Global assets (ie stocks and properties) are now at historically high level. They are fueled by low interest rate. The global economies are booming.
I read a news report that the booming global economies will lead to higher wages. Wage increases of 5% to 10% are projected in several countries.
High wages will lead to inflation. This will be followed by higher interest rate. When this happen, global assets will fall in price quite quickly.
I now keep about 50% of my personal investments in the money market. It earns about 2.5% p.a now. I still have the remainder of my investments in stocks, funds and properties - but most were bought at low prices more than 5 or 10 years ago.
Tuesday, June 12, 2007
A new way to bet
When you invest in the stockmarket, you are taking a bet (unless you are willing to invest for the long term). You bet that you can sell the stock at a higher price and make a profit. If you are forced to sell out at a lower price, you make a loss.
Here is a new way to take a bet:
* you are given 4 stocks
* you are given 4 observation dates which are 3 months apart
* if, on the observation date, any of the stocks fall below 88% of the launch price,
you may suffer partial or total loss of your investment.
* if, all of the stocks are above 95% of the launch price, you are "knocked out" and you get back your investment with a return
* you have the potential to earn a return of 20%, if all of the stocks stay between 88% and 95% of the launch price for the year
To learn about how much you can earn or loss in this "investment", you have to apply and read the prospectus.
Why is similar to a bet? You are betting on the outcome of the prices of the 4 stocks. You have the chance of losing part or all of your investments, and the potential of earning a return of 20%.
What is the chance of each possible outcome? What is the risk and the reward? I do not know. But I suspect that the designer of this bet can fix the odds in the favour of the issuer. As the investor, you will probably lose out, and pay high charges as well (to cover the cost of marketing and other fees).
Lesson: Do not take this bet. It is better to invest directly in stocks, bonds or the money market.
Here is a new way to take a bet:
* you are given 4 stocks
* you are given 4 observation dates which are 3 months apart
* if, on the observation date, any of the stocks fall below 88% of the launch price,
you may suffer partial or total loss of your investment.
* if, all of the stocks are above 95% of the launch price, you are "knocked out" and you get back your investment with a return
* you have the potential to earn a return of 20%, if all of the stocks stay between 88% and 95% of the launch price for the year
To learn about how much you can earn or loss in this "investment", you have to apply and read the prospectus.
Why is similar to a bet? You are betting on the outcome of the prices of the 4 stocks. You have the chance of losing part or all of your investments, and the potential of earning a return of 20%.
What is the chance of each possible outcome? What is the risk and the reward? I do not know. But I suspect that the designer of this bet can fix the odds in the favour of the issuer. As the investor, you will probably lose out, and pay high charges as well (to cover the cost of marketing and other fees).
Lesson: Do not take this bet. It is better to invest directly in stocks, bonds or the money market.
Why Study Science?
This was a common question that many asked Dr. Lee Kum Tatt when he was chairman of the Singapore Science Council and SISIR after Singapore’s independence. Today this same question is still being asked by many.
Read Dr. Lee’s article on this in his blog and the references he gives as to where to get the answers.
Read Dr. Lee’s article on this in his blog and the references he gives as to where to get the answers.
Capital protected products
Dear Mr Tan,
I like the financial products that guarantee no loss of capital and the chance to earn a good rate of return, better than deposit rate.
How do I calculate the chance of getting a better return, and the amount of that return?
-----------------------
REPLY:
If you wish to have a safe investment, you should buy government bonds and earn 3% per annum, or 15% in 5 years.
If you buy a specially structure product, you are taking a gamble. If the gamble is 5% up or down, you stand the chance of earning between 10% to 20% for 5 years - before deducting expenses.
The charges for designing and marketing this product can take away 10% for the 5 years. So you may get an average return of 5% for 5 years. The actual return could be between 0% to 10%.
To make it more attrative, the financial engineers, working for the issuer of the product, can give you a 75% chance of earning close to 0% and a 25% of earning a better return, that can go up to (say) 20% for 5 years (or just 4% per year). They advertise the potential return of 20%, but does no tell you that the chance of achieving it is quite small.
Many investors in these financial products have earned a poor return, close to 0% for the past years.
Lesson: If you want a safe return, buy government bonds and earn 15% for 5 years. Do not spend money to buy other product that eats into the return.
I like the financial products that guarantee no loss of capital and the chance to earn a good rate of return, better than deposit rate.
How do I calculate the chance of getting a better return, and the amount of that return?
-----------------------
REPLY:
If you wish to have a safe investment, you should buy government bonds and earn 3% per annum, or 15% in 5 years.
If you buy a specially structure product, you are taking a gamble. If the gamble is 5% up or down, you stand the chance of earning between 10% to 20% for 5 years - before deducting expenses.
The charges for designing and marketing this product can take away 10% for the 5 years. So you may get an average return of 5% for 5 years. The actual return could be between 0% to 10%.
To make it more attrative, the financial engineers, working for the issuer of the product, can give you a 75% chance of earning close to 0% and a 25% of earning a better return, that can go up to (say) 20% for 5 years (or just 4% per year). They advertise the potential return of 20%, but does no tell you that the chance of achieving it is quite small.
Many investors in these financial products have earned a poor return, close to 0% for the past years.
Lesson: If you want a safe return, buy government bonds and earn 15% for 5 years. Do not spend money to buy other product that eats into the return.
Changes to ST Index
Hi Mr Tan,
I enjoyed reading your blog and your advice, please continue! What is your opinion about the STI changes at the end of the year:
1) The number of constituent stocks will be reduced from 50 to 30. This will make the STI a blue chip index. The reduction in constituent stocks will not significantly alter the representativeness of the index, given that it is value-weighted. In fact, the smallest 20 stocks of the current STI represent only about 10 per cent of the index by market capitalisation.
(2) The STI will be calculated by FTSE according to its internationally recognised methodology for liquidity criteria and free-float adjustment. The index's constituents will also be reviewed by the three parties at regular intervals.
The FTSE ST Indices
The STI will be complemented by a new family of FTSE ST indices that will consist of 5 benchmark and 13 industry indices, including a new theme index to represent China stocks listed in Singapore.
I am looking forward to the new indices and subsequently the ETFs that may come out
--------------------------------
REPLY:
Thank you for alerting me about the proposed changes. I find the changes to be more meaningful, especially as the STI will be weighted by market capitalisation. I got the impression that this was not the case in the past (but I was not sure if it had been changed already).
I am also looking forward to the change, which is to keep up to date with the latest methodology.
I enjoyed reading your blog and your advice, please continue! What is your opinion about the STI changes at the end of the year:
1) The number of constituent stocks will be reduced from 50 to 30. This will make the STI a blue chip index. The reduction in constituent stocks will not significantly alter the representativeness of the index, given that it is value-weighted. In fact, the smallest 20 stocks of the current STI represent only about 10 per cent of the index by market capitalisation.
(2) The STI will be calculated by FTSE according to its internationally recognised methodology for liquidity criteria and free-float adjustment. The index's constituents will also be reviewed by the three parties at regular intervals.
The FTSE ST Indices
The STI will be complemented by a new family of FTSE ST indices that will consist of 5 benchmark and 13 industry indices, including a new theme index to represent China stocks listed in Singapore.
I am looking forward to the new indices and subsequently the ETFs that may come out
--------------------------------
REPLY:
Thank you for alerting me about the proposed changes. I find the changes to be more meaningful, especially as the STI will be weighted by market capitalisation. I got the impression that this was not the case in the past (but I was not sure if it had been changed already).
I am also looking forward to the change, which is to keep up to date with the latest methodology.
Design Blog by Laissezfaire
My daughter Su Ling created a blog to catalog interesting design ideas.
She finds the information by searching Google and her favourite design websites. She extracts interesting designs and posts them on her blog, with suitable acknowledgement and links to the source.
She hopes to share her passion for design with others through this blog and hopes that this will inspire others to appreciate the value of good design.
This is a new way to learn from what is best in the world. The internet is an interesting place, and a useful source of reference.
Design Blog
She finds the information by searching Google and her favourite design websites. She extracts interesting designs and posts them on her blog, with suitable acknowledgement and links to the source.
She hopes to share her passion for design with others through this blog and hopes that this will inspire others to appreciate the value of good design.
This is a new way to learn from what is best in the world. The internet is an interesting place, and a useful source of reference.
Design Blog
Find out about the new plan first
Dear Mr Tan,
I bought Hi-Saver Investment-link Product in 1999 with a maturity date of 2014. It's fully paid up.
It covers $10,000 for death and permanent disability with a top up on death of $55,000. The money are invested in two funds. The funds have shown a good gain.
Every year, some administration fee and charges are deducted. It looks like quite a lot when added together. I don't like them to deduct all those fees and charges.
I am thinking of terminating this plan, but the life insurance cover will also terminate. What do you think?
------------------------
REPLY:
Before you terminate the current plan, you should see what is offered by another insurance company, e.g. NTUC Income. You should find out the following:
* premium payable under the level or decreasing term plan that gives similar coverage
* charges under the new investment fund
You should check if the new plan is better, before you decide to terminate the current plan.
I bought Hi-Saver Investment-link Product in 1999 with a maturity date of 2014. It's fully paid up.
It covers $10,000 for death and permanent disability with a top up on death of $55,000. The money are invested in two funds. The funds have shown a good gain.
Every year, some administration fee and charges are deducted. It looks like quite a lot when added together. I don't like them to deduct all those fees and charges.
I am thinking of terminating this plan, but the life insurance cover will also terminate. What do you think?
------------------------
REPLY:
Before you terminate the current plan, you should see what is offered by another insurance company, e.g. NTUC Income. You should find out the following:
* premium payable under the level or decreasing term plan that gives similar coverage
* charges under the new investment fund
You should check if the new plan is better, before you decide to terminate the current plan.
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