rate, or a floating rate?
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REPLY:
It depends on the terms that are offered to you. Normally, the interest rate should be pegged to a market benchmark plus a margin.
For example, the interest rate on 10 year government bond is now at 3% p.a. A fixed rate mortgage should be at 3% plus a margin of say 1%, ie 4% p.a. It should be fixed for the full term.
The floating rate should be based on the current rate of (say) 2% plus the margin of 1%, ie 3%. This interest rate should be reset every 6 to 12 months, based on the movement of the market benchmark.
At the current time, when interest rate is at a historically low level, it is better to take a fixed rate loan and pay 4% p.a (say) for the next 10 years. You do not have to worry about future changes in the interest rate, as this rate is "locked in".
Apart from any special reason (eg lock in the current interest rate), I generally prefer a floating rate. This gives the greatest flexibilty for you to re-finance the loan, to repay the loan early (when you sell the property) or to change your repayment schedule.
Is it better to take a mortgage on a fixed rate, or a floating rate?
----------------------------
REPLY:
It depends on the terms that are offered to you. Normally, the interest rate should be pegged to a market benchmark plus a margin.
For example, the interest rate on 10 year government bond is now at 3% p.a. A fixed rate mortgage should be at 3% plus a margin of say 1%, ie 4% p.a. It should be fixed for the full term.
The floating rate should be based on the current rate of (say) 2% plus the margin of 1%, ie 3%. This interest rate should be reset every 6 to 12 months, based on the movement of the market benchmark.
At the current time, when interest rate is at a historically low level, it is better to take a fixed rate loan and pay 4% p.a (say) for the next 10 years. You do not have to worry about future changes in the interest rate, as this rate is "locked in".
Apart from any special reason (eg lock in the current interest rate), I generally prefer a floating rate. This gives the greatest flexibilty for you to re-finance the loan, to repay the loan early (when you sell the property) or to change your repayment schedule.
Different types of mortgages
Source: Wikipedia
1. Adjustable rate mortgage (ARM). The interest rate on the loan is periodically adjusted based on an index. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. The borrower benefits if the interest rate falls and loses out if interest rates rise. Adjustable rate mortgages are characterized by their index and limitations on charges (caps).
2. Graduated payment mortage (GPM). It has low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future.
3. Interest only mortgage. During the agreed term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the term the borrower may enter an interest-only mortgage, pay the principal, or convert the loan to a principal and interest payment (or amortized) loan.
4. Fixed rate mortgage(FRM). The interest rate on the loan remains the same through the term of the loan. Fixed rate mortgages are characterized by their interest rate, amount of loan, and term of the mortgage.
5. Negative amortization mortgage. The borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed in advance, to avoid default on payment.
6. Balloon payment mortgage. This mortgage does not fully amortize over the term, leaving a balance due at maturity. The final payment is called a balloon payment. This mortgage may have a fixed or a floating interest rate.
A "two-step" mortgage plan may be used with balloon payment mortgage. Under this plan, sometimes referred to as "reset option", the mortgage "resets" using current market rates and using a fully-amortizing payment schedule. If there is not reset option, the borrower is expected to sell the property or refinanced the loan.
1. Adjustable rate mortgage (ARM). The interest rate on the loan is periodically adjusted based on an index. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).
Adjustable rates transfer part of the interest rate risk from the lender to the borrower. The borrower benefits if the interest rate falls and loses out if interest rates rise. Adjustable rate mortgages are characterized by their index and limitations on charges (caps).
2. Graduated payment mortage (GPM). It has low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future.
3. Interest only mortgage. During the agreed term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the term the borrower may enter an interest-only mortgage, pay the principal, or convert the loan to a principal and interest payment (or amortized) loan.
4. Fixed rate mortgage(FRM). The interest rate on the loan remains the same through the term of the loan. Fixed rate mortgages are characterized by their interest rate, amount of loan, and term of the mortgage.
5. Negative amortization mortgage. The borrower pays back less than the full amount of interest owed to the lender each month. The shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed in advance, to avoid default on payment.
6. Balloon payment mortgage. This mortgage does not fully amortize over the term, leaving a balance due at maturity. The final payment is called a balloon payment. This mortgage may have a fixed or a floating interest rate.
A "two-step" mortgage plan may be used with balloon payment mortgage. Under this plan, sometimes referred to as "reset option", the mortgage "resets" using current market rates and using a fully-amortizing payment schedule. If there is not reset option, the borrower is expected to sell the property or refinanced the loan.
Adjustible Rate Mortgage
Source: About.com
An adjustable rate mortgage (ARM for short), is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
Index
An index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index.
Margin
Think of the margin as the lender's markup. It is an interest rate that represents the lender's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of your home loan.
Adjustment Period
The adjustment period is the period between potential interest rate adjustments.
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NOTE:
Most of the mortgages in Singapore have adjustible rate. However, in the past, they are based on the board rate decided by the lender. Recently, some lenders have introduced loans with rates that are linked to a market benchmark (ie similar to the ARM in America).
An adjustable rate mortgage (ARM for short), is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.
Index
An index is a guide that lenders use to measure interest rate changes. Common indexes used by lenders include the activity of one, three, and five-year Treasury securities, but there are many others. Each ARM is linked to a specific index.
Margin
Think of the margin as the lender's markup. It is an interest rate that represents the lender's cost of doing business plus the profit they will make on the loan. The margin is added to the index rate to determine your total interest rate. It usually stays the same during the life of your home loan.
Adjustment Period
The adjustment period is the period between potential interest rate adjustments.
---------------------
NOTE:
Most of the mortgages in Singapore have adjustible rate. However, in the past, they are based on the board rate decided by the lender. Recently, some lenders have introduced loans with rates that are linked to a market benchmark (ie similar to the ARM in America).
Look for good advisers
COMMENT POSTED IN MY BLOG:
I would like to add that the agents sell what pays them the most commissions besides what is hot (typically what is bad for the investor).
Most are driven by sales commissions. If the client so happens to buy something good for themselves, it is just pure luck.
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REPLY:
There are advisers (agents) who sell low cost products that are good for the investors. They get a modest commission and provide good service to their clients.
I would like to add that the agents sell what pays them the most commissions besides what is hot (typically what is bad for the investor).
Most are driven by sales commissions. If the client so happens to buy something good for themselves, it is just pure luck.
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REPLY:
There are advisers (agents) who sell low cost products that are good for the investors. They get a modest commission and provide good service to their clients.
Monday, July 02, 2007
Lorenzo de Medici
I watched an interesting documentary about Lorenzo de Medici in the History Channel 8 on Starhub. I searched Wikipedia and found the following:
Lorenzo de' Medici (January 1, 1449 – 9 April 1492) was an Italian statesman and ruler of the Florentine Republic during the Italian Renaissance.
Known as Lorenzo the Magnificent (Lorenzo il Magnifico) by contemporary Florentines, he was the most remarkable public figure of his time. Not only a wily diplomat and politician, he headed a brilliant group of scholars, artists, and poets. He was charismatic, tough, passionate, and energetic, equally devoted to his city, his family, the church, and the pursuit of art and learning.
His life coincided with the high point of the early Italian Renaissance; his death marked the end of the Golden Age of Florence.
The fragile peace that he helped to maintain between the various Italian states collapsed with his death; and two years later the French invasion of 1494 began nearly 400 years of foreign occupation of the Italian peninsula.
Though the Medici remained in power in Florence for several centuries, producing three popes and two queens of France, none of his successors approached Lorenzo's range of interests and accomplishments or the generosity of his vision.
Tip: Watch Starhub Channel 8 (History Channel). It is quite interesting.
Lorenzo de' Medici (January 1, 1449 – 9 April 1492) was an Italian statesman and ruler of the Florentine Republic during the Italian Renaissance.
Known as Lorenzo the Magnificent (Lorenzo il Magnifico) by contemporary Florentines, he was the most remarkable public figure of his time. Not only a wily diplomat and politician, he headed a brilliant group of scholars, artists, and poets. He was charismatic, tough, passionate, and energetic, equally devoted to his city, his family, the church, and the pursuit of art and learning.
His life coincided with the high point of the early Italian Renaissance; his death marked the end of the Golden Age of Florence.
The fragile peace that he helped to maintain between the various Italian states collapsed with his death; and two years later the French invasion of 1494 began nearly 400 years of foreign occupation of the Italian peninsula.
Though the Medici remained in power in Florence for several centuries, producing three popes and two queens of France, none of his successors approached Lorenzo's range of interests and accomplishments or the generosity of his vision.
Tip: Watch Starhub Channel 8 (History Channel). It is quite interesting.
Life cycle funds
Source: Investopedia
Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
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Example of asset allocation (Vanguard)
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!
Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
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Example of asset allocation (Vanguard)
Target Equity Bond
maturity
2025 59% 41%
2015 51% 49%
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!
Investment Funds
What is the different between a mutual fund and an exchange traded fund (ETF)?
REPLY:
In a mutual fund (i.e. unit trust in Singapore), the transactions are priced based on the closing price of the underlying investment at the end of the trading day. If you transact, you will only know the price on the following day.
In a ETF, you can decide on the price to transact for this fund. Your transaction is carried out in the stock exchange. You have to find another party who is willing to trade with you based on that price. Usually, the price will follow the net asset value of the fund.
For investors who like to trade, a ETF is more suitable. For long term investors, a mutual fund is probably better (as the cost is lower).
REPLY:
In a mutual fund (i.e. unit trust in Singapore), the transactions are priced based on the closing price of the underlying investment at the end of the trading day. If you transact, you will only know the price on the following day.
In a ETF, you can decide on the price to transact for this fund. Your transaction is carried out in the stock exchange. You have to find another party who is willing to trade with you based on that price. Usually, the price will follow the net asset value of the fund.
For investors who like to trade, a ETF is more suitable. For long term investors, a mutual fund is probably better (as the cost is lower).
Vanguard Funds
I visited the Vanguard website. Here are the performance of their funds, measured in USD:
Vanguard advertised that they have low expense ratio, ie low cost funds. Most of their funds are invested to follow an index. The other funds in the industry are mostly actively managed.
The difference in expense ratio is about 0.8% for one year. If you invest in an actively managed fund, you need to find a manager who is able to earn higher than the market average to cover the higher expense ratio. This is usually quite difficult.
Lesson: Invest in a low cost, well diversified fund.
1 yr Expense Industry
return ratio average
Prime Money Market 5.22% 0.29%
Short Term Inv Grade 5.73% 0.21% 0.97%
Total Bond Market 6.07% 0.20% 1.02%
Balanced Indexed 14.44% 0.20% 1.10%
Total Stockmarket Ind 20.20% 0.19% 1.14%
Diversifed Stock 20.19% 0.43% 1.14%
Total International St 29.42% 0.32% 1.49%
Vanguard advertised that they have low expense ratio, ie low cost funds. Most of their funds are invested to follow an index. The other funds in the industry are mostly actively managed.
The difference in expense ratio is about 0.8% for one year. If you invest in an actively managed fund, you need to find a manager who is able to earn higher than the market average to cover the higher expense ratio. This is usually quite difficult.
Lesson: Invest in a low cost, well diversified fund.
How Vanguard markets its funds
I visited Vanguard in Philadelphia a month ago. Here are my key observations:
* they offer a wide range of funds, at extremely low fees
* the annual fee for their indexed fund is less than 0.2% p.a.
* they offer no-load funds (ie without initial sales charge).
* a large proportion of their investors buy directly through the internet
* they can get information from various sources, including the Vanguard website
Vanguard is now among the top two in the fund management industry. They are able to tap a large and growing market of investors who are interested in low-cost funds and are willing to buy directly (without paying high sales charges to the adviser).
* they offer a wide range of funds, at extremely low fees
* the annual fee for their indexed fund is less than 0.2% p.a.
* they offer no-load funds (ie without initial sales charge).
* a large proportion of their investors buy directly through the internet
* they can get information from various sources, including the Vanguard website
Vanguard is now among the top two in the fund management industry. They are able to tap a large and growing market of investors who are interested in low-cost funds and are willing to buy directly (without paying high sales charges to the adviser).
Risk and return
There are some articles in the newspaper recently commenting that investors are taking high risks and are not getting an adequate return for the risk. What does this mean?
REPLY:
Interest rate globally (and especially in Singapore) is at a low level. To earn a higher return, many investors are buying stocks and properties with low yields, and this cause the prices to go up.
When interest rate increases globally, there is the risk that the investors will move out of the stocks and properties and re-invest in bonds or fixed income. This will cause the stock market to correct severely.
For example, if long term interest rate in Singapore, currently at 3% p.a., were to increase to 5% p.a., there is the potential for the stockmarket to drop by 40%. This risk has not been factored in.
During a recession, the yield expected on risky assets will increase sharply. They will cause a sharper drop in the prices of these assets. This factor has not been taken into account now (as investors are quite complacent about it).
REPLY:
Interest rate globally (and especially in Singapore) is at a low level. To earn a higher return, many investors are buying stocks and properties with low yields, and this cause the prices to go up.
When interest rate increases globally, there is the risk that the investors will move out of the stocks and properties and re-invest in bonds or fixed income. This will cause the stock market to correct severely.
For example, if long term interest rate in Singapore, currently at 3% p.a., were to increase to 5% p.a., there is the potential for the stockmarket to drop by 40%. This risk has not been factored in.
During a recession, the yield expected on risky assets will increase sharply. They will cause a sharper drop in the prices of these assets. This factor has not been taken into account now (as investors are quite complacent about it).
BIGe pays 3.5%
Mr. Tan,
I cannot understand how come Aviva BIGe can guaranteed interest of 3.5% without sales charges and withdrawal fees whereas no other institution can offer that. Is there any "catch" that I overlook on this product?
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REPLY:
Aviva only guarantees 3.5% for 3 months. Thereafter, they have the right to reduce the interest rate (subject to a minimum of 2.5%).
Although they have to pay out 3.5%, they are able (at this time) to invest a portion fo the fund in the stockmarket to earn a much higher return. They are taking some risk, but it can be covered by their risk capital.
This is also a good way for them to build up a base of customers for their other products.
I applaud Aviva for a good business strategy.
I cannot understand how come Aviva BIGe can guaranteed interest of 3.5% without sales charges and withdrawal fees whereas no other institution can offer that. Is there any "catch" that I overlook on this product?
-------------------------
REPLY:
Aviva only guarantees 3.5% for 3 months. Thereafter, they have the right to reduce the interest rate (subject to a minimum of 2.5%).
Although they have to pay out 3.5%, they are able (at this time) to invest a portion fo the fund in the stockmarket to earn a much higher return. They are taking some risk, but it can be covered by their risk capital.
This is also a good way for them to build up a base of customers for their other products.
I applaud Aviva for a good business strategy.
OpenID
I have registered for an OpenID at this website, www.myopenid.com. This OpenID can be used at some websites that have implemented this facility. More websites are expected to have this option in the future.
By using an OpenID, I do not have to provide a login name and password to the "relying website". They will accept my OpenID.
Apart from the service provider that I happen to use, there are many other websites a similar facility.
By using an OpenID, I do not have to provide a login name and password to the "relying website". They will accept my OpenID.
Apart from the service provider that I happen to use, there are many other websites a similar facility.
Investing in High Yielding Bonds
I read an interesting paper on the credit spreads from this website.
During a recession, the credit spread for a high yielding bond can widen to 10%. In good times, it can drop to 3%. This is for the US market.
If you buy a high yielding bond when the credit spread is 10%, you will be able to enjoy a 50% appreciation (my estimate) over a few years, when the credit spread narrows to 3%.
There is the risk that some of these bonds will fail. According to the paper, the risk represents only a proportion of the spread.
Conversely, if you buy a high yielding bond now (at a low credit spread), you stand the chance of losing 33% of your investment during a recession (due to the widening of the credit spread).
Lesson 1: The credit spread is too low now. You are not getting a sufficient reward for the risk. It is better to invest in government bonds.
Lesson 2: In a recession, when the credit spread is high, invest in a fund of high yielding bonds. You diversify the risk and enjoy a good yield (and high credit spread).
During a recession, the credit spread for a high yielding bond can widen to 10%. In good times, it can drop to 3%. This is for the US market.
If you buy a high yielding bond when the credit spread is 10%, you will be able to enjoy a 50% appreciation (my estimate) over a few years, when the credit spread narrows to 3%.
There is the risk that some of these bonds will fail. According to the paper, the risk represents only a proportion of the spread.
Conversely, if you buy a high yielding bond now (at a low credit spread), you stand the chance of losing 33% of your investment during a recession (due to the widening of the credit spread).
Lesson 1: The credit spread is too low now. You are not getting a sufficient reward for the risk. It is better to invest in government bonds.
Lesson 2: In a recession, when the credit spread is high, invest in a fund of high yielding bonds. You diversify the risk and enjoy a good yield (and high credit spread).
Difference between ILP and par fund
Hi Mr Tan,
I have read your useful explanation about the par fund. It seems that the policyholder is at the mercy of the insurance company. If the par fund has high expenses or reduces the bonuses, the policyholder has no choice.
Is there a better option for the investor?
--------------------
REPLY:
It is better to invest in an investment linked fund (ILP) or a unit trust. The fund manager can only spend up to the specified charges in the fund. These charges are transparent and have to be reported.
Due to its transparency, the charges have to be reduced (due to competition). This helps the investor to enjoy lower charges and get a better return.
A ILP or unit trust is likely to give a better return to the investor, compared to a par fund.
I have read your useful explanation about the par fund. It seems that the policyholder is at the mercy of the insurance company. If the par fund has high expenses or reduces the bonuses, the policyholder has no choice.
Is there a better option for the investor?
--------------------
REPLY:
It is better to invest in an investment linked fund (ILP) or a unit trust. The fund manager can only spend up to the specified charges in the fund. These charges are transparent and have to be reported.
Due to its transparency, the charges have to be reduced (due to competition). This helps the investor to enjoy lower charges and get a better return.
A ILP or unit trust is likely to give a better return to the investor, compared to a par fund.
Investing your CPF savings
COMMENT IN MY BLOG:
None is safer than leaving your money in the CPF. This has been proven again and again and again.
When CPF opened up for purposes other than its original objectives it was a big mistake. It opened up because members wanted it. Members thought they were savvy and cleverer at investing than the CPF, instead what a mess they have made to their hard earned money. Many today do not have enough to set aside for minimum sum in the retirement account. What do you think are the reasons? Who benefited from all these changes? Definitely not the administrator and the members!
The so called investment advisors; the insurance agents; the stock brokers,the product manufacturers, the market makers etc; for these people CPF is a gold mine. When things go awry there will be a lot of finger pointing, except ourselves. Scapegoats? Maybe CPF when it closes up again in the future.
------------------------------------------------
REPLY:
I agree that the liberalisation of CPF investments had produced poor results for the investors during the earlier years, as the stockmarket performed badly. This is compounded by the high expenses in the products (as you have pointed out).
In recent years, the stockmarket had performed well. It had given a good return to the investors, including those who invested their CPF savings.
The CPF investment scheme allows the members to invest their savings in equity and bond funds, to earn a better return than the interest rate of 2.5% paid by the CPF. You now have the choice of choosing a low cost, well diversified fund.
None is safer than leaving your money in the CPF. This has been proven again and again and again.
When CPF opened up for purposes other than its original objectives it was a big mistake. It opened up because members wanted it. Members thought they were savvy and cleverer at investing than the CPF, instead what a mess they have made to their hard earned money. Many today do not have enough to set aside for minimum sum in the retirement account. What do you think are the reasons? Who benefited from all these changes? Definitely not the administrator and the members!
The so called investment advisors; the insurance agents; the stock brokers,the product manufacturers, the market makers etc; for these people CPF is a gold mine. When things go awry there will be a lot of finger pointing, except ourselves. Scapegoats? Maybe CPF when it closes up again in the future.
------------------------------------------------
REPLY:
I agree that the liberalisation of CPF investments had produced poor results for the investors during the earlier years, as the stockmarket performed badly. This is compounded by the high expenses in the products (as you have pointed out).
In recent years, the stockmarket had performed well. It had given a good return to the investors, including those who invested their CPF savings.
The CPF investment scheme allows the members to invest their savings in equity and bond funds, to earn a better return than the interest rate of 2.5% paid by the CPF. You now have the choice of choosing a low cost, well diversified fund.
Switch to lower level of risk
Dear Sir
I have been investing $200 monthly in NTUC Income Growth fund since 2005. I know that this is a good fund for long term investment. However, I think the world-wide equity market will not do well in 2008.
Should I switch from Growth to Conservative or Singaore Bond or Global bond fund? I do not wish to terminate this investment because a substantial portion of my money goes to the managment fee, early termination will create a hugh lose.
Can bond fund really protect my $ when world-wide equity market doing badly? Or should I just terminate this investment now at a lose?
---------------------
REPLY:
It is all right to stay invested. It is all right to switch to the Conservative Fund, Singapore Bond Fund or Global Bond Fund to reduce the level of risk and realise some profit.
I have been investing $200 monthly in NTUC Income Growth fund since 2005. I know that this is a good fund for long term investment. However, I think the world-wide equity market will not do well in 2008.
Should I switch from Growth to Conservative or Singaore Bond or Global bond fund? I do not wish to terminate this investment because a substantial portion of my money goes to the managment fee, early termination will create a hugh lose.
Can bond fund really protect my $ when world-wide equity market doing badly? Or should I just terminate this investment now at a lose?
---------------------
REPLY:
It is all right to stay invested. It is all right to switch to the Conservative Fund, Singapore Bond Fund or Global Bond Fund to reduce the level of risk and realise some profit.
Sunday, July 01, 2007
Monitor bond and money market yields
Do you know how to keep track of the yields on bonds, deposits and the money market?
You can search the Financial database at the the MAS website. The website is well designed. It is easy and fast to navigate.
You can find out the current interest rates, and also the changes during the past months.
You can search the Financial database at the the MAS website. The website is well designed. It is easy and fast to navigate.
You can find out the current interest rates, and also the changes during the past months.
Rating of CPF approved funds
COMMENT POSTED IN MY BLOG
Mr Tan, someone like yourself needs to tell the guys at CPF exactly that a fund is safer than buying a stock.
The guys at CPF are wasting money getting the fund rated by Mercer. This indirectly means that consumers wil end up paying for something that is actually better for the average conservative investor.
It is bizzare that CPF allows someone to buy up to their stock limit in one stock while "worry" about someone buying into a fund.
The CPF guys are either trying to protect themeselves by getting the fund mangement company to pay Mercer so that Mercer can be used as a scapegoat if something goes wrong.
----------------
REPLY:
Not all funds are well diversified and safe. It is necessary for the fund to be rated. This is why CPF appointed Mercer to do the rating.
Mr Tan, someone like yourself needs to tell the guys at CPF exactly that a fund is safer than buying a stock.
The guys at CPF are wasting money getting the fund rated by Mercer. This indirectly means that consumers wil end up paying for something that is actually better for the average conservative investor.
It is bizzare that CPF allows someone to buy up to their stock limit in one stock while "worry" about someone buying into a fund.
The CPF guys are either trying to protect themeselves by getting the fund mangement company to pay Mercer so that Mercer can be used as a scapegoat if something goes wrong.
----------------
REPLY:
Not all funds are well diversified and safe. It is necessary for the fund to be rated. This is why CPF appointed Mercer to do the rating.
Maybank's Regal Structured Deposit
Larry Haverkamp has a new posting on his blog. It talks about the pros and cons of structured deposits. As an example, he looks at a recent one -- Maybank's "Regal Structured Deposit". It links your returns to Palm oil prices which have been booming.
Note: Read Dr Money's conclusion. He said, "if you want a better return (and still safe), you can invest in the money market fund". There is no need to invest in a complicated product.
Note: Read Dr Money's conclusion. He said, "if you want a better return (and still safe), you can invest in the money market fund". There is no need to invest in a complicated product.
Ideal structure of an investment fund
What is the ideal structure of an investment fund for long term investments? Is it an indexed fund?
REPLY:
Here is my concept. The ideal structure has the following features:
* no upfront sales charge (except for a modest transaction fee)
* low fund management fee
* low expense ratio
* preferably an indexed fund, but with a certain margin to deviate from the index
It should be cheaper to invest in a fund, compared to buying a stock on the exchange.
The fund management company can cover its expenses and make a modest profit from the management fee. If the fee is high, the investor has the right to withdraw from the fund and invest elsewhere. This ensures that the fund will always be operated efficiently, for the benefit of its investors.
REPLY:
Here is my concept. The ideal structure has the following features:
* no upfront sales charge (except for a modest transaction fee)
* low fund management fee
* low expense ratio
* preferably an indexed fund, but with a certain margin to deviate from the index
It should be cheaper to invest in a fund, compared to buying a stock on the exchange.
The fund management company can cover its expenses and make a modest profit from the management fee. If the fee is high, the investor has the right to withdraw from the fund and invest elsewhere. This ensures that the fund will always be operated efficiently, for the benefit of its investors.
Fair treatment of policyholders
Hi Mr Tan,
I read your blog about the new regulation on the par fund. How can the policyholder ensure that they are fairly treated? Is it fair for the fund to reduce the bonus in bad times, and take a long time to restore the bonus? Is this fair?
To your credit, NTUC was quite fast to restore its bonus rates when you were there as CEO. Will they continue to treat the policyholders fairly?
--------------------------------
REPLY:
NTUC Income is a cooperative society. When I was the CEO, I ensured the following:
* the fund is invested to earn an attractive return, at an acceptable risk level
* the expenses are kept at a low level
* 98% of the surplus is kept for the policyholder (shareholders take only 2%)
This is why NTUC Income was able to declare better bonus rates compared to other insurance companies. The return is much higher.
Many insurance companies spend too much money on the following:
* paying high commission and sales contests to advisers and agency managers
* advertising their products aggressively
* paying high salaries and other expenses
These expenses come out of the par fund, and will ultimately reduce the return to the policyholders. This is not fair to the policyholders. However, the policyholders do not have much choice, as they are stuck with their contract for many years.
I hope that the new regulations on the par fund will help to reduce this problem. (But, it may take a long time for the results to show).
I read your blog about the new regulation on the par fund. How can the policyholder ensure that they are fairly treated? Is it fair for the fund to reduce the bonus in bad times, and take a long time to restore the bonus? Is this fair?
To your credit, NTUC was quite fast to restore its bonus rates when you were there as CEO. Will they continue to treat the policyholders fairly?
--------------------------------
REPLY:
NTUC Income is a cooperative society. When I was the CEO, I ensured the following:
* the fund is invested to earn an attractive return, at an acceptable risk level
* the expenses are kept at a low level
* 98% of the surplus is kept for the policyholder (shareholders take only 2%)
This is why NTUC Income was able to declare better bonus rates compared to other insurance companies. The return is much higher.
Many insurance companies spend too much money on the following:
* paying high commission and sales contests to advisers and agency managers
* advertising their products aggressively
* paying high salaries and other expenses
These expenses come out of the par fund, and will ultimately reduce the return to the policyholders. This is not fair to the policyholders. However, the policyholders do not have much choice, as they are stuck with their contract for many years.
I hope that the new regulations on the par fund will help to reduce this problem. (But, it may take a long time for the results to show).
Saturday, June 30, 2007
Inflated Earnings
In good economic times (as like now), corporate earnings are inflated by the increase in asset prices.
As companies report higher earnings, their share price goes up and the price earning multiples goes up as well. More people buy into the shares.
When the bubble bursts, asset prices drop. Corporate earnings drop as well. In bad times, corporate earnings can drop by more than 50%. You can expect the share prices and price earning multiples to collapse.
Be careful about investing in properties and shares in times of inflated asset prices. It can be risky. Some people consider the current markets to be "frothy".
As companies report higher earnings, their share price goes up and the price earning multiples goes up as well. More people buy into the shares.
When the bubble bursts, asset prices drop. Corporate earnings drop as well. In bad times, corporate earnings can drop by more than 50%. You can expect the share prices and price earning multiples to collapse.
Be careful about investing in properties and shares in times of inflated asset prices. It can be risky. Some people consider the current markets to be "frothy".
HSBC Multi-currency account
Dear Mr Tan,
I am a retiree. I would like to seek your advice regarding HSBS's Multi Currency Savings Account which the bank has been quite active in its promotion.
This single online account gives you easy access to 10 major currencies. You can transfer funds from one currency to another, as well as enjoy attractive interest rates on all 10 currencies offered.
It appears that the account offers attractive interest rates ie more than the interest rates that local banks are offering. In your opinion, do you think it is good to invest?
------------------------
REPLY:
I think that it should be all right. As you are not locked into the investments (except for the short period of any fixed deposit), you have the freedom to move your money among the various currency according to the interest rate that they pay you.
You do need to be careful about investing in foreign currency as it may fluctuate in value compared to Singapore dollars.
Someone suggest that you should also compare the interest rate offered on this multi-currency account, compared to the similar instruments in the market. You should also consider the charges for converning the money. I agree.
Generally, it is good to have the convenience of managing it in one account. Actually, I wanted to open an account myself, but I have not got down to doing it.
I am a retiree. I would like to seek your advice regarding HSBS's Multi Currency Savings Account which the bank has been quite active in its promotion.
This single online account gives you easy access to 10 major currencies. You can transfer funds from one currency to another, as well as enjoy attractive interest rates on all 10 currencies offered.
It appears that the account offers attractive interest rates ie more than the interest rates that local banks are offering. In your opinion, do you think it is good to invest?
------------------------
REPLY:
I think that it should be all right. As you are not locked into the investments (except for the short period of any fixed deposit), you have the freedom to move your money among the various currency according to the interest rate that they pay you.
You do need to be careful about investing in foreign currency as it may fluctuate in value compared to Singapore dollars.
Someone suggest that you should also compare the interest rate offered on this multi-currency account, compared to the similar instruments in the market. You should also consider the charges for converning the money. I agree.
Generally, it is good to have the convenience of managing it in one account. Actually, I wanted to open an account myself, but I have not got down to doing it.
Investments of the Money Market Fund
The money market fund is invested in short term bonds and treasury bills. Here are the current yields from these investments:
* treasury bill: 2.22% (3 months) 2.25% (1 year)
* government bonds 2.58% (5 year)
Daily interbank rates: fluctuate between 2.25 to 3%
Depending on the mix of the instruments, the return of the fund should move within the above range. The fund manager deducts 0.25% to cover its expenses.
Alternative: If you do not wish to invest in the money market fund, you can buy the treasury bills or government bonds directly. You have to pay some transaction fee to the stockbroker or the bank.
* treasury bill: 2.22% (3 months) 2.25% (1 year)
* government bonds 2.58% (5 year)
Daily interbank rates: fluctuate between 2.25 to 3%
Depending on the mix of the instruments, the return of the fund should move within the above range. The fund manager deducts 0.25% to cover its expenses.
Alternative: If you do not wish to invest in the money market fund, you can buy the treasury bills or government bonds directly. You have to pay some transaction fee to the stockbroker or the bank.
Better governance and disclosure for par policies
Dear Mr Tan,
What are your views about the proposed measures to ensure better governance and disclosure for par policies? Will it help to ensure that the consumers will get a higher bonuses and a better return on their par policies?
----------------------
REPLY:
This is just a first step. To ensure its success, a lot of work has to be done over the next few years, to improve the system.
There are two important aspects of the new measures:
a) governance; internal rules that guide the management of the par fund (ie the fund holding the assets of the participating policyholders)
b) disclosure; to disclose the impact on changes in the bonus rates to the participating policyholders
In the ideal situation, the par fund should be managed in the interest of the par policyholders, as follows:
* the fund should be invested to earn a good return over the long term, at an acceptable level of risk
* the expenses should be minimised (so that most of the return will accrue to the policyholders)
* there should be a "fair method" of distributing the surplus between the policyholders and the shareholders
The management has to observe high integrity in managing the par fund and to treat the policyholders "fairly".
In the past, many life insurance companies are operated as "mutual companies"(ie without shareholders). It was easier to ensure that the fund is runned in the interest of the policyholders.
Nowaways, most life insurance companies are operated as stock companies (with shareholders). The companies have to face the challenge of ensuring "fair treatment" of the policyholders, while trying to give the best return to their shareholders.
The proposed new measures try to solve these challenges. It is not easy. But it is worthwhile to make a start.
What are your views about the proposed measures to ensure better governance and disclosure for par policies? Will it help to ensure that the consumers will get a higher bonuses and a better return on their par policies?
----------------------
REPLY:
This is just a first step. To ensure its success, a lot of work has to be done over the next few years, to improve the system.
There are two important aspects of the new measures:
a) governance; internal rules that guide the management of the par fund (ie the fund holding the assets of the participating policyholders)
b) disclosure; to disclose the impact on changes in the bonus rates to the participating policyholders
In the ideal situation, the par fund should be managed in the interest of the par policyholders, as follows:
* the fund should be invested to earn a good return over the long term, at an acceptable level of risk
* the expenses should be minimised (so that most of the return will accrue to the policyholders)
* there should be a "fair method" of distributing the surplus between the policyholders and the shareholders
The management has to observe high integrity in managing the par fund and to treat the policyholders "fairly".
In the past, many life insurance companies are operated as "mutual companies"(ie without shareholders). It was easier to ensure that the fund is runned in the interest of the policyholders.
Nowaways, most life insurance companies are operated as stock companies (with shareholders). The companies have to face the challenge of ensuring "fair treatment" of the policyholders, while trying to give the best return to their shareholders.
The proposed new measures try to solve these challenges. It is not easy. But it is worthwhile to make a start.
Yield on Money Market Fund
Dear Mr Tan,
The fixed deposit interest rate is very low at the moment (<2%). I consider parking a sum of said $30,000 in the Flex-Cash (ie Money Market Fund) as it return is stated at 3% or more.
What do think, is it a right move?
-------------------
REPLY:
The yield on Flexi Cash has also fallen in recent weeks. It should be about 2% p.a. now.
I think that it is all right to put into Flexi Cash as you have the flexibility to take it out at any time, without any penalty.
The fixed deposit interest rate is very low at the moment (<2%). I consider parking a sum of said $30,000 in the Flex-Cash (ie Money Market Fund) as it return is stated at 3% or more.
What do think, is it a right move?
-------------------
REPLY:
The yield on Flexi Cash has also fallen in recent weeks. It should be about 2% p.a. now.
I think that it is all right to put into Flexi Cash as you have the flexibility to take it out at any time, without any penalty.
Money market fund - NTUC Income
Hi Mr Tan,
Recently, I put a sum of money in NTUC money market fund. The bid/offer rate was 1.066, but it drop to 1.065 the following day.
Assuming I had invested 100,000 units, I would have lost $100. Is my assumption correct ?
Why does the price go down? The MMF is not a safe investment. Perhaps I should park my saving in FD or Govt Bond, correct?
-----------------------
REPLY:
You should look at the price over several days and not on a specific day. The drop in price is probably due to a unusual situation (eg usually due to change in money market interest rate) and is corrected the following day.
If you wish to take out your money, you can ask NTUC Income to wait until the price reaches a certain level, so that you are not subject to this temporary fluctuation.
For example, I wanted to withdraw some money when the price was at 1.066. It had been at this level for many days. I gave instruction to make the withdrawal when it reached 1.067. It occured within a few days.
Recently, I put a sum of money in NTUC money market fund. The bid/offer rate was 1.066, but it drop to 1.065 the following day.
Assuming I had invested 100,000 units, I would have lost $100. Is my assumption correct ?
Why does the price go down? The MMF is not a safe investment. Perhaps I should park my saving in FD or Govt Bond, correct?
-----------------------
REPLY:
You should look at the price over several days and not on a specific day. The drop in price is probably due to a unusual situation (eg usually due to change in money market interest rate) and is corrected the following day.
If you wish to take out your money, you can ask NTUC Income to wait until the price reaches a certain level, so that you are not subject to this temporary fluctuation.
For example, I wanted to withdraw some money when the price was at 1.066. It had been at this level for many days. I gave instruction to make the withdrawal when it reached 1.067. It occured within a few days.
Subprime lending
Source: Wikipedia
Subprime lending, also called "B-Paper," is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history.
A subprime loan is one that is offered at a rate higher than A-paper loans due to the increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others.
Subprime lending is typically defined by the status of borrowers. A subprime loan is, by definition, a loan made to someone who could not qualify for a more favorable rate. Subprime borrowers typically have low credit scores and histories of payment delinquencies, charge-offs, or bankruptcies. Because subprime borrowers are considered at higher risk to default, subprime loans typically have less favorable terms than their traditional counterparts. These terms may include higher interest rates, regular fees, or an up-front charge.
Proponents of the subprime lending in the United States have championed the role it plays in extending credit to consumers who would otherwise not have access to the credit market. But opponents have criticized the subprime lending industry for predatory practices such as targeting borrowers who did not have the resources to meet the terms of their loans over the long term. These criticisms have increased since 2006 in response to the growing crisis in the U.S. subprime mortgage industry, wherein hundreds of thousands of borrowers have been forced to default, and several major subprime lenders have filed for bankruptcy.
Subprime lending, also called "B-Paper," is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history.
A subprime loan is one that is offered at a rate higher than A-paper loans due to the increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others.
Subprime lending is typically defined by the status of borrowers. A subprime loan is, by definition, a loan made to someone who could not qualify for a more favorable rate. Subprime borrowers typically have low credit scores and histories of payment delinquencies, charge-offs, or bankruptcies. Because subprime borrowers are considered at higher risk to default, subprime loans typically have less favorable terms than their traditional counterparts. These terms may include higher interest rates, regular fees, or an up-front charge.
Proponents of the subprime lending in the United States have championed the role it plays in extending credit to consumers who would otherwise not have access to the credit market. But opponents have criticized the subprime lending industry for predatory practices such as targeting borrowers who did not have the resources to meet the terms of their loans over the long term. These criticisms have increased since 2006 in response to the growing crisis in the U.S. subprime mortgage industry, wherein hundreds of thousands of borrowers have been forced to default, and several major subprime lenders have filed for bankruptcy.
Friday, June 29, 2007
Property Insurance
When you insure a property, you should be covered against the following perils:
* Fire, lightning, explosion
* Bursting or overflowing of water tanks
* Theft or burglary - has to be caused by forcible and violent entry
* Malicious damage
* Riot & Strike
* Earthquake, wind and storm, flood
* Fire, lightning, explosion
* Bursting or overflowing of water tanks
* Theft or burglary - has to be caused by forcible and violent entry
* Malicious damage
* Riot & Strike
* Earthquake, wind and storm, flood
My management style
How do you describe your management style?
Reply: I set values and goals.
I work with my colleagues on the broad strategies to achieve specific goals. I let them choose the specific strategy and take the specific ations to achieve the results.
I let the results decide on whether they have taken the right actions. Often, the actions can be modified, so that the results can be improved.
My colleagues who worked with me for 5, 10 or more years, generally like my style. I describe it as the "entrepreneurial" approach.
Reply: I set values and goals.
I work with my colleagues on the broad strategies to achieve specific goals. I let them choose the specific strategy and take the specific ations to achieve the results.
I let the results decide on whether they have taken the right actions. Often, the actions can be modified, so that the results can be improved.
My colleagues who worked with me for 5, 10 or more years, generally like my style. I describe it as the "entrepreneurial" approach.
Engaging the customers
How does NTUC Income engage the customer (during the time that you were the CEO)? Does this help in the development of its business?
MY REPLY:
Over the past years, NTUC Income has actively communicated with its customers (policyholders) on the following:
* NTUC Income is a cooperative society
* Most of its surplus are distributed among its participating policyholders
* It shareholders receive only 2% of its surplus
* Its primary aim is to serve its policyholders (members) by offering low cost and a better return
* NTUC Income communicate actively and in a transparent manner
* It does not need to maximise profit for shareholders (ie avoid conflict of interest)
This active communication strategy has built up a strong loyalty among its policyholders.
MY REPLY:
Over the past years, NTUC Income has actively communicated with its customers (policyholders) on the following:
* NTUC Income is a cooperative society
* Most of its surplus are distributed among its participating policyholders
* It shareholders receive only 2% of its surplus
* Its primary aim is to serve its policyholders (members) by offering low cost and a better return
* NTUC Income communicate actively and in a transparent manner
* It does not need to maximise profit for shareholders (ie avoid conflict of interest)
This active communication strategy has built up a strong loyalty among its policyholders.
How to run a world class call center
I wish to share this secret about how NTUC Income wins the award for being a world class call center:
* it uses low cost, effective technology
* the calls are answered immediately by a human voice (without the need to press buttons)
* it has a low turnover rate of employees
* the front line officers handle simple calls and refer difficult cases (about 5% of calls) to specialists to call back
The cost of the technology is only 10% to 20% of what big organisations spend on their call center systems, without sacrificing on the necessary functionalities.
By using a two level system of handling enquiries, it is easy for the front line officers to handle 95% of the calls (with less training and better service quality). They refer the difficult enquiries and complaints to the specialists. This reduces the stress of the job.
They enjoy providing the customer service.
I was involved in the strategy to build up the call center when I was CEO of NTUC Income.
* it uses low cost, effective technology
* the calls are answered immediately by a human voice (without the need to press buttons)
* it has a low turnover rate of employees
* the front line officers handle simple calls and refer difficult cases (about 5% of calls) to specialists to call back
The cost of the technology is only 10% to 20% of what big organisations spend on their call center systems, without sacrificing on the necessary functionalities.
By using a two level system of handling enquiries, it is easy for the front line officers to handle 95% of the calls (with less training and better service quality). They refer the difficult enquiries and complaints to the specialists. This reduces the stress of the job.
They enjoy providing the customer service.
I was involved in the strategy to build up the call center when I was CEO of NTUC Income.
Importance of Customer Service
How important is customer service?
My view: it is very important, especially for a financial institution. It allows the provider to build a long term relationship with the customer.
I observe the following principles in dealing with customers:
* attend to their matter promptly
* be honest, open and transparent (ie HOT)
* look after the customer's interest (helps to build trust).
A good customer is willing to pay a fair price that allows me to meet the expenses and make a fair profit.
I keep my cost low by reducing waste and operating efficiently. This is also appreciated by the customer, as they do not have to pay more for good customer service.
My view: it is very important, especially for a financial institution. It allows the provider to build a long term relationship with the customer.
I observe the following principles in dealing with customers:
* attend to their matter promptly
* be honest, open and transparent (ie HOT)
* look after the customer's interest (helps to build trust).
A good customer is willing to pay a fair price that allows me to meet the expenses and make a fair profit.
I keep my cost low by reducing waste and operating efficiently. This is also appreciated by the customer, as they do not have to pay more for good customer service.
Primary values that drive a business
What are the primary values that drive NTUC Income's business (during the time that you were the CEO)? Are these values responsible for the success of the business?
MY REPLY:
The primary values were:
* act in the best interest of the customers
* act honestly, with integrity, and be transparent
We act in the best interest of the customer and offer good value in the form of lower prices or better return on their savings. We achieve it by operating efficiently, reducing cost and cutting down on wastage.
We were able to earn an adequate margin to meet our expenses and to provide a modest profit to shareholders.
We act honestly, with integrity. We offer products that meet the genuine needs of the customer. We keep the product simple, so that they can understand it, and choose it for its value.
Some business make profits by offering products that "cream off" the customer. They "hype up" the products beyond its real value. We do not engage in these misleading practices.
These values allowed us to build strong loyalty and trust from our members (customers) and contributed to the growth of our business.
MY REPLY:
The primary values were:
* act in the best interest of the customers
* act honestly, with integrity, and be transparent
We act in the best interest of the customer and offer good value in the form of lower prices or better return on their savings. We achieve it by operating efficiently, reducing cost and cutting down on wastage.
We were able to earn an adequate margin to meet our expenses and to provide a modest profit to shareholders.
We act honestly, with integrity. We offer products that meet the genuine needs of the customer. We keep the product simple, so that they can understand it, and choose it for its value.
Some business make profits by offering products that "cream off" the customer. They "hype up" the products beyond its real value. We do not engage in these misleading practices.
These values allowed us to build strong loyalty and trust from our members (customers) and contributed to the growth of our business.
Stop paying premiums earlier
Dear Mr Tan
I bought a living policy (to cover critical illness) from NTUC Income. It requires me to pay premium until age 85. I am not prepared to pay premium for so many years. What should I do with this policy?
------------------
REPLY:
You can decide on when you wish to stop paying the premium, say at age 60, 65 or 70. At that time, you have the following options:
* cancel the policy and receive the cash value
* convert the policy to a "paid-up policy"; you do not have to pay any more premium, and will be covered for a reduced sum assured
You can ask the adviser to get NTUC Income to quote the cash and paid up value at age 60, 65 and 70. You can decide on when is the best time to stop paying the premium
I bought a living policy (to cover critical illness) from NTUC Income. It requires me to pay premium until age 85. I am not prepared to pay premium for so many years. What should I do with this policy?
------------------
REPLY:
You can decide on when you wish to stop paying the premium, say at age 60, 65 or 70. At that time, you have the following options:
* cancel the policy and receive the cash value
* convert the policy to a "paid-up policy"; you do not have to pay any more premium, and will be covered for a reduced sum assured
You can ask the adviser to get NTUC Income to quote the cash and paid up value at age 60, 65 and 70. You can decide on when is the best time to stop paying the premium
Revision of premium under Critical illness plan
Dear Mr Tan,
I bought a critical illness plan. It has a clause that allows the insurance company to revise the premium rate in the future, subject to a cap of 1.5 times. I am worried that the cost may be unaffordable to me. What are your views?
--------------------------------
REPLY:
For most life insurance plans, the premium rate is guaranteed for the entire term of the contract.
The only exception is for a critical illness plan. There is a clause that allows the insurance company to revise the premium rate, if it is necessary due to an increase in claims.
The reason for this clause is:
* the plan covers several critical illnesses, such as cancer, heart failure, etc
* the insurance company is worried that the claim rate for some illnesses may increase significantly in the future (beyond what was projected in the premium rate)
* due to this uncertainty, they cannot guarantee the current premium for many years into the future
If the claim rate is kept within the current projection (which already allows for higher claim due to age), there is no need for the insurance company to revise the rate.
So far, the claim experience has been favourable. There was no need for the insurance company to revise the rate. I believe that this situation should continue into the future.
I bought a critical illness plan. It has a clause that allows the insurance company to revise the premium rate in the future, subject to a cap of 1.5 times. I am worried that the cost may be unaffordable to me. What are your views?
--------------------------------
REPLY:
For most life insurance plans, the premium rate is guaranteed for the entire term of the contract.
The only exception is for a critical illness plan. There is a clause that allows the insurance company to revise the premium rate, if it is necessary due to an increase in claims.
The reason for this clause is:
* the plan covers several critical illnesses, such as cancer, heart failure, etc
* the insurance company is worried that the claim rate for some illnesses may increase significantly in the future (beyond what was projected in the premium rate)
* due to this uncertainty, they cannot guarantee the current premium for many years into the future
If the claim rate is kept within the current projection (which already allows for higher claim due to age), there is no need for the insurance company to revise the rate.
So far, the claim experience has been favourable. There was no need for the insurance company to revise the rate. I believe that this situation should continue into the future.
Collateralised Debt Obligation (CDO)
Recently, you hear about problems with the sub-prime mortgages in USA. There is a high default rate among these mortgages. The high default has now affected the CDOs that are issued on these assets.
Here is a definition about CDOs from Wikipedia:
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.
CDOs divide the credit risk on a portfolio of fixed income assets among different tranches. They issue senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches(unrated).
Losses are applied in reverse order of seniority and therefore junior tranches offer higher coupons.
Using CDO technology, from one portfolio of generally risky assets a range of products are created, from the risky equity tranche to the relatively lower-risk senior debt.
Lesson: There are many complicated financial products in the market. When things go wrong, it is quite difficult to sort out who takes the losses on the various tranches of the products. It is risky to invest in these products.
Here is a definition about CDOs from Wikipedia:
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.
CDOs divide the credit risk on a portfolio of fixed income assets among different tranches. They issue senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches(unrated).
Losses are applied in reverse order of seniority and therefore junior tranches offer higher coupons.
Using CDO technology, from one portfolio of generally risky assets a range of products are created, from the risky equity tranche to the relatively lower-risk senior debt.
Lesson: There are many complicated financial products in the market. When things go wrong, it is quite difficult to sort out who takes the losses on the various tranches of the products. It is risky to invest in these products.
Structured products advertised in the newspapers
I have studied many of the structured products that are advertised in the newspapers recently.
Here are my observations:
* many products have an element of speculation, ie you will get a higher return if certain events happen; for some products, you may suffer a large loss under other specified events
* the advertisements usually do not give the essential details; you have to ask for the prospectus or the brochure
* it is difficult to predict the likelihood of these events or to calculate the likely amount of the gain or loss (even for an expert like me)
* after paying the embedded charges and the marketing expenses, the products are likely to give a poor return to the investor
Lesson: Do not invest in these products; you are paying a high cost and not getting any real value.
If you wish to take risk, invest in equity directly. If you want a safe investment, buy government or highly rated corporate bonds.
Here are my observations:
* many products have an element of speculation, ie you will get a higher return if certain events happen; for some products, you may suffer a large loss under other specified events
* the advertisements usually do not give the essential details; you have to ask for the prospectus or the brochure
* it is difficult to predict the likelihood of these events or to calculate the likely amount of the gain or loss (even for an expert like me)
* after paying the embedded charges and the marketing expenses, the products are likely to give a poor return to the investor
Lesson: Do not invest in these products; you are paying a high cost and not getting any real value.
If you wish to take risk, invest in equity directly. If you want a safe investment, buy government or highly rated corporate bonds.
Save for children's education
COMMENT IN MY BLOG:
If you are require some money after some years (e.g. 20 years later for children education) and insurance, it may not be good to buy a term plan and invest the rest as Mr Tan said.
At the 20th years, it may be a market down turn or the companies you bought are valued lowly by the market, and you are not able to get a decent returns - though the chances are low if the time is long.
With an endowment fund, all reversionary bonus declared in the past years are guranteed, your are more assured of a reasonable returns and assured cash after 20 years.
----------------------
MY REPLY:
If you save for your child's education in a large, well diversified, equity fund, you are able to withdraw the savings over a few years to fund the education expenses. This ensures that you get an average market return and is not affected by the market price at a specific maturity date.
You can enjoy the benefit of a higher long term return from the equity market. This return is likely to be much higher than an endowment plan. You also save on the high charges embedded in an endowment plan.
You also have the option to move to a bond fund closer to the maturity date, and avoid the fluctuation in the equity fund.
If you are require some money after some years (e.g. 20 years later for children education) and insurance, it may not be good to buy a term plan and invest the rest as Mr Tan said.
At the 20th years, it may be a market down turn or the companies you bought are valued lowly by the market, and you are not able to get a decent returns - though the chances are low if the time is long.
With an endowment fund, all reversionary bonus declared in the past years are guranteed, your are more assured of a reasonable returns and assured cash after 20 years.
----------------------
MY REPLY:
If you save for your child's education in a large, well diversified, equity fund, you are able to withdraw the savings over a few years to fund the education expenses. This ensures that you get an average market return and is not affected by the market price at a specific maturity date.
You can enjoy the benefit of a higher long term return from the equity market. This return is likely to be much higher than an endowment plan. You also save on the high charges embedded in an endowment plan.
You also have the option to move to a bond fund closer to the maturity date, and avoid the fluctuation in the equity fund.
Thursday, June 28, 2007
Critical illness rider
Dear Mr Tan,
I bought a basic life policy with a few riders (ie accident, critical illness, etc).
I was assured by the insurance agent that all premiums for the riders would be loaded up to a maximum of 1.5 times the original premium.
When the policy document arrived, only critical illness had a written clause that indicates that premium would be capped at 1.5 times the original premium. There is no cap on the other riders.
Is this all right?
---------------
REPLY:
I believe that the premium for the basic policy and all the other riders (except for critical illness) are already fixed at the current rate for the duration of the contract. You can check with the agent to confirm that this is the case. If so, you do not have to worry about future increase in the premium rate for these riders.
The premium rate for critical illness is the only rider that is subject to revision. This is the practice of the insurance industry, and reflects the possibility that the claim on critical illness may increase significantly in the future. In your case, your insurance company has set a capped at 1.5 times of the premium.
I bought a basic life policy with a few riders (ie accident, critical illness, etc).
I was assured by the insurance agent that all premiums for the riders would be loaded up to a maximum of 1.5 times the original premium.
When the policy document arrived, only critical illness had a written clause that indicates that premium would be capped at 1.5 times the original premium. There is no cap on the other riders.
Is this all right?
---------------
REPLY:
I believe that the premium for the basic policy and all the other riders (except for critical illness) are already fixed at the current rate for the duration of the contract. You can check with the agent to confirm that this is the case. If so, you do not have to worry about future increase in the premium rate for these riders.
The premium rate for critical illness is the only rider that is subject to revision. This is the practice of the insurance industry, and reflects the possibility that the claim on critical illness may increase significantly in the future. In your case, your insurance company has set a capped at 1.5 times of the premium.
Index Funds
Dear Mr Tan,
What are your views on index funds?
http://www.sgx.com/psv/securities/etf/documents/isharesmsci_sinprospectus.pdf
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REPLY:
Please read my FAQ. I like investing in index funds due to its low cost. In the case of Singapore, a good index fund is the ST Tracker Fund
What are your views on index funds?
http://www.sgx.com/psv/securities/etf/documents/isharesmsci_sinprospectus.pdf
-------------
REPLY:
Please read my FAQ. I like investing in index funds due to its low cost. In the case of Singapore, a good index fund is the ST Tracker Fund
Application of actuarial know-how
1. Here is an example of how actuarial know-how can be applied in motor-car insurance
100,000 people insure their cars
20% have an accident each year
Total claims to be paid is estimated to be (say) $60 million (average of $3,000 per claim)
Expenses to run the business $20 million
Total is $80 million
Each person has to pay a premium of $800
The insurance company can charge more, to make a profit margin
2. Different premium rates
Not everyone pays the same premium rate of $800
Some people are more accident prone
Some vehicles are more expensive to repair
The premium rate varies according to the type of risk
3. Time value of money
The claims are paid one, two or more years in the future
The premium can be invested to earn an income
This can be used to reduce the premium rate, or to increase
the profit.
100,000 people insure their cars
20% have an accident each year
Total claims to be paid is estimated to be (say) $60 million (average of $3,000 per claim)
Expenses to run the business $20 million
Total is $80 million
Each person has to pay a premium of $800
The insurance company can charge more, to make a profit margin
2. Different premium rates
Not everyone pays the same premium rate of $800
Some people are more accident prone
Some vehicles are more expensive to repair
The premium rate varies according to the type of risk
3. Time value of money
The claims are paid one, two or more years in the future
The premium can be invested to earn an income
This can be used to reduce the premium rate, or to increase
the profit.
Role of Insurance in Financial Well-being
Talk at Junior College
Mr Tan Kin Lian qualified as an actuary in 1975. He was the chief executive of NTUC Income for 30 years from 1977 until his retirement in 2007.
In his talk, he will touch on the following topics:
* Economic functions of insurance
* Careers in insurance
* Role of an actuary
* Special skills requied to be an actuary
Insurance plays two important economic functions. It is a way of managing risks of individuals and businesses. Each person contributes a small sum of money (called a premium) into a pool to pay the claims of the people who suffered the insured losses. By reducing risks for all the parties, it helps people to carry out their economic activities and daily lives, without being financially destroyed by an unfortunate event.
Life insurance is also a way for ordinary people to make regular savings for their future needs. The funds that are mobilised can be invested for the long term to build the infrastructure and the productive capacity of the economy. It also earns a return on the funds to be shared by the investors.
The insurance industry provide careers for the following categories of people:
* marketing and sales
* customer service
* technical (underwriting risk and managing claims)
* investments
* administrative, support, technology and management functions
The actuary plays a special role in the insurance industry. He evaluates the risks and calculates the premium rates to be charged for the risks. His skill is applied in all fields of insurance, namely in life, general and health insurance.
He has to use two special knowledge:
* statistics showing the chance of occurrence of certain losses
* time value of money, as the losses may occur at various times in the future
Some actuary also play an important role in marketing and communication. He can explain the insurance and financial products in simple terms for the ordinary people to understand.
You can read more about Mr Tan and his special area of knowledge from the following:
Blog
Website
Mr Tan Kin Lian qualified as an actuary in 1975. He was the chief executive of NTUC Income for 30 years from 1977 until his retirement in 2007.
In his talk, he will touch on the following topics:
* Economic functions of insurance
* Careers in insurance
* Role of an actuary
* Special skills requied to be an actuary
Insurance plays two important economic functions. It is a way of managing risks of individuals and businesses. Each person contributes a small sum of money (called a premium) into a pool to pay the claims of the people who suffered the insured losses. By reducing risks for all the parties, it helps people to carry out their economic activities and daily lives, without being financially destroyed by an unfortunate event.
Life insurance is also a way for ordinary people to make regular savings for their future needs. The funds that are mobilised can be invested for the long term to build the infrastructure and the productive capacity of the economy. It also earns a return on the funds to be shared by the investors.
The insurance industry provide careers for the following categories of people:
* marketing and sales
* customer service
* technical (underwriting risk and managing claims)
* investments
* administrative, support, technology and management functions
The actuary plays a special role in the insurance industry. He evaluates the risks and calculates the premium rates to be charged for the risks. His skill is applied in all fields of insurance, namely in life, general and health insurance.
He has to use two special knowledge:
* statistics showing the chance of occurrence of certain losses
* time value of money, as the losses may occur at various times in the future
Some actuary also play an important role in marketing and communication. He can explain the insurance and financial products in simple terms for the ordinary people to understand.
You can read more about Mr Tan and his special area of knowledge from the following:
Blog
Website
Express differing views
The visitor to my blog include:
* ordinary people who are interested in financial education
* insurance and investment professionals
My blog is intended mainly for the ordinary people. Most of them find my views to be educational and useful.
I also welcome the contribution of the professionals, as they add to my limited knowledge. They can tell me more about certain products in the market, to allow me to make an analysis.
Some of them express views that differ from my views. This is all right. They should avoid making judgement. After all, it is just a view.
* ordinary people who are interested in financial education
* insurance and investment professionals
My blog is intended mainly for the ordinary people. Most of them find my views to be educational and useful.
I also welcome the contribution of the professionals, as they add to my limited knowledge. They can tell me more about certain products in the market, to allow me to make an analysis.
Some of them express views that differ from my views. This is all right. They should avoid making judgement. After all, it is just a view.
Trading in Endowment Policies
There is a website service (in the UK) that allows a policyholder to find someone who is willing to buy his endowment policy for a better price than the cash value offered by his insurance company.
The advertisement says:
* We offer an exclusive 'execution-only' service for people wishing to sell their unwanted endowment policies.
* Shop around the endowment marketplace in order to try and find you the best offer for selling your endowment policy.
* We will usually get you a number of offers for your endowment policy.
This is how the "trading" works. The insurance company has a monopoly of your endowment policy, and will offer you a poor value. This allows them to make a profit when you surrender your policy.
By approaching the market place, you may be able to find another buyer who can give you a higher value. They will keep the policy till maturity and still make a profit over their funding cost.
I believe that someone tried to introduce this service in Singapore. But I am not aware if it has been successful.
The advertisement says:
* We offer an exclusive 'execution-only' service for people wishing to sell their unwanted endowment policies.
* Shop around the endowment marketplace in order to try and find you the best offer for selling your endowment policy.
* We will usually get you a number of offers for your endowment policy.
This is how the "trading" works. The insurance company has a monopoly of your endowment policy, and will offer you a poor value. This allows them to make a profit when you surrender your policy.
By approaching the market place, you may be able to find another buyer who can give you a higher value. They will keep the policy till maturity and still make a profit over their funding cost.
I believe that someone tried to introduce this service in Singapore. But I am not aware if it has been successful.
Wednesday, June 27, 2007
Structured products and life annuity
COMMENT POSTED IN MY BLOG:
Mr. Tan,I agree with most of your write-ups except for your view on structured products and annuity.
First, I think you are not conversant with structured products.They are very low risk if you understand them and you can say they offer free lunch.(good return at almost no risk)
Secondly, CPF offers the best annuity . It has good payout and has options to let you choose the duration and amount of payout. If you want to recieve until 100 years old it can be designed as such.
Today Insurers'annuities are not comparable except maybe variable annuity.
As a whole it is commendable of you to educate the public.You are indeed providing a social service. Thank you , Mr. Tan.
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MY REPLY:
Most of the structured products which are capital guaranteed give a poor return. For example, the Swing Fund that recently matured gave a return of 2% in total for 5 years. During this period, the stockmarket went up by more than 50%.
If you want no risk, invest in a government bond. You can get nearly 15% for 5 years. This is much better than the structured products which give less than 5% (after deducting the charges).
Leaving your money in CPF to earn 4% per annum is a good idea. It is also a good idea to invest in a participating annuity plan from NTUC Income. You should see an insurance adviser to learn about the difference. You can make a better decision.
Read the FAQ.
Mr. Tan,I agree with most of your write-ups except for your view on structured products and annuity.
First, I think you are not conversant with structured products.They are very low risk if you understand them and you can say they offer free lunch.(good return at almost no risk)
Secondly, CPF offers the best annuity . It has good payout and has options to let you choose the duration and amount of payout. If you want to recieve until 100 years old it can be designed as such.
Today Insurers'annuities are not comparable except maybe variable annuity.
As a whole it is commendable of you to educate the public.You are indeed providing a social service. Thank you , Mr. Tan.
---------------------
MY REPLY:
Most of the structured products which are capital guaranteed give a poor return. For example, the Swing Fund that recently matured gave a return of 2% in total for 5 years. During this period, the stockmarket went up by more than 50%.
If you want no risk, invest in a government bond. You can get nearly 15% for 5 years. This is much better than the structured products which give less than 5% (after deducting the charges).
Leaving your money in CPF to earn 4% per annum is a good idea. It is also a good idea to invest in a participating annuity plan from NTUC Income. You should see an insurance adviser to learn about the difference. You can make a better decision.
Read the FAQ.
Financial Planning Tips and Products
If you wish to have my financial planning tips and an explanation of the common products, you can read the FAQs here.
Low cost endowment plan
Dear Mr Tan,
Are there any low cost endowment plan? I like to get a secure return of about 4% per annum, and have life insurance cover built in as well.
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REPLY:
You can buy a single premium endowment plan. It should give you a return that meets your target. The upfront charge is usually less than 3% of the single premium. This allows the policyholder to earn a good return (after deducting the charges).
I am not aware about any monthly premium endowment plan that are designed to be "low cost". It is possible for this plan to be designed with an upfront charge of (say) 20% of the annual premium. This will give a good return to the policyholder. There will be a good market for this product.
Most endoment plan that are now in the market have an upfront charge that take away one year's of premium. The net return is poor.
Are there any low cost endowment plan? I like to get a secure return of about 4% per annum, and have life insurance cover built in as well.
-----------------------------
REPLY:
You can buy a single premium endowment plan. It should give you a return that meets your target. The upfront charge is usually less than 3% of the single premium. This allows the policyholder to earn a good return (after deducting the charges).
I am not aware about any monthly premium endowment plan that are designed to be "low cost". It is possible for this plan to be designed with an upfront charge of (say) 20% of the annual premium. This will give a good return to the policyholder. There will be a good market for this product.
Most endoment plan that are now in the market have an upfront charge that take away one year's of premium. The net return is poor.
Streettracks Gold Shares
streetTRACKS® Gold Shares is the first gold-backed exchange-traded fund to be listed in Asia. It is designed to track the price of gold and trade like any stock on the exchange.
The Gold Shares are backed by physical allocated gold bullion and are denominated in U.S. dollars. Investors can buy as little as one board lot of ten shares, with each share priced at approximately one-tenth the spot price for an ounce of gold. If the gold price is USD 650, the minimum investment amount is USD 650.
The Gold Shares are backed by physical allocated gold bullion and are denominated in U.S. dollars. Investors can buy as little as one board lot of ten shares, with each share priced at approximately one-tenth the spot price for an ounce of gold. If the gold price is USD 650, the minimum investment amount is USD 650.
Transparent interest rate on home loans
Hi Mr Tan
What are your views about the "transparent" interest rate charged by DBS Bank on their home loans? It seems to be slightly higher than the interest rate of other banks. As the interest rate moves with the interbank rate, will I have to pay more, if interest rate goes up?
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REPLY:
I prefer a transparent interest rate. The rate charged by DBS is based on a interbank rate, plus a premium of 1.25%. I think that this is a fair rate.
It is better to have a transparent rate. This ensures that you will get a fair rate, even if you do not monitor it closely.
There were news reports that some banks adopt many tranches of board rates previously, and may be overcharging some customers, who do not monitor the rate closely.
It does not matter that the interest rate may move up or down with the market. Over the years, this will average out. It is more important that you arrange with the bank for the following:
* keep the same monthly payment, even if interest rate goes up
* flexibiilty to make early repayment, if you have the cash.
What are your views about the "transparent" interest rate charged by DBS Bank on their home loans? It seems to be slightly higher than the interest rate of other banks. As the interest rate moves with the interbank rate, will I have to pay more, if interest rate goes up?
--------------------
REPLY:
I prefer a transparent interest rate. The rate charged by DBS is based on a interbank rate, plus a premium of 1.25%. I think that this is a fair rate.
It is better to have a transparent rate. This ensures that you will get a fair rate, even if you do not monitor it closely.
There were news reports that some banks adopt many tranches of board rates previously, and may be overcharging some customers, who do not monitor the rate closely.
It does not matter that the interest rate may move up or down with the market. Over the years, this will average out. It is more important that you arrange with the bank for the following:
* keep the same monthly payment, even if interest rate goes up
* flexibiilty to make early repayment, if you have the cash.
Invest in Gold ETF
Hi Mr Tan,
What is you view in investing in Gold via Exchange Traded Funds (ETF)? Is it a good time to go into Gold?
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REPLY:
I am not familiar with investing in gold, and also the right "timing" to invest in gold.
Some experts believe that gold should be part of a well diversified portfolio. If the current price is not too high, it may be a good time to implement this diversification.
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FROM MY STOCKBROKER:
The Counter is Gold 10 US $ under stock exchange. Seller @ US 63.80(Last done 63.60)
It is similar to trading in STI-ETF. However, this is in 10 shares and in US $
Fom the above indication, you can buy min of 10 shares, the cost will be US$ 638
According to my colleague, this price is fair as it is close to physical gold and move in tandem to it.
What is you view in investing in Gold via Exchange Traded Funds (ETF)? Is it a good time to go into Gold?
--------------------
REPLY:
I am not familiar with investing in gold, and also the right "timing" to invest in gold.
Some experts believe that gold should be part of a well diversified portfolio. If the current price is not too high, it may be a good time to implement this diversification.
--------------------
FROM MY STOCKBROKER:
The Counter is Gold 10 US $ under stock exchange. Seller @ US 63.80(Last done 63.60)
It is similar to trading in STI-ETF. However, this is in 10 shares and in US $
Fom the above indication, you can buy min of 10 shares, the cost will be US$ 638
According to my colleague, this price is fair as it is close to physical gold and move in tandem to it.
Insights into Financial Investments
Dear Mr Tan,
Thank you for so unselfishly sharing your knowledge with us. I especially appreciate your insights into financial investments and your friendly approach. I enjoy reading your blog!
I wish you all the best.
Thank you for so unselfishly sharing your knowledge with us. I especially appreciate your insights into financial investments and your friendly approach. I enjoy reading your blog!
I wish you all the best.
Understanding Research
Research is important to build our knowledge based industries in Singapore. Besides manpower and infra structure developments we must bring our capabilities to higher levels through research in order to advance and remain competitive.
Dr. Lee Kum Tatt has been involved in many fields of research in his life. He shares with us his experiences and views on how he classified research and how they are evaluated. Read his article on Classification of Research Activities in his blog.
Dr. Lee Kum Tatt has been involved in many fields of research in his life. He shares with us his experiences and views on how he classified research and how they are evaluated. Read his article on Classification of Research Activities in his blog.
Insurance is pooling of risk
Insurance is pooling of risk. If we have a large group of people joining an insurance scheme, everyone pays a contribution to the pool. The contribution is used to pay benefits to those few who have to make a claim for the insured event, e.g. death or accident.
If you join a pure insurance scheme, the cost should be quite low. It is based on the total amount of claim divided by the number of people, plus a small loading to cover the expenses.
Unfortunately, the real cost to the consumer could be much higher, due to the following factors:
* the pure insurance is combined with some other benefits, such as savings and investment
* a proportion of the premium is used to pay the commission for the adviser to sell the product
* the consumer may not get a good deal
If you buy the simple product that offers only the pure insurance, you will be able to compare the prices charged by a few insurance companies. You can get a product that offers you the coverage at a modest cost.
Lesson: Go for the simple products that you can understand and make a comparison. You can get a better deal.
If you join a pure insurance scheme, the cost should be quite low. It is based on the total amount of claim divided by the number of people, plus a small loading to cover the expenses.
Unfortunately, the real cost to the consumer could be much higher, due to the following factors:
* the pure insurance is combined with some other benefits, such as savings and investment
* a proportion of the premium is used to pay the commission for the adviser to sell the product
* the consumer may not get a good deal
If you buy the simple product that offers only the pure insurance, you will be able to compare the prices charged by a few insurance companies. You can get a product that offers you the coverage at a modest cost.
Lesson: Go for the simple products that you can understand and make a comparison. You can get a better deal.
My approach towards my career
Hi Mr Tan,
I'm just finished NS and is currently awaiting for my enrolement into NTU to study engineering. During my free time, I had been thinking about my future goals and what I want to achieve in the future, in my personal development, career, wealth ,and family and friends.
I'm writing to you hoping that you could share with me your advice. What made you chose the path you have choosen? Before you started out did you had a vision of what you want to achieve? Did you just know by instinct that the financial industry was the right fit for you? Was money the primary consideration?
As a corporate veteran, what are your views? Is it really hard to get promoted these days? Do you have any advice on how to successfully climb the corporate ladder? What in your opinion are the most important factors or skills that has contributed to your carrer? Is it the people-skills like they always say (EQ) rather that the credentials? Any tips on how to be a people person ?
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REPLY:
I decided to take the actuarial course because it suited my interest. I was strong in mathematics and was able to communicate clearly. These strenghts make it quite easy for me to pass the actuarial course. However, for most other people, this course was considered to be very challenging and difficult.
I know that the actuary is well paid, but it was not an important factor to me. Interest was more important. I enjoy studying the actuarial course, because the subjects are very useful for many aspects of daily lives, eg financial, investment and demographic matters.
I also took an active interest in learning about information technology and how to program computers to do the calcuations, data processing and other work. They help to make it easy for business to be conducted more efficiently, at lower cost and better customer service.
Here is my approach towards promotion in my career:
* I learn the skills that are useful for my work
* I put them to good use, to improve the business results
* The opportunity for promotion will come
* I am patient.
I hope that you find these remarks to be useful.
I'm just finished NS and is currently awaiting for my enrolement into NTU to study engineering. During my free time, I had been thinking about my future goals and what I want to achieve in the future, in my personal development, career, wealth ,and family and friends.
I'm writing to you hoping that you could share with me your advice. What made you chose the path you have choosen? Before you started out did you had a vision of what you want to achieve? Did you just know by instinct that the financial industry was the right fit for you? Was money the primary consideration?
As a corporate veteran, what are your views? Is it really hard to get promoted these days? Do you have any advice on how to successfully climb the corporate ladder? What in your opinion are the most important factors or skills that has contributed to your carrer? Is it the people-skills like they always say (EQ) rather that the credentials? Any tips on how to be a people person ?
------------------------------------
REPLY:
I decided to take the actuarial course because it suited my interest. I was strong in mathematics and was able to communicate clearly. These strenghts make it quite easy for me to pass the actuarial course. However, for most other people, this course was considered to be very challenging and difficult.
I know that the actuary is well paid, but it was not an important factor to me. Interest was more important. I enjoy studying the actuarial course, because the subjects are very useful for many aspects of daily lives, eg financial, investment and demographic matters.
I also took an active interest in learning about information technology and how to program computers to do the calcuations, data processing and other work. They help to make it easy for business to be conducted more efficiently, at lower cost and better customer service.
Here is my approach towards promotion in my career:
* I learn the skills that are useful for my work
* I put them to good use, to improve the business results
* The opportunity for promotion will come
* I am patient.
I hope that you find these remarks to be useful.
My blog had 60000 visitors
Dear Mr Tan,
Congratulations for having more than 60,000 visitors to your blog. This is a milestone during this short span of time (since 8 Feb 2007).
Once again, thank you for the free and independant advice on financial matters.
--------------------------------------------------------
REPLY:
I receive an average of 500 visitors a day. The visitors have incresed in recent weeks.
Congratulations for having more than 60,000 visitors to your blog. This is a milestone during this short span of time (since 8 Feb 2007).
Once again, thank you for the free and independant advice on financial matters.
--------------------------------------------------------
REPLY:
I receive an average of 500 visitors a day. The visitors have incresed in recent weeks.
Tuesday, June 26, 2007
Market Timing
COMMENT POSTED IN MY BLOG
Mr. Tan, you seem to be an advocate of market timing, from most of your postings. Investors following your advice are in great danger. I think, Mr. Tan, you need to get your understanding of investment right.
Despite your many years as a CEO of Income and to be fair to you, your knowledge of investment is horrendous.
You better stick to insurance. Even in this area I also find your recommendations not appropiate sometimes. You have great knowledge in products but not planning.
You are sincere, there is no doubt at all. but this is not enough. Hope you take this in good spirit of sharing.
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REPLY
I posted a study by Plexus Asset Management. It showed the experience over the past 100 years in the United States. For a investor who made an investment at a time of high market P/E ratio, the return over the next 10 years is lower than for other periods.
If you wish to ignore this study, it is all right. In my case, I prefer to avoid investing a lump sum at a time when the market is high. I prefer to wait for a more normal time. It is all right, if you make small monthly investments, and take take advantage of "averaging".
Mr. Tan, you seem to be an advocate of market timing, from most of your postings. Investors following your advice are in great danger. I think, Mr. Tan, you need to get your understanding of investment right.
Despite your many years as a CEO of Income and to be fair to you, your knowledge of investment is horrendous.
You better stick to insurance. Even in this area I also find your recommendations not appropiate sometimes. You have great knowledge in products but not planning.
You are sincere, there is no doubt at all. but this is not enough. Hope you take this in good spirit of sharing.
----------------------------------------------
REPLY
I posted a study by Plexus Asset Management. It showed the experience over the past 100 years in the United States. For a investor who made an investment at a time of high market P/E ratio, the return over the next 10 years is lower than for other periods.
If you wish to ignore this study, it is all right. In my case, I prefer to avoid investing a lump sum at a time when the market is high. I prefer to wait for a more normal time. It is all right, if you make small monthly investments, and take take advantage of "averaging".
Three in one
Jakarta imposes a "three in one" system. For certain roads, during certain hours, each car should have at least 3 people. If not, the driver has to pay a heavy fine.
This is simular to the "four in one" system adopted in Singapore about twenty years ago.
This is simular to the "four in one" system adopted in Singapore about twenty years ago.
My experience with Valuair
I took Valuair to Jakarta and back.
My experience is positive. The seat is comfortable. They serve a light meal on each trip. The fare is a discount of about 30% compared to Singapore Airlines.
The only disadvantage is that they allow a maximum of 9 kgs for a bag taken into the cabin. I had to check in my bag.
My experience is positive. The seat is comfortable. They serve a light meal on each trip. The fare is a discount of about 30% compared to Singapore Airlines.
The only disadvantage is that they allow a maximum of 9 kgs for a bag taken into the cabin. I had to check in my bag.
Sunday, June 24, 2007
Useful to have a financial or insurance adviser
I suggest the following approach for the ordinary lay person:
* learn about the basic aspects of financial planning (eg read my FAQs)
* use a low cost financial or insurance adviser
The adviser who can help you to make the best decision for your circumstances. If you do not take up a lot of their time, they can give you the advice for a low fee or to earn a modest rate of commission. For example, the advisers from NTUC Income falls into this category. By using the adviser, you can save a lot of time, and make a better decision.
For example, I can buy shares through the internet. But, I find it useful to go through a stockbroker. The fees have now come down to 0.3% (down from 1% a few years ago). I find it to be a fair rate of commission for the time spent by the stockbroker.
* learn about the basic aspects of financial planning (eg read my FAQs)
* use a low cost financial or insurance adviser
The adviser who can help you to make the best decision for your circumstances. If you do not take up a lot of their time, they can give you the advice for a low fee or to earn a modest rate of commission. For example, the advisers from NTUC Income falls into this category. By using the adviser, you can save a lot of time, and make a better decision.
For example, I can buy shares through the internet. But, I find it useful to go through a stockbroker. The fees have now come down to 0.3% (down from 1% a few years ago). I find it to be a fair rate of commission for the time spent by the stockbroker.
Future return depends on your entry level
I saw a study by Plexus Asset Managmeent. It looked at the P/E ratios of the S&P 500 index for each year from 1871 to 2006 and calculates the average ten-year forward real return.
Here is the findings
Lesson: Your future return depends on your entry level. If you invest in the stockmarket now (at P/E ratio of about 18 times), the likely real return over the next 10 years is 5.7% p.a. (and not the high return of past years).
Here is the findings
Average Average
P/E ratio 10 year return
8.5 11.0% p.a
12.0 8.1% p.a
15.0 6.1% p.a.
17.6 5.7% p.a.
21.6 3.2% p.a.
Lesson: Your future return depends on your entry level. If you invest in the stockmarket now (at P/E ratio of about 18 times), the likely real return over the next 10 years is 5.7% p.a. (and not the high return of past years).
Free and independent advice
COMMENT POSTED IN MY BLOG:
Don't you think it's good we have Mr Tan here dispensing his free and independent advice in financial matters?
Why should financial advisors get a fee? From Mr. Tan free unbiased recommenation, you can get free independent financial advice at NTUC's business centre, and still get your financial plan implemented. There is no fee.
Just imagine if the rest like the banks and insurers follow the leadership of NTUC, would it be great cost savings for the consumers? In fact, I don't see any flaw in this business model at all. Free advice, low cost plans, zero fees.
Don't you think it's good we have Mr Tan here dispensing his free and independent advice in financial matters?
Why should financial advisors get a fee? From Mr. Tan free unbiased recommenation, you can get free independent financial advice at NTUC's business centre, and still get your financial plan implemented. There is no fee.
Just imagine if the rest like the banks and insurers follow the leadership of NTUC, would it be great cost savings for the consumers? In fact, I don't see any flaw in this business model at all. Free advice, low cost plans, zero fees.
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.
* 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.
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