A mathematician and actuary are in a room. There is a pretty girl at the other end of the room. It takes 10 seconds to walk half the distance to the girl, another 10 seconds to walk half the remaining distance, another 10 seconds to walk half the remaining distance, and so on. How long will it take to reach the girl?
The mathematician replied ... "I will never reach the girl. No matter where I am, there is a distance and it takes 10 seconds to walk half of that distance."
What did the actuary say? .... Remember, the actuary is a practical person.
Tuesday, February 5, 2008
Boosting the US economy
The US Government intends to spend USD 150 billion to boost the economy. President Bush and the Republicans like most of the money to be given as tax rebates in the hands of tax payers to spend. The Democrats prefer the money to be spent by the Government to benefit the people.
Which is better?
Surveys have shown that most people will not spend the tax rebate. Instead, they will keep it as their savings. This will not have the impact of boosting the economy.
The Republications argued that individuals know how to spend their money. They do not like other people, such as the Government, to decide how to spend the money.
Generally, I prefer the Democrat's approach. Certain expenditure have to be decided by the Government, e.g. invest in infrastructure, welfare for the poor, or to boost the economy. This is more likely to be effective, compared to leaving it "to the market".
Which is better?
Surveys have shown that most people will not spend the tax rebate. Instead, they will keep it as their savings. This will not have the impact of boosting the economy.
The Republications argued that individuals know how to spend their money. They do not like other people, such as the Government, to decide how to spend the money.
Generally, I prefer the Democrat's approach. Certain expenditure have to be decided by the Government, e.g. invest in infrastructure, welfare for the poor, or to boost the economy. This is more likely to be effective, compared to leaving it "to the market".
Changes to CPF Investment Scheme
Dear Mr. Tan,
From 1 April 2008, there are some restrictions on investing CPF money in financial products. My insurance agent advise me to invest before the deadline. Is this a good move?
REPLY
If you keep your money in CPF, you can earn 2.5% + 1% bonus on ordinary account or 4% + 1% on special account. This is a good rate of return.
Most life insurance products offer a lower return, in spite of a slightly higher risk. This is due to the high charges taken away by the insurance company to pay agent's commision and for their profit margin.
If you wish to invest your ordinary account, you should select a low cost investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you are not sure, it is better to keep your money in the CPF and enjoy a fairly attractive interest rate, with the bonus.
Read this article from Dr Money:
http://newpaper.asia1.com.sg/columnists/story/0,4136,153456,00.html
More articles:
http://www.tankinlian.com/drmoney/
From 1 April 2008, there are some restrictions on investing CPF money in financial products. My insurance agent advise me to invest before the deadline. Is this a good move?
REPLY
If you keep your money in CPF, you can earn 2.5% + 1% bonus on ordinary account or 4% + 1% on special account. This is a good rate of return.
Most life insurance products offer a lower return, in spite of a slightly higher risk. This is due to the high charges taken away by the insurance company to pay agent's commision and for their profit margin.
If you wish to invest your ordinary account, you should select a low cost investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
If you are not sure, it is better to keep your money in the CPF and enjoy a fairly attractive interest rate, with the bonus.
Read this article from Dr Money:
http://newpaper.asia1.com.sg/columnists/story/0,4136,153456,00.html
More articles:
http://www.tankinlian.com/drmoney/
Agent plays an important role
The agent (e.g. stockbroker, property, insurance) can play an important role in the new economy. They can help the customer to assess information, give advice and handle the transactions.
I communicate with my stockbroker by e-mail, mobile phone and SMS. I ask for information and also make transactions (to buy or sell shares or other securities). The stockbroker can ask his colleagues in the research department to get the information that I need.
I pay a brokerage of 0.3% on the shares that are transacted. This is much lower than the initial spread of 3% to 5% that is charged by unit trust and insurance funds.
I hope that the insurance industry and the agents can be as efficient as the stockbroking industry, and offer their products at lower cost to the customers.
I communicate with my stockbroker by e-mail, mobile phone and SMS. I ask for information and also make transactions (to buy or sell shares or other securities). The stockbroker can ask his colleagues in the research department to get the information that I need.
I pay a brokerage of 0.3% on the shares that are transacted. This is much lower than the initial spread of 3% to 5% that is charged by unit trust and insurance funds.
I hope that the insurance industry and the agents can be as efficient as the stockbroking industry, and offer their products at lower cost to the customers.
Government bonds and endowment
Mr. Tan,
What is the difference between investing in a single premium endowment for 10 years and buying a government bond for the same period? Which is better?
REPLY
The net yield in both cases should be quite similar, i.e. around 3.5% per annum.
The endowment provides some life insurance cover (but this is really quite insignificant). A part of the return is not guaranteed, so the actual return may be slightly higher or lower, depending on the future bonuses. If you terminate the policy before maturity, you are likely to suffer a loss.
The government bond gives a guaranteed yield and is risk free. You can sell the government bond at any time, based on its fair market price. There is no penalty. The dividends are paid to you every 6 months (which may or may not be an advantage to some investors).
I prefer government bonds due to its low cost, and its flexibility (i.e. not locked-in).
What is the difference between investing in a single premium endowment for 10 years and buying a government bond for the same period? Which is better?
REPLY
The net yield in both cases should be quite similar, i.e. around 3.5% per annum.
The endowment provides some life insurance cover (but this is really quite insignificant). A part of the return is not guaranteed, so the actual return may be slightly higher or lower, depending on the future bonuses. If you terminate the policy before maturity, you are likely to suffer a loss.
The government bond gives a guaranteed yield and is risk free. You can sell the government bond at any time, based on its fair market price. There is no penalty. The dividends are paid to you every 6 months (which may or may not be an advantage to some investors).
I prefer government bonds due to its low cost, and its flexibility (i.e. not locked-in).
High cost Endowment Policy - Views
Mr. Tan,
Is it possible for an insurance company to offer an endowment policy with low expense charge, so that the return can be 4% or better? I do not mind giving some of the return, as long as it is reasonable, and i still get a good return.
REPLY
It is possible for an insurance company to design an endowment plan that offers a higher return. The customer has to buy this plan directly from the insurance company, as the insurance agent will not sell it, due to low commission. So far, I am not aware of any insurance company willing to offer this "low cost" endowment plan.
Mr. Tan,
I have been studying your figures closely. If I save $500 over 20 years, my total saving is $120,000. the return based on $198,000 is $78,000. If the charges take away $45,000, then I am left with a return of only $33,000. Why should the charges take away nearly 60% of my hard earned return for 20 years?
REPLY
It is correct that the high charges take away more than 50% of the return that you can earn over the next 20 years. It is better to invest in a low cost product, so that most of the return will go back to you. For life insurance protection, you can buy a separate, low cost Term insurance plan.
Mr Tan,
Where can I get yield of 5% if I save $500 a month?
REPLY
If you are investing for the next 20 years, it is likely that you will get a return of 5% per annum on an investment fund. The gross return on the life insurance fund should also give you 5% per annum (my estimate), before deducting expenses.
Is it possible for an insurance company to offer an endowment policy with low expense charge, so that the return can be 4% or better? I do not mind giving some of the return, as long as it is reasonable, and i still get a good return.
REPLY
It is possible for an insurance company to design an endowment plan that offers a higher return. The customer has to buy this plan directly from the insurance company, as the insurance agent will not sell it, due to low commission. So far, I am not aware of any insurance company willing to offer this "low cost" endowment plan.
Mr. Tan,
I have been studying your figures closely. If I save $500 over 20 years, my total saving is $120,000. the return based on $198,000 is $78,000. If the charges take away $45,000, then I am left with a return of only $33,000. Why should the charges take away nearly 60% of my hard earned return for 20 years?
REPLY
It is correct that the high charges take away more than 50% of the return that you can earn over the next 20 years. It is better to invest in a low cost product, so that most of the return will go back to you. For life insurance protection, you can buy a separate, low cost Term insurance plan.
Mr Tan,
Where can I get yield of 5% if I save $500 a month?
REPLY
If you are investing for the next 20 years, it is likely that you will get a return of 5% per annum on an investment fund. The gross return on the life insurance fund should also give you 5% per annum (my estimate), before deducting expenses.
CDOs being rated downwards
Collateralized debt obligations may be downgraded as many as five levels as mortgage-related losses force Fitch Ratings to review its criteria for $220 billion of the securities.
The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to guidelines proposed by Fitch today.
CDOs that package high- yield assets may be reduced as many as three levels for the portions first in line for losses.
The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to guidelines proposed by Fitch today.
CDOs that package high- yield assets may be reduced as many as three levels for the portions first in line for losses.
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