Sunday, July 8, 2007
Talks and Interviews
If you wish to know more about my ideas, especially during the time that I was with NTUC Income, you can read the following articles. They are short and easy to read.
Buy term and invest the difference
COMMENTS POSTED IN MY BLOG:
Take the advice of Mr. Tan by recommending term plans and invest the rest. This is the way to ensure your clients are adequately covered.
Whole life plan deprives your client of adequate protection.This is what is happening in Singapore. Many deceaseds" family are in financial difficulties because their bread winners didn't leave enough. They left their money with insurance agents.Check with the single parent society and they will you the stories.
The insurance agents have a role to play but their interest often comes first. They are greedy, incompetent, dishonest and unethical; this results in many not properly and adequately covered.
That is why AXA, the world's largest insurer, decided to sell ONLY term plans and investment products. That is their belief that it is the only way to address under coverage and also to remove the conflict of interest.
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REPLY:
"Buy term and invest the difference" is suitable for the well educated and financially savvy.
For those who are not so familiar with investments, a low cost traditional product may also be suitable. They will benefit from a low cost product, rather than a high cost product.
Take the advice of Mr. Tan by recommending term plans and invest the rest. This is the way to ensure your clients are adequately covered.
Whole life plan deprives your client of adequate protection.This is what is happening in Singapore. Many deceaseds" family are in financial difficulties because their bread winners didn't leave enough. They left their money with insurance agents.Check with the single parent society and they will you the stories.
The insurance agents have a role to play but their interest often comes first. They are greedy, incompetent, dishonest and unethical; this results in many not properly and adequately covered.
That is why AXA, the world's largest insurer, decided to sell ONLY term plans and investment products. That is their belief that it is the only way to address under coverage and also to remove the conflict of interest.
-------------------------
REPLY:
"Buy term and invest the difference" is suitable for the well educated and financially savvy.
For those who are not so familiar with investments, a low cost traditional product may also be suitable. They will benefit from a low cost product, rather than a high cost product.
Express your views fairly
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.
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.
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?
--------------------------------------
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.
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.
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