If you are investing your money for 10, 20 or more years, you should find a low cost fund. A difference of 1% over 20 years can contribute to an additional 20% (plus) to your retirement funds.
Read about it in this FAQ.
Saturday, July 21, 2007
Renewal of motor insurance
Dear Mr Tan,
My motor insurance is due for renewal. Where can I find the best terms and premium?
REPLY:
I suggest that you read this FAQ.
By shopping around, you can get a better rate. The insurance cover is quite standard anyway.
My motor insurance is due for renewal. Where can I find the best terms and premium?
REPLY:
I suggest that you read this FAQ.
By shopping around, you can get a better rate. The insurance cover is quite standard anyway.
A cooperative has to answer to its members
COMMENT POSTED IN MY BLOG
Yes, but being a co-operative can also mean that they answer to nobody, just like what I am experiencing now. Phone call to CEO cannot get him, leave message to make contact, no response. Email to him, no response. Talk to agent, say management told her not to respond to me.
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REPLY:
I suggest that you raise your issue with the service quality manager. If you still do not get a reply, you can write a complaint to FIDReC.
The CEO of a co-operative has to answer to its board of directors and to its members at its annual meeting. This is similar to a private company.
If you write to the CEO of many large companies, you will not get a reply from them as well. They are busy people. They will normally get a subordinate to reply to you.
Yes, but being a co-operative can also mean that they answer to nobody, just like what I am experiencing now. Phone call to CEO cannot get him, leave message to make contact, no response. Email to him, no response. Talk to agent, say management told her not to respond to me.
------------------------
REPLY:
I suggest that you raise your issue with the service quality manager. If you still do not get a reply, you can write a complaint to FIDReC.
The CEO of a co-operative has to answer to its board of directors and to its members at its annual meeting. This is similar to a private company.
If you write to the CEO of many large companies, you will not get a reply from them as well. They are busy people. They will normally get a subordinate to reply to you.
Underlying assets of structured products
Some structured products are invested in CDOs (collateralised debt obligations). These are described as their "underlying assets".
These underlying assets are NOT the same as the "reference entities" which are used to determine the additional return based on certain complicated formulas involving their share prices.
As the reference entities are large, familiar companies, many investors MISUNDERSTOOD that their money are invested in these entities (which is NOT the case).
CDOs are invested in bonds and mortgages of various quality (including subprime mortgages that are now seeing high default rates in USA). The manager re-packages the assets into various tranches of the CDOs, rated from AAA (least risky) to the equity tranche (most risky).
The rating of CDOs are NOT the same as the rating of corporate bonds. CDOs earn a higher return (up to 2% p.a. more) than corporate bonds, due to the higher risk.
If you buy a structured product that is invested in the CDOs, you may not get the full extent of the higher return (for the higher risk), due to the expenses of the structured product.
Two large funds managed by Bear Stearns have made significant investment in CDOs which were rated AA or AAA. They have recently marked down the value of these highly rated CDOs significantly. The investor in their funds have lost most or all of their money. (This is a worst case scenario).
Lessons:
Avoid investing in CDOs, either directly or through structured products, unless you are familiar with this type of product, and you get a return that commensurate with the risk.
These underlying assets are NOT the same as the "reference entities" which are used to determine the additional return based on certain complicated formulas involving their share prices.
As the reference entities are large, familiar companies, many investors MISUNDERSTOOD that their money are invested in these entities (which is NOT the case).
CDOs are invested in bonds and mortgages of various quality (including subprime mortgages that are now seeing high default rates in USA). The manager re-packages the assets into various tranches of the CDOs, rated from AAA (least risky) to the equity tranche (most risky).
The rating of CDOs are NOT the same as the rating of corporate bonds. CDOs earn a higher return (up to 2% p.a. more) than corporate bonds, due to the higher risk.
If you buy a structured product that is invested in the CDOs, you may not get the full extent of the higher return (for the higher risk), due to the expenses of the structured product.
Two large funds managed by Bear Stearns have made significant investment in CDOs which were rated AA or AAA. They have recently marked down the value of these highly rated CDOs significantly. The investor in their funds have lost most or all of their money. (This is a worst case scenario).
Lessons:
Avoid investing in CDOs, either directly or through structured products, unless you are familiar with this type of product, and you get a return that commensurate with the risk.
Friday, July 20, 2007
Consumer Protection on Mortgages - USA Experience
In his testimony to Congress, chairman Bernarke said that the Federal Reserve Board will implement the following measures to strenghten consumer protection on mortgages:
* improve the disclosure of the terms
* write the disclosures in a form suitable for the layman
* carry out focus group study to check if the layman understand the terms.
* ensure that the terms are fair to the consumers
Lesson: We can learn from the experience of USA. We have to make sure the financial products sold in Singapore meet the above tests.
* improve the disclosure of the terms
* write the disclosures in a form suitable for the layman
* carry out focus group study to check if the layman understand the terms.
* ensure that the terms are fair to the consumers
Lesson: We can learn from the experience of USA. We have to make sure the financial products sold in Singapore meet the above tests.
Negative aspects of Singapore system
The strengths of the Singapore system are:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
These are also our weaknesses. Here are the negative aspects of these characteristics:
1. Low corruption. Many people are afraid to make decisions. They do not want to be accused of being corrupt. They like to define their area of responsibility clearly and to have clear guidlines. If they are not sure, they like to point to another person to decide. Or, they will give the "no" answer.
2. Meritocracy. To do well, we have to be better than the other person. We have to be top of the class. We look after our self interest and behave selfishly. We are not able to work well with other people in a team.
3. Economic development. There is too much emphasis on economic development, to the detriment of other important aspects of our life - i.e. social, art, culture, leisure.
4. Efficiency. We push efficiency to the extreme, with the aim of making more profits. Often, this is done at the expense of customer service. We compete too hard, and work on inadequate margins. Sometimes, we may adopt shady practices to make more profit.
5. Stable and good government. We leave too much matters to be decided by the government. We are not able to experiment with new ideas on our own.
The areas that make us strong, also contribute to our weakness. Some of the weaknesses of the "Singapore character" can be traced to these factors. This is just my view.
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
These are also our weaknesses. Here are the negative aspects of these characteristics:
1. Low corruption. Many people are afraid to make decisions. They do not want to be accused of being corrupt. They like to define their area of responsibility clearly and to have clear guidlines. If they are not sure, they like to point to another person to decide. Or, they will give the "no" answer.
2. Meritocracy. To do well, we have to be better than the other person. We have to be top of the class. We look after our self interest and behave selfishly. We are not able to work well with other people in a team.
3. Economic development. There is too much emphasis on economic development, to the detriment of other important aspects of our life - i.e. social, art, culture, leisure.
4. Efficiency. We push efficiency to the extreme, with the aim of making more profits. Often, this is done at the expense of customer service. We compete too hard, and work on inadequate margins. Sometimes, we may adopt shady practices to make more profit.
5. Stable and good government. We leave too much matters to be decided by the government. We are not able to experiment with new ideas on our own.
The areas that make us strong, also contribute to our weakness. Some of the weaknesses of the "Singapore character" can be traced to these factors. This is just my view.
Thursday, July 19, 2007
The Day When Singapore Panicked
Dr. Lee Kum Tatt is an early pioneer in the application of Science & Technology in many sectors of Singapore’s development.
His definition of a pioneer is a person who has no proper training and experience to do what was expected of him to do and to succeed.
Some lucky guys survived and others did not. Yet many still want to be pioneers but their negative AQ, fear of failure, holds them back.
Read about Dr. Lee’s accounts of some of the projects he was involved in. Read about the uncertainties Dr. Lee faced and the way he handled them. We can derive some encouragement if not inspiration from Dr. Lee’s experience.
His definition of a pioneer is a person who has no proper training and experience to do what was expected of him to do and to succeed.
Some lucky guys survived and others did not. Yet many still want to be pioneers but their negative AQ, fear of failure, holds them back.
Read about Dr. Lee’s accounts of some of the projects he was involved in. Read about the uncertainties Dr. Lee faced and the way he handled them. We can derive some encouragement if not inspiration from Dr. Lee’s experience.
Credit card for students?
Dear Mr Tan,
A RADICALLY new type of credit card with no minimum income requirement and just $500 in credit has arrived in Singapore. Is this radical or ridiculous?
The Straits Times cartoon depict something is real and can be quite an issue as students start to live on credit and interest roll over.
Should this be encouraged? Will holding such a credit card be then a trend among the students? Should we start to allow our children to start living on credit at such a young age?
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REPLY:
It is convenient to use a credit card for payments. Students need this convenient mode of payment as well. Otherwise, they will have to incur a high cost to pay by cash.
We can educate the student to pay on time, and avoid the interest charges. They should not live on credit.
It is better for the student to apply for a debit card to use the convenience of making payment. It does not involve any credit. The money is deducted immediately from your bank account.
Some banks are willing to waive the annual fee for the debit card for the first 1, 2 or more years (subject to conditions).
A RADICALLY new type of credit card with no minimum income requirement and just $500 in credit has arrived in Singapore. Is this radical or ridiculous?
The Straits Times cartoon depict something is real and can be quite an issue as students start to live on credit and interest roll over.
Should this be encouraged? Will holding such a credit card be then a trend among the students? Should we start to allow our children to start living on credit at such a young age?
---------------------------------------------------------------
REPLY:
It is convenient to use a credit card for payments. Students need this convenient mode of payment as well. Otherwise, they will have to incur a high cost to pay by cash.
We can educate the student to pay on time, and avoid the interest charges. They should not live on credit.
It is better for the student to apply for a debit card to use the convenience of making payment. It does not involve any credit. The money is deducted immediately from your bank account.
Some banks are willing to waive the annual fee for the debit card for the first 1, 2 or more years (subject to conditions).
Singapore Dollar and the Carry Trade
The Japanese Yen has been the funding currency for the carry trade for many years. Due to the low interest rate in Japan, many people borrowed money in Yen to invest in higher returns from overseas assets. The Japanese savers also sent their money to invest overseas.
The carry trade has caused the Japanese Yen to weaken considerably against the other currencies. It weakened by more than 15% against the Euro, Australian and New Zealand currency during the past year.
Apart from the Japanese Yen, another currency used to fund the carry trade was the Taiwan dollar, due to its low interest rate. Recently, the authority increased the interest rate to reduce the outflow of funds.
There is a news report in Bloomberg that some people are now looking at the Singapore dollar as the next funding vehicle for the carry trade. This is due to the low interest rate in Singapore.
The impact of the carry trade has been the weakening of the funding currency. As more people invest overseas to earn a higher interest rate, the funding currency is expected to weakened.
But an expert told me that the impact on the Singapore Dollar is likely to be small, as the bulk of currency flows is due to real trade (like our paying for imports of goods and foreigners paying for exports).
The carry trade has caused the Japanese Yen to weaken considerably against the other currencies. It weakened by more than 15% against the Euro, Australian and New Zealand currency during the past year.
Apart from the Japanese Yen, another currency used to fund the carry trade was the Taiwan dollar, due to its low interest rate. Recently, the authority increased the interest rate to reduce the outflow of funds.
There is a news report in Bloomberg that some people are now looking at the Singapore dollar as the next funding vehicle for the carry trade. This is due to the low interest rate in Singapore.
The impact of the carry trade has been the weakening of the funding currency. As more people invest overseas to earn a higher interest rate, the funding currency is expected to weakened.
But an expert told me that the impact on the Singapore Dollar is likely to be small, as the bulk of currency flows is due to real trade (like our paying for imports of goods and foreigners paying for exports).
Sub-prime mortgages in America
Sub-prime mortgages are sold to people of lower credit standing, or offer additional financing beyond the prudent limit.
Many borrowers are not able to pay the interest on these loans or the principal installments. There is a high default rate.
Many borrowers were not given proper advice on the financial impact of the loans. They were not told about the actual payments that have to be made, and their ability to afford these payments.
The Federal Reserve Board has acknowledged that this problem is within their responsibility. They are taking the following steps:
* set standards for the lenders
* require proper disclose of the terms to the borrowers
* make sure that the terms are in language that the layman can understand.
Lesson: We need a similar approach for the financial service sector in Singapore.
Many borrowers are not able to pay the interest on these loans or the principal installments. There is a high default rate.
Many borrowers were not given proper advice on the financial impact of the loans. They were not told about the actual payments that have to be made, and their ability to afford these payments.
The Federal Reserve Board has acknowledged that this problem is within their responsibility. They are taking the following steps:
* set standards for the lenders
* require proper disclose of the terms to the borrowers
* make sure that the terms are in language that the layman can understand.
Lesson: We need a similar approach for the financial service sector in Singapore.
Good financial products
I wish to identify certain insurance and financial products that give good value to cusomers. They have to meet the following criteria:
* transparent
* easy to understand
* have reasonable charges
* easy to withdraw (with fair charges)
* easy to compare with similar products in the market
If the product issuer can provide the facts, I shall be able to make an assessment and recommend the product in my blog.
I am in favour of the following products:
* exchange traded fund
* low cost, well diversified fund
* government securities
* highly rated corporate bonds
* fixed deposits
* term insurance
Each product should earns a fair return that is commensurate with the risk.
* transparent
* easy to understand
* have reasonable charges
* easy to withdraw (with fair charges)
* easy to compare with similar products in the market
If the product issuer can provide the facts, I shall be able to make an assessment and recommend the product in my blog.
I am in favour of the following products:
* exchange traded fund
* low cost, well diversified fund
* government securities
* highly rated corporate bonds
* fixed deposits
* term insurance
Each product should earns a fair return that is commensurate with the risk.
Structured products in America
I was told that structured products are not sold to retail investors in America.
Why?
I do not know the reason. I suspect that the structured products that are unfair to consumers will probably be challenged by consumer advocates in America.
Individuals who wish to speculate in movements of stocks, currencies and indices can trade in futures and options. The cost of trading is relatively low and the terms are more transparent.
Why?
I do not know the reason. I suspect that the structured products that are unfair to consumers will probably be challenged by consumer advocates in America.
Individuals who wish to speculate in movements of stocks, currencies and indices can trade in futures and options. The cost of trading is relatively low and the terms are more transparent.
Wednesday, July 18, 2007
Customer-friendly Call Center
What is a customer-friend call center?
It meets the following criteria:
* answers your call immediately
* by a person (not a machine)
* gives you the answer immediately to simple questions (represents the bulk of cases)
* for a complicated matter, get the relevant expert to call you back
The call centers of most large organisations are NOT customer friendly:
* they ask you to press many buttons
* they ask you to navigate through many options
* the customer usually gets lost on the way
* mostly, a frustrating experience.
It meets the following criteria:
* answers your call immediately
* by a person (not a machine)
* gives you the answer immediately to simple questions (represents the bulk of cases)
* for a complicated matter, get the relevant expert to call you back
The call centers of most large organisations are NOT customer friendly:
* they ask you to press many buttons
* they ask you to navigate through many options
* the customer usually gets lost on the way
* mostly, a frustrating experience.
Give your full name
I like to ask commenters in my blog to give your full name and vested interest (if any), if you wish to state an honest opinion that appear to be confrontational.
I will delete any comment that represents a personal attack, if it is made in the cloak of anonymity.
I accept opinions that may differ from my opinion, even if anonymous, so long as it is expressed fairly and with honest intent.
I will delete any comment that represents a personal attack, if it is made in the cloak of anonymity.
I accept opinions that may differ from my opinion, even if anonymous, so long as it is expressed fairly and with honest intent.
Logic9 (Sudoku)
Have you seen the Sudoku puzzle in Today paper? Do you know how to play the puzzle? You can read the rule of this puzzle and the tips here.
The puzzles are good for children (i.e. train them in mathematics and logic) and for seniors (keep the mind active). Enjoy.
The puzzles are good for children (i.e. train them in mathematics and logic) and for seniors (keep the mind active). Enjoy.
An efficient public service
COMMENT POSTED IN MY BLOG:
What do you mean - "owned by the people"? If the company is owned by the government, is it the same as being "owned by the people"? Even Income has shareholders. Who owns Income then?
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REPLY:
The key distinction should be the mode of operation and not on the type of ownership.
Some activities can be operated as a public service, on a cost-recovery basis, with the aim aim to keep the charges as low as possible. They do not aim to make large profit for shareholders.
Transport, utilities, health care and savings for retirement can be runned as a public service to meet the needs of the general public. They can be operated efficiently, at low cost, and high standard of customer service (without being privatised).
NTUC Income is operated as a cooperative, for the benefit of its policyholders. This is similar to a "public service".
What do you mean - "owned by the people"? If the company is owned by the government, is it the same as being "owned by the people"? Even Income has shareholders. Who owns Income then?
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REPLY:
The key distinction should be the mode of operation and not on the type of ownership.
Some activities can be operated as a public service, on a cost-recovery basis, with the aim aim to keep the charges as low as possible. They do not aim to make large profit for shareholders.
Transport, utilities, health care and savings for retirement can be runned as a public service to meet the needs of the general public. They can be operated efficiently, at low cost, and high standard of customer service (without being privatised).
NTUC Income is operated as a cooperative, for the benefit of its policyholders. This is similar to a "public service".
Well rated Bonds
REPORT FROM BLOOMBERG:
Bear Stearns told investors in one of its hedge funds that they won't get any money back after creditors forced it to sell assets at depressed prices.
A second fund still contains `sufficient assets' to cover the $1.4 billion it owes its parent firm, there's very little value left for the investors.
The funds faced `unprecedented declines' in bonds that were rated AAA or AA, the two top investment grades.
Lesson: It is possible for well-rated bonds to face unprecendented declines, and may lead to a 'credit event'.
Bear Stearns told investors in one of its hedge funds that they won't get any money back after creditors forced it to sell assets at depressed prices.
A second fund still contains `sufficient assets' to cover the $1.4 billion it owes its parent firm, there's very little value left for the investors.
The funds faced `unprecedented declines' in bonds that were rated AAA or AA, the two top investment grades.
Lesson: It is possible for well-rated bonds to face unprecendented declines, and may lead to a 'credit event'.
Risk of credit default
Investors in some structured products are taking the risk of credit default. If a "credit event" happens, they may lose a substantial or all of their principal.
What is the risk of this happening?
The issuer said "We have issued similar products in recent years, and none have not defaulted".
I studied a report from a credit rating agency on the default rates in past years:
* For the past two years, the default rate is small. It is at a historical low level, due mainly to the booming global economy.
* Looking at a longer period, the default rate is higher. It is still small, but not that small.
As the structured products are issued for 5 to 6 years, the risk of a global downturn is "not small". This could lead to a higher default rate.
Lesson: Do not take this risk (as you may not be adequately compensated for it). If things turn bad, you may be in for a big surprise. By that time, you cannot reverse your decision.
What is the risk of this happening?
The issuer said "We have issued similar products in recent years, and none have not defaulted".
I studied a report from a credit rating agency on the default rates in past years:
* For the past two years, the default rate is small. It is at a historical low level, due mainly to the booming global economy.
* Looking at a longer period, the default rate is higher. It is still small, but not that small.
As the structured products are issued for 5 to 6 years, the risk of a global downturn is "not small". This could lead to a higher default rate.
Lesson: Do not take this risk (as you may not be adequately compensated for it). If things turn bad, you may be in for a big surprise. By that time, you cannot reverse your decision.
Cash back on a Term Policy
A life insurance company advertised a "cash back" if there is no claim under its term insurance plan.
This is how the plan works:
* the premium for the term insurance plan is, say $X a year
* for the cash back plan, the insurance company will charge $Y, which is probably charge 3 or 4 times of $X
* the difference between $Y and $X is invested to produce the cash back benefit to be paid on the end of the term.
Is this a good plan? You should consider the following:
* what is the return on the premium for the cash back benefit
* do you get a cash value, if you discontinue the plan during the term.
Lesson: Generally, it is better to avoid a "bundled" or "lock-in" product, unless the terms of the product are designed to be fair to the consumer.
This is how the plan works:
* the premium for the term insurance plan is, say $X a year
* for the cash back plan, the insurance company will charge $Y, which is probably charge 3 or 4 times of $X
* the difference between $Y and $X is invested to produce the cash back benefit to be paid on the end of the term.
Is this a good plan? You should consider the following:
* what is the return on the premium for the cash back benefit
* do you get a cash value, if you discontinue the plan during the term.
Lesson: Generally, it is better to avoid a "bundled" or "lock-in" product, unless the terms of the product are designed to be fair to the consumer.
What's bad about the Singapore system?
I posted my views earler about what's good about the Singapore system. They are:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
I will now give my views about what's bad about the Singapore system. They are:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
Yes. They are the same as the "what's good". The same factors that accounted for our success also contributes to our problems. I shall elaborate more about the negative aspects in a few days time.
If we understand both the good and the bad aspects, we may be able to adjust, to increase the "good" and reduce the "bad" impacts.
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
I will now give my views about what's bad about the Singapore system. They are:
* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.
Yes. They are the same as the "what's good". The same factors that accounted for our success also contributes to our problems. I shall elaborate more about the negative aspects in a few days time.
If we understand both the good and the bad aspects, we may be able to adjust, to increase the "good" and reduce the "bad" impacts.
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