Investment planning? Huh?

The above is all about planning with you.

Consideration for having an investment plan – In Singapore the Savings rate is currently 0.125% while inflation is at 5.5%. The problem will then be: erosion of purchasing power taking your wealth (if any) lower. If you agree, please read on.

Most people are afraid to lose money. The common reason is that they are so busy with their work/profession; they do not have time to monitor or understand markets. This would lead to losses during down market corrections or bear markets.

If you do not have time to monitor / understand markets, you have two choices;

• keep the money wherever it comes from and earn the (pathetic) interest/yield; is is definitely safe this way or
• seek referral for a trusted wealth planner (at a small professional fee); please read on.

Depending on your risk profile, time horizon and investment objectives, etc a strategy is drawn up for your approval (applying the Art of War principle).

Depending on my reading of financial markets coupled with on-going intermarket analysis, an on-going strategy is drawn up to accomplish your (realistic) investment objectives (goal) and a stretch goal.

A well defined client-planner relationship is established with well defined responsibilities of the client and the planner. While the client’s responsibility is to provide changes in personal profile and objectives, the planner’s duty is constant monitoring, updates (as in posting of my blogs) and pro-active ( & reactive) management of the client’s portfolio.

If all is fine, the strategy is drawn up with diversification and asset allocation specifications within the client’s risk profile and depending on the economy cycle. Communications are through emails and SMSs!

For the record, during the global financial crisis in 2008-2009, the Asset under Management does not exceed more than 6% of loss while some may even enjoy a 2% gain. As for Year 2011 the results are posted here.

As of current, the Asset Under Management had recuperated losses in year 2011 and depending on respective risk profiling; some are enjoying 2-10% of gain. (wow, isn't this fantastic; the secret (or no secret/no brainer) is discipline and startegies are defined to cut losses while preventing further erosion of your pricipal, hence a small lost is recuperated easily) It has been an extremely difficult fourteen (14) months. Fighting fire for 12 months and delivering some goals YTD.

I am exhausted! As the market will always be there the next business day, I will be taking a well defined break. Hence, whichever, the market will trend the following week, I will be taking a rest and be taking ALL the profit of the table. If you’re happy with your performance too, you may decide to move into bonds that provide regular income (dividends).

If you miss my post, don’t worry as I will still monitor the financial markets and continue blogging. Of course the major difference is that my responsibilities will be much lighter while enjoying a well defined break!

Happy Investing! By the way, the Greek situation may finally come to a close this weekend or probably (it is so common that datelines are postponed and postponed with the exception; planned riots do not get postponed) the can would be kick further again and again.

To expect the unexpected

(Posted Sunday, 530 pm)

The main point of this post is a discussion on expecting the unexpected. Look at how the market reacted when the unexpected were announced.

It is a no brainer. If we can expect the unexpected, all of us will be rich. The surprise last week were

·         the coordination of Central Bank actions AND

·         The 50 basis point cut in China’s RRR.

What’s even more surprising is that the news came together. This resulted in an even bigger rally.

The other recent occurrence was on Oct 26^th thereabout. The event were

·         The EU summit announcement of the Greek haircut, bank recapitalization and EFSF

·         The very favorable announcement of the Oct US GDP data

Again, the combination of two big news on a single day contributed to the HUGE rally in high yield assets, commodities, currencies and the equity markets. Though the Oct 26^th event did not really take off well, the markets did not test the support levels again (yet?).

Fortunately, the news was favorable. BUT what if the news were unfavorable and what if there were more than one bad news on s single day? To expect the unexpected and taking pro-active management before the event can certainly maintain or generate potential returns. (I believe that my posting before the markets melted late Q2 and early Q3 was of benefit to your portfolio!)

If you can contribute, thefinance.sg would certainly be the place to post your comments. Let’s bring our brains together and prosper! It will be alright if you remain anonymous, even better if you like to put a nickname!

Thinking out of the box by expecting the unexpected would certainly generate high potential returns but I am one, the audience is many!

 Happy investing and have a great weekend. The jungle warfare begins tomorrow when New Zealand opens at 2am Monday morning!

Did you miss an important post for November?

Commencing December 2011, I will try to post the articles that had received weak readership from the previous month. If the contents may be of interest, press the hyperlink to journey onto the right post!

The following were posted but received weak readership; what you may have missed 

Would the ECB/IMF theory become a probability ; a possible channel to solving the Euro debt crisis and hence solving the European debt crisis.

Global major indices close down for November ; Link to US economic and global calendars

The US dollar index ;A very important indicator that predicts rally and slumps

Dynamic risk profiling; The wrong assumption most investors make while completing the risk profiling questionnaire

Markets can stay more illogical than you can stay We all trade logically we still lose money. Why is that?

Are Asia Pacific equities impotent? Explains why Asian markets are different from US markets

YTD major benchmark performance 2011 Nov 11th This is useful if you were investing in Unit Trusts. The posts identify which markets are in correction or bear market territory.

Insurance is not a necessity

(Posted Wednesday, 3pm)

The following is just a guide to assist you to determine if there is a need. In the end, the decision is yours finally.

When you buy insurance, you are actually practicing a sort of risk transfer by

·         transferring a potential financial loss to

·         a third party (insurer)

·         Whereby the proceeds will be distributed through a will or by nomination.

The later part of the above sentence is often not debated.

What happens if there is no income to protect? A homemaker or a minor does not earn an income.

It all depends on whether the loss of your loved ones will impact you financially. A homemaker would have economic value. She looks after your home, looks after your children, sends your children to school, cooks a nice meal when you reach home, etc. In other words, in the event of the loss of a homemaker, who would look after the above? Would the replacement impact you financially?

A child does not earn an income. So why do you buy whole life insurance for your child(ren). Your response is that there may be a need for child education funding or hospital and surgical (H&S) expenses. I am here to clarify. Then your child is NOT buying life insurance. You are actually transferring your financial risk for child education funding or related H&S expenses. A whole life plan does NOT provide child education nor H&S benefits.

I am very worried that the audience has a whole wardrobe of clothes for display and may not have the appropriate combination for a particular function. In other words, buying prescription for the wrong reason.

What sort of questions do you need to think about before meeting your insurance agent or financial planner?

1.    What is the objective of buying life insurance?

2.    Is this to protect the potential loss of your income?

3.    Who are my dependants or beneficiaries?

If you do not have dependants or beneficiaries, it is obvious the financial benefits will go to you (self). In other words, you are buying life insurance for one’s own interest.

You could be single, not married. You may not have siblings, dependants or children. Then what sort of insurance plan would meet your criteria? An endowment plan, whole life or term plan?

·         Would a term plan (low cost, high protection) with Total & permanent disabilities and/or terminal illness benefits suit you? Low cost

·         Would an endowment plan suit your needs for high protection in the event of disabilities or terminal illness? (This would be the highest cost) Or

·         Would you choose a whole life plan even when you’re single with no dependants or beneficiaries? Your answer could still be Yes because it provides cash values while a term plan does not. However, would the difference in premium between a whole life plan and a term be better use elsewhere in your financial planning?

In other words, did you consider financial planning and budgeting? You may chave to consider your budget at the next financial planning stage, like a comprehensive hospital and surgical plan with ‘as charged’ benefits, long term care income, disability income, supplement your retirement planning. While paying more for a life plan, you may have fewer budgets to address other financial needs.

There’s no right or wrong answer whichever you choose. What is more important is that the fact find process would result in a list of goals with priorities (with your adviser) and due diligence is provided to assist you to make a decision. That’s why the ‘fact finds’ or ‘know your client’ questionnaires is an important process.

The above is NOT a discussion about whether term, endowment or whole life is a better choice. There is no right or wrong answer. The main point is ‘do you see the importance of a comprehensive fact find and financial planning process’? Well the benefits is certainly obvious – a complete financial peace of mind!

(Penny for your thoughts.

An honest and totally unbiased financial planner is certainly hard to come by. It is again, sad to say that life insurance agents do not qualify being unbiased because they can only market their own products. What if they don’t have the products? It is obvious, the fact find forms don’t address those concerns.

Take long term care income as an example. There are only three insurers out of ten insurers addressing long term care concerns. If you are not connected with these three insurers, your insurance agent would not have discussed long term care concerns with you. Hospital and surgical plan in another area where not all insurers in Singapore provide. Hence, is there a complete fact find process?)

The best product for major Illness is?

(Posted Saturday, 7pm)

Financial risk management is the study of financial impacts affecting an income earner in the unfortunate event of temporary or permanent loss of income of self, a loved one, siblings or dependants. One method of risk management is risk transfer. Without the client realizing a financial impact, the planner cannot proceed.

For e.g. the loss of potential income for a breadwinner, age 35, He has a wife and a child age 1. The family saves 35% (CPF and 15% cash savings). Supposing his annual income is S$40,000 a year. In the unfortunate event of premature death, he does not want his wife, sibling or loved ones to shoulder his burden. His potential loss of income for the next 25 years (cost of seeing his child through education and he also plans to retire at age 60) is 40k times 25 years. That’s a whopping S$ 1 million. My responsibility as a financial doctor is to ask if this would be a financial impact. If he does, my next step is to ask for his agreement and I’ll proceed.

Let’s get to the concern upon diagnosis of a major illness. Others would term major illness as dread disease or critical illness, etc. Let’s use Cancer for discussion. Assuming you understand the policy schedule and definition for benefits payable upon the diagnosis of major cancer.

Upon diagnosis of major Cancer, the benefits are payable. I highlighted major because this event is critical, is a dread disease and is grave. Imo, this would seriously impact the potential income of the earner.

Otherwise, I would term this stage of Cancer as ‘not’ major, not critical, early stage. The impact could be resolved by looking into hospital and surgical insurance (a cost reasonable solution), outpatient Cancer treatment or early stage critical illness coverage.

Imo, the confusion comes from the last 2 paragraph, if the insurance agent or financial planner does not get his fact finding right! The client will be paying additional premium.

The client agrees that upon diagnosis of a major illness he wants a solution. As being matured, professional, he shares his concern and financial impact. Upon early diagnosis, he would like a comprehensive hospital and surgical (H&S) plan. He figures that early stage diagnosis would not warrant a loss of income and the H&S plan would cater for his pre, in and post hospitalization expenses. They have emergency funds to see them through for early stage recuperation and other expenses.

Hence, I offered 4 different types of solution from 4-5 insurers. This would provide him an unbiased solution as compared to just one insurer. A preferred insurer may NOT provide choice of cost/premium, yield, features, and benefits from a range of 4-5 insurers. You may be ‘blinded’ by the frog that lives in an island without knowing what the global world is offering! But that’s not the point!

The following is the comparison for Sum assured S$ 300,000, Age 35, Smoker until age 65 (Would most of the audience still earn an income after age 65?)

A: Term plan with critical illness benefits

B: Whole life plan with accelerate/enhanced critical illness benefits

C: Whole life plan with additional critical illness benefits

D: Whole life with embedded critical illness benefits

E: Endowment plan with accelerated/enhanced critical illness benefits

Annual premium  / Type	A	B	C	D	E
Basic plan	1652.25	6743.95	6743.95	3963.30	11624.55
Enhance CI		2049.15		(embedded)	1623.40
Additional CI			4783.65
Total	1652.25	8793.10	11527.60	3963.30	13247.95

Please note that the benefits payable for (A) and (D) is exactly the same if death or diagnosis of major illness were to occur before age 65. Actually, A pays more than D in the event of TPD!

We are human ‘machines’. Like it or not, with the food we are eating, the pressure we face in our daily lives and at work, death is a sure thing, but major illness will certainly accelerate the death benefits.

I am NOT going to dwell into Whole life or Endowment has cash values. But which would you pay for the risk transfer upon diagnosis of a major illness for possible loss of income. The cards are laid upon the table. You, as the client is deemed to be informed, which would you, decide?

Would you choose ‘A’ or one of the others because it has cash values? If you are choosing the one with Cash Values, than the whole fact find / diagnosis has to go back to the beginning to change your priority to cash values instead of risk transfer upon diagnosis of a major illness. You can’t have the whole pie and just eat it!


Finally, the best product for major illness coverage (in my opinion) is ADVICE! Similarly, in the medical field, it is not the medication that addresses your concern but you seek the doctor's advice for the right prescription, am I correct?

If you find the post beneficial in risk management or insurance matters, please feel free to visit my blog at seettpat.blogspot.com and choose the categories: Evergreen or risk management. If you find the post beneficial to your friends, siblings, loved ones, dependants, please feel free to forward such that it could reach out to a wider audience.

Please note. NO recommendations are made. The choice is yours. My primary responsibility is to lay the cards on the table such that you are informed to make a wise decision!

Which ILP provides the best returns?

The following was sent by an anonymous who would like to know which Investment link plan would provide/generate the best returns. He is puzzled by the various allocation rates offered by different insurers. What does the allocation rate mean? How does Units Trust differ? 

Allocation rate / Insurer	A	B	C	D
Year 1	30	30	15	55
Year 2	30	60	54	65
Year 3	55	90	102	75
Year 4	105	105	102	100
Year 5	105	105	102	100
Year 6	105	105	105	100
Year 7	105	105	105	100

The following forms part of my opinion. There is NO intention to make any recommendation of any ILP or Unit Trust fund(s).

My response is:

My assumptions follows:

(I could be wrong but I doubt any insurance agent can deliver performance because without having the appropriate license, they could only assist to recommend funds that meet your risk profiling, nothing more.

Without the appropriate license, they are not supposed to choose any funds for you. For e.g. if your risk profiling is ‘Moderate’ or ‘Balanced’, their recommendation is probably within the 50% equities and 50% bonds guidelines. They cannot recommend a narrowly focused country specific fund like China, India or Singapore with a 100% allocation in equities for a risk profile of ‘Balance’ or ‘Moderate’. This is NOT within MAS guidelines!

Some Independent Financial Advisers (IFA) has Market Strategists and Portfolio Manager to assist portfolio management. They provide investment talks/forums to educate clients to an informed decision. Otherwise, your investment performance will depend on lady luck.)

As the information you provided me was just the above allocation rate, I would not be able to provide my opinion on its feature and benefits. Hence, I’ll try to make assumptions and discuss from the (non) allocation rate point of view.

If your annual contribution is S$ 10,000, a 15% allocation rate means that S$ 1,500 is supposedly allocated for investment in Year 1. S$ 8,500 is deducted for Cost of distribution like commission, etc.

The allocation rate that is not allocated for Company A

·         is (100-30) for Year 1, (100-30) for Year 2 and (100-55) for Year 3.

·         That would be 70 plus 70 plus 45 giving a total of 185% not allocated.

·         At Year 4, you would have 5% additional units which would make the break even period to be approximately 37 years or Year 41

Similarly,

·         the break even period for Company B is approximately 22 years or Year 26

·         the break even period for Company C is approximately 25 years or Year 31

·         There will be no break even period for Company D.

The assumption is that if the unit price is unchanged, it would take Company A, B, C to break even in 41 years, 26 years and 31 years respectively.

While the bid offer spread varies with different insurers, the break even period would take much longer. The B/O spread reduces (in addition to) the allocation rate further.

The allocation rate for unit trust is 100%. The break even period is immediate (Bid offer spread is not taken into account)

Whichever/Whatever your intention to purchase an ILP plan is for risk management or for investment, please consider that any addition of riders (as a result of risk management for e.g. critical illness rider, term rider, waiver of premium, etc) will only exhaust your units because there will be deduction for the respective cost in terms of units before allocation rate. This will take the breakeven period very much longer.

We have not even discussed the plan generating yields! Am I correct? A growth in a Unit Trust fund will generate the same amount with the respective ILP plan.

As far as my knowledge permits, IMO, the most important feature of ILP plans is the waiver of premium on diagnosis of critical illness. In the unfortunate event of a diagnosis, the premiums are waived; you just sit back and collect your income/maturity/retirement benefits when the time is ripe!

I hope the above crystallize your queries/concern!

YTD global statistics for Insights

(Posted Saturday 3pm, Nov 12th 2011)

Insights into Risk Management & Financial Markets is a blog which provides timely information on global markets. In addition, we try to provide our own opinion of market movements that makes Market Sense of investors’ psychology in Asia, Europe and the US.

The popular categories are Evergreen, Market Trends, Investing and Global Financial Crisis.

The following are audience YTD in percentage terms:

Audience	YTD
Singapore	68.14%	1
United States	8.84%	2
Indonesia	6.81%	3
Malaysia	2.41%	4
Hong Kong	1.42%	5
United Kingdom	0.82%	6
India	0.79%	7
Russia	0.76%	8
Australia	0.63%	9
Germany	0.58%	10
Others	8.81%
Total	100.00%

The following are audience for the previous month in percentage terms:

Audience	Monthly	Previous
Singapore	55.40%	1
Indonesia	19.60%	3
United States	6.11%	2
Slovenia	3.16%	-
Russia	2.72%	8
Malaysia	2.55%	4
Germany	1.49%	10
United Kingdom	1.19%	6
India	0.92%	7
Sweden	0.83%	-
Others	6.02%
Total	100.00%

The audience is growing very well. I like to thank the audience from Indonesia, Russia and Germany for assisting to promote the blog

Insights into Risk Management & Financial Markets Insights into

Again, we THANK YOU!