Tuesday, November 9, 2010

Thursday, November 4, 2010

Wednesday, November 3, 2010

Tuesday, November 2, 2010

Monday, November 1, 2010

Fruitful decade for Singaporeans

The Business Times

By Roy Varghese

Foundation Adviser
IPAC Singapore

WITH less than 100 days to the end of 2010, it makes sense to take stock of the first decade of the new millennium. Baby boomers, those born between 1946 and 1964, have a special incentive to reflect on the past and take charge of the future to ensure that their quality of lifestyle in retirement is not permanently impaired as a result of the massive negative impact of global bear markets in the last 10 years.

The experience of investors and families in this decade will vary based on their circumstances and where they live and work. American baby boomers, especially those who are about to start their retirement, generally feel that they have made no progress in this miserable decade as the US stock market is now at the same level or below what it was on Jan 1, 2001.

Singapore's middle-class families, in contrast, have a lot to be grateful for in the same period. In 2001, the youngest cohort of baby boomers was probably starting families and living in their first homes. Now, in their mid-40s, most of them may be close to being mortgage-free unless they upgraded to private property.

Meanwhile, Singapore baby boomers in their mid-50s are dealing with funding children's tertiary education and building their retirement capital, which took a substantial hit two years ago if the portfolios were invested in higher-risk assets.

Finally, those in the early to mid-60s may be anxious about having enough resources to see them through retirement in the next two decades.

To understand the gripes of investors who are still under water as a result of the 2008 global financial crisis, I ran a series of simulations comparing lump-sum investing and regular savings plans in MSCI World Index, S&P 500 Index, Berkshire Hathaway-A (BRK-A) and the Straits Times Index (STI), all measured in US dollars.

There are some interesting conclusions for the serious-minded wealth accumulator.
MSCI World Index

If you invested US$100,000 into the MSCI World Index 10 years ago (through an exchange-traded fund or index fund if it existed in 2001), your portfolio would be worth US$80,000 today.

If you invested US$10,000 every year starting September 2000, your portfolio would be worth US$106,000 today.

In reality, it's unlikely anyone in the world would have chosen either of these two approaches exclusively.

The principle here is the application of basic diversification in global equities based on stocks from selected developed countries.

The exclusion of developing markets from this index is reason enough to question if the MSCI World Index is a relevant benchmark for retail investors in the new world order.

S&P 500

If you invested US$100,000 into the S&P 500 Index 10 years ago, the portfolio would be valued at US$78,000 today. This is slightly worse than the MSCI World Index lump-sum strategy.

On the other hand, if you had invested US$10,000 every year for 10 years as part of a regular investment programme, your portfolio would be worth US$99,000 today.

An American retail investor seeking exposure to large-cap domestic stocks might have included this index as part of a larger portfolio. This is why there is widespread unhappiness among Americans who feel that they were let down by their domestic stock market despite diligent regular investing over a 10-year period in a pension plan.

Berkshire Hathaway

As an American or international investor who is a fan of Warren Buffett, let's assume that you invested US$100,000 into the BRK-A stock 10 years ago.

You would own one share plus change of this legendary stock that would be worth US$194,000 today, up by 94 per cent.

If it were possible to buy fractional BRK-A as part of a regular savings plan, investing US$10,000 per year over 10 years would have created a single-stock portfolio with less than two shares of BRK-A worth US$ 146,000.

Mr Buffett's stock picks have proven superior to any diversified global or American equity market in this decade.

Straits Times Index

Finally, if you invested US$100,000 into the STI 10 years ago, your portfolio would be worth about US$198,000 today.

It would have almost doubled in 10 years and this works out to be an annual growth rate of 7 per cent in US dollar terms.

As a disciplined Singapore investor who invested US$10,000 equivalent per year over 10 years into the STI, presumably with manual construction of the index (which has changed its component stocks over time), your portfolio would be worth US$191,000 today .

The low base in Singapore stock prices in September 2000 gave the lump-sum approach a slight edge over regular investing.

In any case, it cannot be denied that the dazzling recovery from the two bear markets in this decade resulted in the STI being the clear winner of the four pairs of scenarios in our simulation.

Conclusions on the outcomes

Before we draw some over-arching conclusions, it is worth clarifying two points.

First, dividends from the underlying stocks are not reflected in the indexes, which measure only price changes. This means that at least 2 per cent per annum of dividend yield can be added to the annualised returns for all four scenarios to estimate total returns more accurately.

Second, we have not considered fees and charges for fund management, financial advice or income taxes. At the individual investor level, the actual results would not have been exactly the same as the simulated performance. Overall, we can be confident the general outcomes of the four scenarios can provide us some direction going forward.

In terms of the merits of anchoring a diversified portfolio to US domestic large caps, shadowing the MSCI World Index and the S&P 500 was detrimental to investment performance after 10 years.

The global financial crisis had a more severe impact on US stocks than either Singapore equities or Berkshire Hathaway.

There were two separate bear markets that impacted US equities this decade: the 2001 to 2003 global recession (-50 per cent) and the 2008 to 2009 global financial crisis (-45 per cent).

The Singapore stock market generally mimicked the declines of the S&P 500 but the ensuing bull markets in 2003 to 2007 (+200 per cent) and 2009 to the present (+100 per cent) have propelled the STI to a brilliant position compared to the start of the decade. BRK-A was more like the STI than the S&P 500 except that the Berkshire recovery was more stellar after the first recession compared to the post Wall Street meltdown of 2008.

Mr Buffett can afford the risk-concentrated holdings in the Berkshire conglomerate that includes insurance company Geico, railway Burlington Northern Santa Fe, Washington Post, Amex, Coke, Goldman Sachs and General Electric. This may not be appropriate for retail investors who need diversity in their portfolio.

Asset allocation, with asset classes outside equities, remains the cornerstone of sound investment strategies for individuals, especially those who are very close to retirement.

On the question of dollar-cost averaging versus lump-sum investing based on the four selected candidates, it is clear that adding to the portfolio after a steep market decline pays off in the future. Mechanical equal investing may not be optimal; a shrewd investor should be prepared to do ad-hoc top-ups to the portfolio when a correction is deemed substantial. Professional advice is strongly recommended when investors are confused, irrationally exuberant or nervous.

What now for Singaporeans?

Based on anecdotal evidence, Singaporean baby boomers who own private property did very well this decade if they measured growth in personal net worth. This is a simple exercise to do. Subtract liabilities from assets on Jan 1, 2001 and compare this figure with your net assets today. Private property values may have doubled or tripled over the decade.

If this is indeed the case, a compounded growth rate of 10 per cent per annum in personal net worth is entirely possible. That's a better growth rate than the STI of bluechip stocks held over the decade.

Even iconic Berkshire Hathaway delivered only 4 per cent per annum in Sing dollar terms over the decade owing to the massive depreciation of the US dollar in the last few years.

How can an investor justify a hypothetical benchmark of 10 per cent per annum compounded growth rate for his personal net worth? Add a risk premium of 3 per cent per annum to a risk-free yield of 3 per cent per annum and inflation of 3 per cent per annum over the long term and one per cent per annum currency impact for foreign currency assets and you get a rough benchmark of 10 per cent per annum nominal growth rate for personal net worth.

What this means is that a Singapore investor should not be bound to global indexes for personal net worth progress reporting. For a moderate-risk baby boomer, a globally diversified portfolio of equities, with no more than 20 per cent dedicated to US stocks, plus bonds, Reits, Singapore and Asian equities represents an ideal investment core. (Older baby boomers should have more bonds and defensive assets).

Private property underpins the liquid assets for long-term capital appreciation of retirement capital.

Baby boomers in Singapore received an excellent tutorial from The Lost Decade that never was.

These are the writer's personal views and not ipac's.
This article was first published in The Business Times.

Saturday, October 30, 2010

Thursday, October 28, 2010

Wednesday, October 27, 2010

How Health Minister Khaw paid $8 for his heart bypass ...

Ng Jing Yng

SINGAPORE - Health Minister Khaw Boon Wan paid only $8 from his pocket for his heart bypass in May.

In order to reiterate the importance of adequate coverage, Mr Khaw said in his latest blog post yesterday that his operation, at the National Heart Centre Singapore (NHCS), was mostly paid for by MediShield and a private Shield supplement, while Medisave helped in the co-payment of the rest of his hospital bill.

According to figures on the Ministry of Health website, the bill for heart bypass surgery is less than $30,000 for nine in 10 patients staying in an A class ward in NHCS.

Those covered under MediShield - a basic insurance scheme for CPF members - can choose to top up their basic coverage by supplementing it with plans from private insurers, while Medisave allows members to dip into its accounts to pay for hospitalisation expenses.

Recounting a recent meeting with health insurers, Mr Khaw also flagged the possibility of extending MediShield to cover mental illness, congenital illness and neonatal treatment.

Mr Raymond Fernando, whose wife suffers from schizophrenia, told MediaCorp such a move would "greatly help in relieving my financial burden and, hopefully, lead to other insurers taking the cue". It could also reduce the stigma of mental illnes and encourage more patients to come forward, said Mr Fernando.

Another idea floated during Mr Khaw's meeting with the health insurers was to raise the MediShield claim limits on outpatient cancer care, which stand at $300 per weekly treatment cycle and up to $2,800 for radiotherapy treatment.

Mr Khaw added that there was also discussion on raising the monthly payout for ElderShield - a severe disability insurance scheme - to extend the monthly basic payout of $400 and to extend the payout period beyond six years.

Tuesday, October 26, 2010

Seek cover when you're young

my paper
By Reico Wong

MENTION the word "insurance" and most people tend to yawn, change the topic or, in some cases, literally vanish.

It is undeniable that the subject becomes unbearable when pesky insurance agents descend on you and try to shove different products down your throat.

However, the benefits of getting insured is apparent in the long term, as adequate insurance coverage is a necessity.

The time to seek cover is when one is young and healthy, as insurers grant full coverage and at a lower premium.

But, more importantly, insurance coverage is critical as one's future is unpredictable.

Individuals will also want to think about their dependants - parents, as they become older and unable to work; one's spouse, who may be tied down by financial obligations like home-mortgage and other personal loans; and one's children, to fund their education.

Besides death, other tragedies can occur. Then, hospitalisation and health-care bills will be an immense burden. You do not want to drain your loved ones' savings.

Life insurance is one of the most basic, yet critical, types of policies you should have.

Life insurance is a contract between an insurer and a policyholder, where the insurer agrees to pay a designated beneficiary a sum of money upon the contracted individual's death and, in some cases, if the individual becomes critically ill or suffers from a permanent disability.

In return, the policyholder pays a stipulated premium, either at regular intervals or in a lump sum.

According to the latest statistics from the Life Insurance Association of Singapore (LIA), the industry paid out a total of $1.85 billion to policyholders and beneficiaries as of end June.

Of this, $210 million was related to death, critical-illness or disability claims, while the remaining $1.64 billion went to policies that had matured.

With more than 140 registered insurers in Singapore offering a wide variety of life-insurance policies, it is no surprise that even those interested in the product may feel overwhelmed and not know where to start looking.

Issuers say a variety of factors determine the type of insurance policy and extent of coverage one should look for. These revolve around one's age and the stage of life one is at, including marital status, children, medical history, earning capacity, goals and anticipated financial needs.

For example, a person in his 20s to 30s who is unmarried would typically be focused on building his career and on asset accumulation.

With his financial resources in the foundation phase, his main concerns should be in the areas of accident and disability protection, as well as on investment.

On the other hand, a married couple in their mid-30s to early 40s with children should be more focused on wealth accumulation and enhancement. They should look towards family security and debt cancellation, focusing not only on the same aspects as those in their 20s to 30s, but also on the long-term care and welfare of dependants.

"A person's sum assured (or the insurance coverage needed) should be roughly 10 times of his annual income, as a rule of thumb," said insurer Great Eastern Holdings.

The company pointed out that term-insurance plans, the cheapest among the various types of life insurance, can cost less than $50 each month. Whole life-insurance policies, meanwhile, cost much more because they offer longer-term protection and have an investment component.

The LIA points out that individuals should expect to receive three documents from their financial advisers at the point of sale - a guide to life insurance, a product summary and a benefit illustration.
It also advises that individuals purchase insurance policies on a needs-driven basis, and always after conducting a cautious analysis of financial status and the ability to pay long-term regular premiums.

While individuals can choose to cancel or switch insurance policies, this must be done wisely as premiums paid will not be refundable, and there are typically penalties imposed on policyholders for early policy termination.
Individuals switching from one policy to another might also want to ensure that they do not cancel the original policy until the new one is in force - you do not want to be left without coverage, especially for a long period of time.
While there is no cap to the number of life-insurance policies an individual can buy, critical-illness and permanent-disability claims is subject to certain benefit caps. Multiple claims cannot be made if coverage is on a reimbursement basis.

Financial advisers' track record should be also evaluated, not just the range of products offered.
Other tips the LIA suggests include not taking up any policy if you are unsure of its scope and functions, as well as insisting on having all documents.



ALSO known as ordinary, permanent or straight life insurance, this type of policy provides life-long protection that pays out a benefit to a contracted individual's beneficiaries upon the policyholder's death.

Such policies sometimes also cover critical illness and permanent disability.
It typically also has an investment component, which builds up cash value that the policyholder can withdraw or borrow against to meet future goals.
Note that the rate of returns here may not be as competitive as other investment alternatives.
Often, such policies allocate more money as one ages to the mortality component, while what goes into the investment portion is reduced over time.

This is a pure protection plan that covers a contracted individual for a fixed period of time.
The benefit is specific, and will be paid out only if a policyholder's death occurs within the specified time period.

Premiums for term insurance are usually lower than those for a wholelife policy, and such policies offer higher coverage for most people, except for those advanced in age.

This is due not only to the shorter time period of insurance coverage, but also because the policy does not have an investment component.

Variable life policies are like whole life policies, except that they allow more flexibility in the investment component.

A contracted individual is able to choose from a range of investment options within an insurer's portfolio, such as stocks, bonds and certain types of funds. The insurer often manages these investment products itself, collecting a fee.
Financial planners, however, warn that such policies are only for riskoriented individuals and those unlikely to need to tap on their savings on a short notice.
Variable returns fluctuate with the direction of financial markets and, if the markets plunge, the cash value portion of the policy will be severely affected.

Universal life policies allow a contracted individual to review and shift money between the mortality and investment components. The cash value of investments can thus grow at an adjusted variable rate.
Most of such policies also guarantee a minimum interest-crediting rate.
The policyholder can also adjust the premiums as his circumstances change.

Although highly flexible, universal life policies have certain drawbacks. If you choose to pay lower premiums at certain times, you might have to pay higher charges later on. The alternative is to drop the policy and withdraw the cash value you may have built up. But, if you drop the policy early, you will have to pay a surrender charge.

Monday, October 25, 2010

Is savings enough for retirement?

The Star/Asia News Network

For many young adults, retirement is not something they are thinking about at this stage of their lives.

Those who have been working for less than 10 years have only recently begun to establish their careers, so foremost on their mind would be working to achieve success in their respective vocations.

For them, life still has a lot to offer, and the process of winding down an active lifestyle and retiring is, quite simply, not high on their list of things to do.

According to the findings of the AXA Retirement Scope 2010, a global retirement study conducted across 26 countries in Europe, the United States and Asia, the percentage of the Malaysian working population who have started preparing for their retirement has declined from 48% in 2007 to 38% in 2010.

The study also shows that among the 38% who have started to prepare for retirement, most of them did so only at or near age of 40.

Meanwhile, 46% said they would start to prepare for retirement when they hit 50.

Among the young, only one in five has started to prepare for retirement.

Most of them do plan to start but rather late, at age 46.

Take for example, Anusya Sree, 28, who got married late last year.

"Retirement is not something I am thinking about at the moment; and isn't it a negative thought with so much yet to do? I am only just experiencing life as a married woman. I am looking forward to spending many happy years with my husband and raising a family of our own," says the bank executive.

For Anusya, her priority now is to ensure she has a successful career.

"I have been working for five years, and am enjoying the thrill of being an independent working adult. I have not even decided when I will have children, much less when I will retire."

Similarly for Nicole Tan, 26, a producer for an online travel web portal, retirement is not high on her list of priorities at the moment.

"No, I have not started planning. I would like to build up my career so I have a good platform from where I can start planning for retirement. I am saving up to buy my first property, if that counts."

However, she is aware that having sufficient funds in her retirement years will require a large amount of money.

"It would be an astronomical amount. I am not capable of reaching even 10% of it at the moment," says Tan.

Findings of the AXA Retirement Scope 2010 survey confirm the general perception that only 14% of the Malaysian working population know exactly how much their retirement income should be.

However, not all young adults are focused on the here and now.

Badrulsyah, 35, for example, started planning for his eventual retirement five years ago.

"It is vital for one to start planning early. I learnt that if you leave it to the last minute, you will not have enough time to build up sufficient funds.

"I also know I cannot count on EPF savings alone. After making withdrawals to buy a house, for example, there is even less money to last through the retirement years," says the self-employed entrepreneur.

The AXA Retirement Scope 2010 survey findings show that the working segment's (especially young and mid-life) level of confidence in their own amount of retirement income suffered a big drop from 2007.

Only 37% of the working population now consider their future income to be sufficient compared with 62% in 2007.

Badrulsyah roughly estimates that he will need about RM750,000 (S$312,572) in his retirement fund and if invested wisely, should generate an income stream of its own.

"I try to put away 50% of my income every month, and this includes EPF contributions, insurance premiums, property investments and more."

"However, it is not easy as there are other obligations such as the house and car loans, utility bills and food expenditure," he says.

Lee Yun-Han, 25, is one who had his life mapped out from when he was still in secondary school.

"I came up with my lifetime plan 10 years ago - become a professional chartered accountant, work my way up the corporate ladder and become the CEO of a listed company."

Lee saysthe accounting path did not work out so well, but his plan is still on course.

"I modified my plan, and today I work as a management consultant. I am now in step two of my plan, and remain hopeful that I will reach step three before I retire."

Lee also believes it is crucial to start planning early.

"Life goes by really fast, and before you know it, retirement is just around the corner. I have now lived a quarter of a century, and the time seems to have passed in a blink of the eye. With another blink, I will be 50, and in a third blink, I could be pushing up daisies (deceased)."

Lee has done his homework on how much he will need for retirement.

"I estimate that I will require at least RM5.1mil (S$2.1 million), assuming that I live for another 35 years and need RM5,000 (S$2,083) a month to get by."

"I make a conscious effort not only to save, but also to grow my savings by investing in a diversified portfolio of shares and property."

"Right now, 50% of my income goes to servicing my loans on investment properties, 30% to bills, and 20% to cash reserves. There is a separate slush fund for girlfriend expenditure that is not on the books," quips Lee.

Furthermore, not everyone who is not planning for retirement is living an extravagant lifestyle.

Anusya says that she does not spend money freely.

"Money is hard to come by - that much I have realised over the past few years. I realise now that I am more careful with my own money than I was when getting hand-outs from my parents!"

She says that she does buy the occasional piece of designer wear and her husband sports the latest-generation mobile phone.

"We like to enjoy life, and if this means spending money, then we will. But we only do so after the bills have been paid and there is money to spare."

Anusya also says that they have other financial priorities besides retirement planning.

"We are saving to buy our own house, and also need a second car. Even after we have enough for that, there is the family issue to think about."

"Quite frankly, I do not see a distinction between the act of saving money and planning for retirement. We put some money away every month for what we call our 'emergency' fund, so isn't that the same?"

Similarly, Tan likes to enjoy life, and she has a passion for visiting new places.

"I have an addiction to travel, so there's quite a heavy monthly expense there. But I try to save about RM1,000 to RM2,000 (S$417-S$834) every month."

She says that she does not have any fixed monthly commitments now, but she expects more of them in future.

That could be one of the reasons she still puts money away whenever possible, and not necessarily for retirement.

"I started saving five years ago when I got my first full-time job. I would feel insecure if I had no savings. We will always need to save for that rainy day that could hit us anytime - be it being stuck in a period of unemployment, or hospitalisation fees for a close family member, or to cover for those days when we just want to quit and travel the world," she says.

Ultimately, those interviewed wished that their retirement will come at a time they choose, and not be forced upon them.

"The retirement age is something forced upon you by virtue of policy and legislation. If you enjoy and love what you do, it becomes a passion - and you do not retire from a passion," says Lee.

"I would want to continue working past the retirement age of 55 - not because of the money, but because I would be able to contribute so much more to society. I would very much want to keep my body active, my mind sharp, and my spirit alive."

But for Linda Eng, 31, an administration executive with a construction company, retirement planning is not just about saving.

"Yes, I have my own contingency fund for my retirement, i.e. savings in the bank, a small investment amount in unit trust funds and, of course, EPF. I am now planning to buy a house for my retirement. So, I have to work hard to ensure that my retirement life is well planned."

"Recently, however, something happened that made me realise only having savings is not enough. I need to also protect what I have saved."

She explains that one of her colleagues who seemed to be in perfect health, ate well and kept a balanced lifestyle was diagnosed with cancer.

"It was a terrible shock to all of us, and what was even more shocking was that he had to spend close to RM100,000 (S$41,676) for medical treatment. He and his family had to use some of their hard-earned savings, which was meant to be used for later years. It was gone in a blink of an eye!"

While Eng accepts that uncertainties in life cannot be controlled, "It can happen to anyone at any age", she believes one can take precautions.

"It is not about how much you saved because what you have saved may just disappear overnight when something unexpected happens. And when it does, I do not want my savings to be affected. I want to be sure that my retirement fund will last my lifetime." -The Star/ANN

Wednesday, October 20, 2010

Tuesday, October 19, 2010

Monday, October 18, 2010

An income for life

Tuesday, October 12, 2010

Don't follow your heart in the market

Tue, Oct 12, 2010

my paper
IT'S A well-known fact that investors love "hot" stocks.

They're always interested in learning about the latest market sentiments, which companies other investors are putting their money on, and chasing stocks that are on the upswing.

But following the market is one of the worst ways to make investment decisions, experts say. Investors miss prime buying opportunities and lose out on good returns, especially if they focus only on the short term.

"Value in the long run is determined by (company) fundamentals, while short-term gyrations reflect market participants' psychological weaknesses, such as herding," Georgetown University accounting and finance professor Prem Jain wrote in his latest book, Buffett Beyond Value: Why Warren Buffett Looks To Growth And Management When Investing.

"Knowledge is the best antidote to making wrong decisions," he said.

Such knowledge applies on a variety of fronts: understanding market psychology, examining the intrinsic value of a stock, and identifying your own buying and selling patterns.

Know what drives the market

Prof Jain may have highlighted the importance of fundamentals, but he and other experts would add that fundamentals alone do not drive stock prices - investors' emotions also play a role.

Stock prices often move in wild swings, particularly in the short run, because they are driven to a large extent by emotions and human behaviour.

Fear, greed, attachment, overconfidence, denial and optimism drive the market, often without much basis. Most investors also don't have the self-discipline to overcome these emotions.

Market trends leading to booms and busts do not last forever and will eventually reverse. As historical data shows, there are few warning signs for investors to take heed of before the market moves in the opposite direction.

Investors thus need to learn how to spot when emotions and human behaviour are driving stock prices.

They need to look beyond what others are buying and think of a winning strategy instead.

Commit to a strategy

As investors may well point out, it's easy to talk about behaving rationally, but it's immensely difficult to walk the talk

Essentially, investors need to prepare and pre-commit, argued Mr James Montier, author of The Little Book Of Behavioural Investing: How Not To Be Your Own Worst Enemy.

He pointed out that investors can and do control the process by which they invest: They simply need to remove the drivers of forced decisions from their portfolios.

To do that, they need to do their research in a cold, rational state. They must seek out the intrinsic value of a stock, and then pre-commit to following their own analysis and prepared steps of action.

Firstly, an investor might want to evaluate the fundamentals on a combination of fronts, such as the price-to-earnings ratio of the stock, its track record, how conservatively the company is financed, and what makes the stock likely to be worth more in the future.

Mr Montier also pointed out in his book that it's useful to have a "wish list" of companies you believe to be well-run and have sustainable potential, but are priced too high.

Standing orders can be placed with brokers to buy these stocks if, for some reason, the market brings their prices down to bargain levels.

Still, it might be also a good idea to follow Mr Buffett's core investment principle of investing only within your circle of competence, buying stocks of companies whose businesses you truly understand.

Understand your own investment behaviour

Another notable point highlighted by experts is that investors should focus more on the process of investing, rather than on just the outcome, as there are no magical short cuts to being a good investor.

Investors need to understand their own investment habits, particularly where their weaknesses lie.

And this is best done by putting it all down on paper, said Prof Jain.

He encouraged investors to write down the various investment decisions they made, what types of stocks they bought, pinpoint the reasons behind the decision, and separate all the months the market went up from the months it went down.

This would enable an investor to establish if he is a net buyer or net seller during the various months, and whether he may have a herd mentality.

"Systematic thinking will help you determine what you know or do not know, and help to overcome your psychological biases," said Prof Jain.

"Ultimately, everyone has to make judgment calls, but following a systematic approach will help you know when you are making a judgment call."

Sunday, October 3, 2010

Self-awareness is power

Published October 2, 2010, The Business Times
Knowing yourself, your goals, and errors is the first lesson in behavioural finance. By Genevieve Cua

BUY-AND-HOLD investing came in for a hammering with the crisis of 2008, as did diversification. Thanks to deep losses in the recent downturn, more advisers have begun to trade client portfolios more actively at the margins, an exercise called 'tactical' asset allocation - or, to put it more plainly, market timing.

But this practice came in for a beating at a talk earlier this week at the Private Wealth Management Conference organised by the CFA Institute.

In a talk laced with humour, Meir Statman, Glenn Klimek professor of Finance at Santa Clara University, had a very clear message for investors and advisers. Prof Statman's research focuses on behavioural finance.

The first lesson, he says, is to know yourself, your goals, and errors. The second is to assure yourself by knowing not just the science of financial markets and instruments, but also the science of human behaviour.

He likens financial advisers to financial physicians. 'Physicians take care of your health, and financial advisers your wealth and well being . . . Good financial advisers have to listen, empathise, educate. That's a big job.

'In standard finance, investors are rational. In behavioural finance, they are normal. People are not rational, they are normal. Sometimes we are normal smart, sometimes normal stupid. It would be nice if we could increase the ratio of smart to stupid, but we're always people.'

People, he says, have been disappointed by diversification, which failed to provide any cushion from loss at the worst of the crisis. Assets in a portfolio are picked for their low correlations with each other, so that they should not rise or fall in tandem. But in a crisis, correlations among most assets spike.

'Diversification assures you that you won't have all your eggs in the crummiest asset. But it also means you won't have your entire portfolio in the best. But you'd be in between.

'People say I'm disappointed. There must be something better - market timing, tactical asset allocation. It's tempting, but it's the equivalent of jumping from the frying pan into the fire.'

He cites a joint study with Kenneth Fisher, to ascertain if the implementation of PE trading rules work. Between 1871 and 2002, US$1 invested in the stock market grew to about US$67,000 using a buy-and-hold mode. In contrast, a trading rule of investing whenever PEs dropped below 26 times would have netted roughly US$60,000.

If market timing isn't a panacea, why do many people - finance professionals included - believe that it is? A number of human traits can explain this: Overconfidence; 'representative' error which is the human tendency to find patterns where they may not exist. The latter error blurs the line between hindsight and foresight.

Trading, in any case, is a zero sum game, he says. 'If I think the market is too high and I sell, someone else is buying it. There is an idiot in every trade and if you don't know who it is, you're in trouble . . .

'You have to ask yourself: . . . What's my information advantage to give me an edge? In all likelihood it's nothing, you're deluding yourself.'

Investors, he says, can protect themselves by making advisers their allies. 'To advisers, I say make yourself worthy of the designation.

'Knowing that you commit cognitive errors is the first step. The second is to remind yourself. Like me, you probably have problems creating defences.'

Advisers, he says, 'have to continuously be teachers of our clients'. 'You can't say I told you that, that you know fear will cause you to be risk averse. You have to teach them again and again.'

While modern portfolio theory (MPT) is routinely taught in finance schools, it is impractical in practice. MPT has a number of key assumptions - that investors are rational and risk averse; that there are no trading costs, for instance.

It points investors to 'optimal' portfolios which represent a combination of assets that give the maximum return for a given level of risk.

The theory implies just one level of risk tolerance, says Prof Statman. 'But we build portfolios not as a whole, as prescribed by (Harry) Markowitz, but in a pyramid. We buy money market funds for downside protection and stocks and lottery for the upside.'

Together with Hersh Shefrin, Prof Statman published a paper in 2000 on 'behavioural portfolio theory'. It posits that investors have multiple mental accounts, and the resulting portfolio does not coincide with a traditional portfolio based on MPT and an efficient frontier.

The behavioural portfolio basically is a two-level pyramid where the lower layer is designed to avoid poverty, and the higher layer is designed 'for a shot at riches'.

Risk tolerance itself may be linked to culture. Prof Statman has written a paper on this - The Cultures of Risk Tolerance. He finds that people who are more trusting, for instance, are more willing to take risk. Those from countries where incomes are relatively low are more willing to take risk.

In 'collectivistic' societies, where there is a family network and cohesive ties, risk tolerance is also higher. This could be because an extended family provides a downside cushion.

At the other end of the spectrum is the 'individualistic' society where individuals are expected to look after themselves. Singapore and China rank fairly low on the individualistic scale, and the highest ranked are the US and UK.

Prof Statman himself keeps his investments 'very, very simple'. 'What do I do in a crazy market? I invest and close my eyes rather than try to pick out where the mania will go; it's self-defeating.

'It's very hard to explain to clients, but I think the way to do it is to say - here is what we know from science. Here are some studies I can show you about how people try to take advantage of cycles and fail.'

Once you've made the plunge to invest, switch off the noise from news commentators, he says. 'I keep my investments very, very simple, and I think I've done very well. I invest exclusively in index funds and let stuff take its course. I have enough money in my downside protection account to make sure I'm not going to be poor.

'The money in my upside account, I don't do options. The stuff I have in equities, sometimes it goes up and it goes down. I shrug, what can I do?

'If you train yourself to be like that, you will do yourself a great favour. It's hard, (an adviser's) business is transaction oriented, because I'm not going to give you much business. I don't trade. I think (that's) smart behaviour.'

Friday, October 1, 2010


Wednesday, September 29, 2010

12 Weeks Equals 1 Year

Forget about a year. Let's redefine a year. A year is now 12 weeks. No, there are not four periods in a year, that's old thinking. Think about the implications of a 12-week year. The excitement, energy, and focus that happen every December now happen continuously. The year-end push to hit our goals now takes place not once every 12 months, but all the time.

How many bad weekdays can you have in a 12-week year and still hit your goal? And if you can't afford a bad week, then each day of the week automatically becomes more important. Periodization narrows the focus to daily and weekly, which is where execution occurs.

A Period-by period focus keeps us from getting ahead of ourselves and ensures that each week counts.

Commitments are powerful. I’m sure you can recall a time when you were determined to accomplish something meaningful to you, and were willing to do whatever it took to make it happen. I remember back when I was a young boy in fifth grade and how I yearned for a new 10-speed bicycle. Boy, was it a beauty! Metal-flake green paint with racing tires and a black leather saddle! The problem was it was a hundred bucks, which was a lot of money for a ten-year old kid back then. But that didn’t stop me. I had to have that bike. So I did anything and everything I could to earn money. There was nothing that was going to keep me from owning that bike. That’s an example of commitment, a personal promise that you make with yourself. Keeping self-promises builds character, esteem, and success.

We all know intuitively that commitment is fundamental to effective execution and high performance. Any yet many of us fall short of our commitments on a regular basis. It seems that when things get difficult we find “reasons’ to focus on other activities. Often our interest wanes when things get tough. There is a difference between interest and commitment. When you’re interested in doing something, you only do it when circumstances permit. But, when you’re commitment to something, you accept no excuses, only results. When we commit to something, we do things that we would not ordinarily do. The question if “if” goes away and the only question is “how”? Commitment is powerful, and yet there are times when all of us struggle to commit.

There are four keys to successful commitment:

  1. STRONG DESIRE – in order to fully commit to something you will need a clear and personally compelling reason. Without a strong desire you will struggle when the implementation gets difficult. With that compelling desire driving you, “insurmountable” obstacles become exciting challenges. In other words, the end result that you are striving to achieve needs to be meaningful enough to get you through the hard times and keep you on track.
  2. CLEAR ACTIONS – Once you have an intense desire to accomplish something, you then need to identify the core actions that will produce the result you’re after. In today’s world, many of us have become spectators, rather than participants. We must remember that it’s what we do that counts. In any endeavour, there are numerous activities to accomplishing an effort. In most cases there are few core activities that account for the majority of the results, and in some cases there is one, perhaps two, primary activities that ultimately produce the result. It is critical that you identify the one or two core actions and focus on them.
  3. COUNT THE COSTS – Commitments require sacrifice. In any effort there are benefits and costs. Too often we claim we desire something without considering the costs. Costs are the hardships that you will have to endure to accomplish your desire. Costs can include time, money, risk, uncertainty, loss of comfort, etc. Identifying the costs allows you to consciously choose whether or not you are willing to pay that price. It is extremely helpful when you are in the middle of one of the costs to recognize that you anticipated this and decided it was all worth it.
  4. ACT ON COMMITMENTS, NOT FEELING – There will be times when you won’t fell like doing the critical activities. We’ve all been there, getting out of bed at 4.30am to jog in the cold can be daunting, especially when you are in a toasty warm bed. It is during these times that you will need to learn to act on your commitments, not your feelings. If not, you will never build momentum and will be continually starting over, or as is so often the case, giving up. Learning to do the things you know you need to do regardless of how you feel is a core discipline for success.
Many times commitments are made more arduous by the time frame in which the commitment is made. It is difficult to commit to anything for a lifetime. Even keeping a promise for an entire year can be challenging. With periodization you are not asked to make lifetime or annual commitments, but rather period commitments. It is much more feasible to establish and keep a 12-week commitment than an annual promise. At the end of the period you reassess your commitment and begin again.

Commitments ultimately shape our lives. Making and keeping commitments starts a constructive process that is self-reinforcing and empowering.

Tuesday, September 28, 2010

Monday, September 27, 2010

Travel Insurance FAQ

Travel insurance is an essential part of any trip and is something that should not be put aside as it is as important as the tickets to your destination. People usually have heard about travel insurance, but might not know the specific reasons why they need travel insurance. There are many who undermine the importance of travel insurance.

But is it also a fact that numerous individuals have suffered immensely because of not having travel insurance. In order to ensure that you do not ruin your entire trip and repent later, it is best to find out all about travel insurance and getting it done. The following are frequently asked questions for travel insurance.

What is travel insurance protection?

Travel insurance is a type of insurance that covers you financial for any losses or illness that may unfortunately occur to you while on your trip. Having travel insurance policy is the best idea to reduce your risks and increase your enjoyment while traveling.

Why should I buy travel insurance?

Travel insurance will help and provide necessary protection you will need in the occurrence of an unfortunate event while traveling. Any individual traveling anywhere without travel insurance will be in a dangerous situation if an accident occurs. There are many things that can suddenly happen, leaving you in dire straits. In case of emergency situations, you should always have travel insurance to fall back on.

Have you ever imagined what would happen if a planned trip gets cancelled or the airline you were planning to flu with goes bankrupt? These are situations that are, indeed, unlikely. But at the same time, they are not impossible. As the old saying goes, it is always better to be safe than sorry. So getting travel insurance is a very good idea.

What is the coverage for travel insurance?

Travel insurance provides coverage for medical cost, transportation to a medical facility, and reimburse you for certain or some nonrefundable costs due to a interrupted trip, and financial loss of funds. It also provides coverage if you lost your luggage at the airport.

Travel insurance covers stolen or lost possessions but there may be limits on cash or individual items. It can protect you from all substantial losses that includes canceled trips, lost luggage, medical emergencies or other unexpected situations.

How does Travel Insurance help you?

Travel insurance is a great friend in need. Even if you fall ill and cannot travel, thanks to travel insurance, you can rest assured about getting your money back.

The whole point of insurance is to guard you from unprecedented trouble. Life is uncertain. There is no way in which we can tell what is about to happen even in the very next moment. Thus, it is best not to take chances and make proper arrangements so that when you land up in trouble, you have something to fall back on.

Travel insurance is very important because it provides a buffer for you in case anything goes wrong. It is especially important when you are in a foreign land, you are at a greater risk because your familiarity with the place is low.

How much does travel insurance cost?

It will depend on your insurance company provider and their policy. The cost of travel insurance usually will range up to 12 percent of the cost of your vacation/trip. If you are investing more in your trip, you need more protection.

Is travel insurance really important and how many people actually get paid for their claims?

Travel insurance is highly recommended, there are usually about 10% of people who file claims. Some travelers may have taken a overly expensive trip when they have to pay out of their own pocket if they did not buy travel insurance.

What is the medical care coverage?

When there is a case of illness or serious injury, medical transportation to an appropriate medical facility and medical treatment will be covered.

How long will travel insurance provide coverage?

Travel insurance can be brought starting from as little as one day to up to a year. Different insurance companies may vary with their service of coverage.

When is the best time to buy travel insurance?

The best time to buy travel insurance is as soon as possible before you go on your trip or vacation. Travel insurance should be active during your entire trip.

Thursday, September 23, 2010

Perils of the financial safety net

by Jan M Rosen Sep 23, 2010

SHAKEN by what seemed to be an earthquake in the world's financial markets two years ago, millions of retirees fled to safety, shifting their holdings into savings accounts, Treasury bills, money market funds or certificates of deposit.

Now, they are suffering from the aftershocks: With short-term interest rates well below 1 per cent, their assets are not producing enough income for daily living expenses.

What to do? There is no quick answer to that question but four leading financial advisers offered a variety of ideas for investing with significantly better yields while limiting risk.

Diversifying portfolios is a main theme and it's important to analyse cash flow and assess financial priorities, distinguishing between needs like money for food and utilities and favourite outlays like family gifts that may no longer be practical.

Some may discover that, although portfolio values have fallen in the last two years, their assets are still sufficient for their long-term needs. Others may have to rethink their financial plans and tailor their portfolios accordingly. What follows are the advisers' suggestions:

Dr Jason T Thomas, chief investment officer of Aspiriant, a wealth management firm, emphasised the need for a diverse portfolio with a strong equity stake meant to provide solid cash flow. In trying to avoid risk, many people have incurred "purchasing power risk", he said, because the return is lower than the level of inflation.

Dr Thomas also favours real estate investment trusts because they are "an opportunity to buy into a depressed market" and many pay dividends of 5 per cent and higher.

Commodities are "an unloved asset class", but holding them or an exchange-traded fund that holds them is a way to hedge against rising prices of raw materials in the future.

When buying high-yield bonds, he prefers a fund because of its professional management and diversified holdings. He said he would avoid most Treasury and corporate bonds for now because interest rates are so low. As rates rise, bond prices fall, so holders may have to keep the bonds until maturity to get their principal back. In repositioning a portfolio, Dr Thomas said: "Don't do it all at once; do it in steps."

Mr Mark L Pollard, wealth management adviser and senior vice-president at Merrill Lynch warned: "In desperate times, people do desperate things. If you blow your capital, it's gone. It maybe necessary to temper expectations."

Still, he said, a prudent investor can do much better than staying in cash or Treasury bills. A portfolio of high-quality stocks can yield dividends of 4 per cent and offer a potential for long-term capital appreciation.

Retirees who have enough for basic expenses from other holdings, pensions or Social Security and are bullish on the underlying stock might find the notes attractive for generating income, provided they are comfortable with the downside risk.

Mr Jamie Kalamarides of Prudential Retirement said retirees in their late 60s may live for 30 more years; many fear they may outlive their money. Yet, as investors, they tend to be risk-averse.

He recommended slowly shifting to a diversified portfolio from money market funds and CD's. Traditionally, that would include preferred stocks and bonds, and perhaps a fixed annuity for guaranteed income. Today, he said, Prudential and others offer a new generation of annuities with a guaranteed minimum-withdrawal benefit.

The product is meant to overcome misgivings about traditional annuities while providing lifetime income, appreciation if the market rises, flexibility in withdrawing money and money for the estates of holders who die within 20 years.

Ms Elizabeth Schlueter, national practice leader for the private wealth management group of JPMorgan Chase, advised retirees to look at the total return of their portfolios, not just interest and dividends. "We believe as a firm that it is important to stay invested," she said, with diversified holdings of equities, bonds, mutual funds and alternatives like hedge funds, commodities and currency but changes in a portfolio should be made over time, not suddenly. The New York Times

Wednesday, September 22, 2010

Experts recommend having three to six months of living expenses squirreled away for a crisis -- twice that amount in a bad economy! Find the cash for it with these steps.

To complete this How-To you will need:

Savings account
Automatic deposits

Step 1: Boost your take-home pay

Increase your take-home pay by reducing or temporarily suspending your 401K contributions and any other voluntary paycheck deductions. If you usually get a tax refund, ask your employer to reduce the taxes taken out of your paycheck. Resume your 401K contributions as soon as you can.

Step 2: Increase deductibles

Lower insurance costs by increasing the deductible — the amount you pay out of pocket before your insurance kicks in. Higher deductibles mean lower monthly premiums.

Step 3: Sell what you don't need

Sell possessions you can live without on eBay, through online classified ads such as Craigslist, or at a yard sale.

Step 4: Open a savings account

Put the proceeds of your cash-generating measures into the highest-yielding interest account you can find that does not penalize you for early withdrawal.

Tip: Online savings banks usually offer the best rates.

Step 5: Divert money into savings

Set up an automatic deduction from your paycheck that goes directly into your savings account.

Step 6: Earn more

Earn some extra money with part-time work. Maybe a local merchant could use an extra pair of hands over a holiday. Or perhaps there's a resort area nearby that hires part-time seasonal help. Babysitting and yard work are also effective standbys.

Step 7: Hands off!

Keep your hands off the money unless you have a true emergency.

Tuesday, September 21, 2010

All-out effort to pay out unclaimed CPF savings

CPF members from January can opt to have their savings transferred directly to CPF accounts of their nominees instead of having the payouts made in cash when they pass away. CPF board will automatically disburse the money to the nominees.

CPF savings if left unclaimed for seven years following the death of a member will be moved into the general monies of the CPF Fund. However, claimants will still be able to approach CPF board any time after the seven years to claim the money due to them.

CPF board will trace beneficiaries by exploring all ways to try to locate them. It will go through its own records and residential listings to locate the beneficiary. If this fails, letters will be send to the person who notified the board of the member’s death of to the last known address of the dead member.

If there is no response, advertisement in major newspapers will be placed to ask beneficiaries to come forward to claim the money.

To prevent unclaimed money, if you have not done a CPF nomination, making a nomination will be recommended if you like your nominees to receive proportion of CPF savings when you are no longer around.

Monday, September 20, 2010

Who can make you richer?

Whether or not you're clueless about money, it pays to have a financial expert to help you manage and grow your wealth.

When you are young, you were given your first piggy bank and encouraged to save for a rainy day. Years later, you are still doing the same thing – saving for a rainy day, albeit with more sophisticated instruments. Your piggy bank may long have given way to internet banking. It’s not really enough to just have savings.

What is more important is making sure your money is growing, whether you have parked it. Unfortunately, keeping your cash in a traditional savings account, however stable, wouldn’t deliver the big bucks – not with today’s interest rates. What you need are people who can help you make your money grow, and make you richer in the long run.

A financial planner helps you to map your financial future. He will create investment plan to help you meet your targets: your children’s education or your retirement. Combination of investment products that will deliver the returns you expect within the risks you can tolerate will be implemented.

Financial planner will help carry out your retirement plan, maximise your investments, minimise your risks, having the right insurance product to cover these risks, manage your budget and reduce your debt, determine how you can save on taxes, and so on.

Don’t let financial experts fool you with sales talk, if he promises high returns for low risks, that’s a major red flag. Higher returns always mean more risks, there are no exceptions. To protect yourself from such hype, insist on written information and advice from your expert. If he is qualified, your expert will be happy to comply. If you have the advice or information in writing, it allows you to review your options before making a decision.

Friday, September 17, 2010

Six Retirement Mistakes to Avoid

By: Cindy Perman
CNBC.com Writer

You know you need to save for retirement and to max out your company matching.

But beyond that, do you really know what you’re doing? It’s quite possible you’re still making mistakes with your retirement savings.

If you’re not scared, you should be: With most retirement mistakes, you’re losing money that you’ll never get back. And, it’s a lot of money. Imagine if your employer screwed up your paycheck. You wouldn’t tolerate that at all. And you certainly shouldn’t tolerate it from yourself — your retirement is your paycheck after you retire.

“Saving for retirement needs to be a higher priority,” said Greg McBride, a senior financial analyst at Bankrate.com. “There is a widespread, cavalier attitude toward retirement savings because our parents got along just fine with very little retirement savings, thanks to pensions and government benefits. But today’s workforce has no assurance of either once they retire.”

So, we checked in with a few financial analysts and here are Six Retirement Mistakes You Should Avoid.

1. Not utilizing tax-savings options.

Admittedly, this doesn’t sound sexy, but pay attention: Never pay any tax on your retirement savings before it’s time. In 401(k)s, Simple Employee Pension plans, Individual Retirement Accounts and Keogh plans for the self-employed, you are only taxed when you withdraw money. So don’t withdraw it until you’re ready to retire, or you will not only lose that money to taxes — but also the compound interest that money would make in your account. In the case of Roth IRAs and Roth 401(k)s, there are never any taxes — even in retirement.

2. Not utilizing catch-up provisions for those 50 and older.
When you turn 50, the annual contribution limit goes up for both IRAs and 401(k)s. With the IRA, you can add an additional $1,000 per year for a total of $6,000. And with the 401(k), you can add an additional $5,500 for a total of $22,000.

Even if you're on track to meet all of your retirement goals, this is tax-free money that can start working for you now. And, like mistake No. 1 — if you miss the opportunity now, you'll never get the chance to make up that money later. So tuck a little more away now — and you'll rest easier in retirement.

3. Withdrawing or borrowing from your retirement plan — FOR ANY REASON.

But I need it to buy a house! But I need it to send my kid to college! I promise I’ll pay it back!

Whatever reason you can come up with for why you need to borrow money from your 401(k), it’s never a good idea. Let’s repeat that so we’re clear: It’s NEVER a good idea.

The reason why is simple: You’ll never get that money back — even if you repay it.

“No one would argue with the merits of sending your kid to college. Or the notable benefits to homeownership,” McBride said. “But you won’t get a higher contribution limit next year because you took money out this year — You will always have that amount less. There’s no way to close the gap.”

“If you have to raid the retirement account to buy a house — don’t buy a house,” McBride said. “Your kid can borrow money to go to school — but you can’t borrow money to retire.”

4. Underestimating how long you’re going to live.

So your parents lived until they were 80 or 90 but you’re convinced you’re going to 70 tops.

Say, where’d you get that crystal ball?

The official retirement age was set at 65 because the average life expectancy used to be 62. But guess what? Now it’s in the mid-80s.

“When we plan out retirement for our clients, we assume life expectancy of 90 for men and 95 for women,” said Stacy Francis, a personal financial adviser and founder of Savvy Ladies, a group aimed at educating women about money.

“Our clients just look at us and roll their eyes,” Francis said. “They say — if I’m still around at 88 there’s just no way!”

Well, unless you have a time machine and know for sure — you should follow Francis’s lead and plan for living into your 90s — or even to 100. If not, you can be pleasantly surprised … with all the money you have left over.

5. Overestimating your returns.

So, you took quite a hit in your retirement savings during the past two years. You feel humbled. You feel like you’ve learned a lot.

But have you?

If you’re assuming that you’ll get back to an average of 8 percent to 10 percent returns by the time you retire, then the answer to that question is “No.”

“We call this the ‘New Economy’ because the returns we expect on our portfolio are closer to 6 percent — maybe even 7 percent,” Francis said. “A lot of people have really used the market as a backup to get them where they want to go … We’re telling people, ‘Guess what? There’s a new normal.’”

Francis advises people to take a long, hard look at their lifestyle, and consider a different standard of living for retirement. If you have two homes, maybe downsize to one. Spend less. Really, how much more stuff do you need?

6. Failing to make a retirement budget.

In these working years, you probably know what your annual salary is, what your net take-home pay is — and what your expenses are.

But do you know those numbers for your retirement?

How exactly do you expect to live?

It’s not enough to just dump money into an account. You need to know how much is there, how much it’s projected it will grow — and if it’s going to meet your income needs.

“The assumptions that people have about retirement are generally insane,” said Jerry Lynch, a financial adviser and owner of JFL Consulting in Fairfield, NJ. “They don’t realize the potential cost of medical care and they assume rates of return which just aren’t realistic,” he said.

Lynch says a safe withdrawal for your retirement income is 4 to 4.5 percent. That means, if you have a million dollars when you retire, you should be drawing no more than $40,000 to $45,000 a year.

If you don’t set up a budget now — and make sure your savings plan is set up to meet that goal, you could be in for a big surprise.

“The quality of your retirement is going to die if you think you’re going to run out of money,” Lynch said.
Ask yourself this: If you run out of money, how easy would it be to get a job at 85?

Wednesday, September 15, 2010

Investing is like buying clothes

An investment portfolio is not very much different from clothes in a wardrobe as we rely on our financial goals, time horizon and risk appetite when we decide how much we want to invest in each asset class.

Cash, equities and bonds are common investment instruments. All of them come with different degree of risk. Cash is the safest of them all but it will not maintain its value over time because of inflation. Equities which include shares and unit trusts are relatively riskier than cash and bonds.

Equities generally give positive returns if one has a long investing horizon and is able to ride out the volatilities of the market but they are riskier assets. There is a simple rule to calculate the percentage to put in equities, but this formula may not suit everyone.

The optimal combination depends on your risk appetite, risk capacity, financial goals and age. You will be able to sleep soundly through any economic cycle when you have a suitable portfolio that matches all these factors.

Tuesday, September 14, 2010

Who should have life insurance?

Simply put, insurance is the protecting of assets, giving you the peace of mind knowing your property is safe. List of types of insurance goes on from health, life, vehicle, and house. People living in the developed world have at least one form of insurance.

Insurance is protecting something by paying insurance company a monthly premium and they will in return protect your property, health or loved ones if something were to happen.

Insurance has become a very important aspect of our daily lives. Imagine you are driving your car and you get rear ended, insurance doesn’t exist. What will you do? Chances are you will have to pay for the repair bill or you will have to sue the person at fault in court. Imagine your house is burned down and you don’t have insurance. You will be out of a house and you will still have to pay for the mortgage. Insurance allows us the peace of mind to purchase expensive assets and know that they are safe.

If insurance didn’t exist, most people wouldn’t buy expensive cars, houses and people will be paying thousands of dollars in medical bills when they are sick. Some might be thinking insurance isn’t worth it. This may be true for insurance such as boat insurance that you might use only once or twice a year. But for valuable asset such as a house, car or your health, insurance is almost a must.

Wednesday, September 8, 2010

Tuesday, September 7, 2010

She has 3 policies, but no coverage

WITH three critical illness policies under her belt, she assumed her insurance coverage was comprehensive enough.

Ms Theresa Tan's policies with Prudential saw her dutifully forking out a total of $600 in insurance premiums every month.

She believed she had forked out about $77,000 for them over the years. But when it came to coverage, the mother of three, 42, thought wrong.

She was diagnosed with early stage breast cancer, or stage 0, in June.

That same month, she went through a 12-hour operation at Gleneagles Hospital to remove her right breast and to have reconstructive surgery done, using skin and fat from her stomach.

The operation and hospitalisation cost $30,000 and was covered by another insurance policy she had with Aviva.

Ms Tan then tried submitting her claim to Prudential this month for loss or potential loss of income.

She thought she could claim up to $100,000 for one policy and up to $107,000 for another policy.

But her claims were rejected by Prudential, which explained to her in a letter that her condition was non-invasive and "does not fulfil the definition of cancer".

Ms Tan's condition is known as ductal carcinoma in situ (DCIS) in her right breast.

This is a condition where the cancer starts in the milk ducts of the breast. It was considered non-invasive at that stage as the cancer had not spread beyond the milk ducts into the surrounding breast tissue.

In Ms Tan's case, she had a mastectomy because the cancer cells were located in various parts of her breast.

Prudential's decision has surprised Ms Tan, especially since her family's medical history was known to her insurance agents.

Her mother was diagnosed with breast cancer when she was 19 years old. She subsequently died in 2003 after a long battle against cancer.

Her mother's illness was what made Ms Tan buy her first insurance policy when she was 22.

Said Ms Tan, who is the co-partner of nanzinc.com, an online portal set up with her friend, entrepreneur Nanz Chong-Komo: "Fortunately, my mum had a pension plan so her treatment was covered.

"But seeing what she went through and given I was not under pension, I wanted to make sure that I was provided for.

"I thought by buying three policies I was covering myself in every circumstance, but it didn't work out that way."

She claimed the gaps in her policy - it did not cover early stage cancer - was not explained to her by her insurance agents.

Neither was the option of a rider to supplement her existing policies offered.

"What does this term mean?"

Did she think she should have read the fine print in her policy documents?

She said: "Even if I had read the fine print, I don't think I would have understood what DCIS meant as a layman."

Ms Tan, who set up a blog - A Clean Breast of It - about her battle with breast cancer, said she later found out that most insurers do not pay out for non-invasive, early stage cancers.

Critical illness coverage typically covers the loss of income that comes from up to 30 critical diseases. These include major cancers, heart attack, coronary artery bypass, stroke and kidney failure.

Fortunately, Ms Tan, who is on three months' medical leave since her operation, has not suffered loss of income as she is still being paid.

Apart from the online portal, Ms Tan also runs a writing agency, earning on average $5,500 per month.

But she said: "It does limit my options. I can't continue to keep being paid if I'm not working. What happens if I still don't feel well after three months? Or if I need to take a six-month break to rest?"

Currently, she suffers from stomach cramps and can barely sit up for two hours at a go, she said. Ms Tan said: "I hope telling my story will create more awareness. I tell my friends to check their coverage and to make sure they are covered in full."

What she wishes is for the insurance industry to broaden its definition of critical illness to include non-invasive and early stage cancers.

Or to at least make it compulsory to offer to customers other options which cover the gaps in any policy, she said.

Ms Tan lives in the east with her husband, 43, a civil servant, their son, 11, two daughters, four and nine, and her parents-in-law, both retirees in their 70s.

A spokesman for Prudential Singapore said Ms Tan's policies "unfortunately do not qualify for stage 0 cancer."

She said coverage of early stage cancers depend on the kind of policy purchased and the definition of cancer in that particular policy.

She said: "Standard critical illness (CI) policies typically do not cover stage 0 cancer... It is important to know that each and every critical illness stated in the CI policy is precisely defined.

"They are based on standard definitions given by the Life Insurance Association (LIA). Unless the person's disease or surgery has fully satisfied the definition in the policy, no claim is payable."

But the spokesman pointed out that Prudential has policies like PruSmart Lady, which provide coverage for female-related illnesses that are non-critical in nature such as DCIS.

Policy booklet

She added that all information pertaining to a specific policy is provided in the policy booklet given to customers.

Dr Wong Seng Weng, 40, consultant oncologist at The Cancer Centre, drew a distinction between cancers where the person's longevity is compromised versus conditions which are treatable.

He said: "DCIS, if diagnosed and treated early, usually the survival rate is 100 per cent.

"Usually life insurers pay out when a person's longevity is compromised."

But this doesn't mean that the cancer has to be very advanced, before a claim can be made, he clarified.

Even if the cancer is at stage 1, the insurer can pay out if it is an invasive form that spreads, he said.

Ms Tan is grateful she caught her cancer early. She said: "I'm thankful I caught it earlier so I didn't need to go through chemotherapy and radiation.

"But I believe cancer is cancer, whether in the early or late stages."

Why most standard policies don't include non-invasive cancer

WHY do the bulk of standard critical illness policies not include non-invasive cancer?

MsPauline Lim, executive director of Life Insurance Association (LIA), explained: "Carcinoma in situ is specifically excluded from cover as these cancers can be treated and is not viewed as a 'critical' condition."

She said: "Insurers base their premiums on the extent of coverage.

"There is a much higher incidence of the less serious cancers, so if they are also covered, it means premiums will cost much more and become less affordable for most ordinary people.

"This is not beneficial from a public policy perspective. LIA reviews its standard CI definitions from time to time."

The LIA standardises the definitions of critical illnesses.

Ms Lim said consumers should look out for the following:

  • The scope of coverage and the circumstances under which policy will pay out.
  • Whether the amount of critical illness (CI) payout is sufficient.
  • If the CI premiums are fixed or if they increase as the policy holder gets older.
  • If there are exclusions for any of the CI conditions
Recent policies

Recent policies in the market do offer early stage coverage or multiple critical illness coverage.

These typically cost more than policies based on LIA's standard definitions, said the spokesman.

One such policy is Great Eastern's Early-Payout Critical Care (EPCC), which provides payouts at earlier stages of critical illness.

Its Great Eastern PinkLife plan pays out 25 per cent of the sum assured for carcinoma in situ, for cancers in the female organs.

This article was first published in The New Paper.

Monday, September 6, 2010

Don't let your health get you in the red

By The Life Insurance Association

Economists call it "hyperbolic discounting", but really, it is at the heart of human nature.

Discounting is the human tendency to put a higher value on something that reaps little benefits at present over something that can bring you greater benefits in the future.

This can be easily applied to health insurance coverage. With pressing financial needs such as your mortgage and car loan playing tug-of-war for your wallet, you would rather not spend on a personal health insurance plan, thinking that the national healthcare schemes will help to pick up the tab.

Our national healthcare system is targeted to ensure affordability, and whilst our healthcare system is one of the best in the world, the truth is that healthcare costs are escalating.

The increase in our healthcare costs is inevitable, given our ageing population, the shift towards "rich-country" chronic degenerative diseases that cost more and take longer to treat, and a general attitudinal shift towards a preference for private healthcare.

In Singapore, whilst 84 per cent of our population is covered by Medishield (as of 2009), against a backdrop of rising healthcare costs, many of us may potentially find ourselves in dire straits when an accident or debilitating illness strikes and wipes out a large portion of our savings account.

The bare minimum

If you are working, you will have Medisave, a dedicated savings account that is meant for medical treatment. However, there is a limit to how much you can withdraw a year, provided you have an excess of $34,500 in your Medisave account. Factor in escalating medical costs and it will be highly likely that any major surgery will wipe out your Medisave account for future use.

Even a simple accident can set you back more than you think. Tear your knee ligaments because of slip down a staircase, and the operation can set you back anywhere from $6,000 to $10,000. That could be a big financial burden for someone in his 30s trying to achieve financial stability.

True, Medisave provides minimal cover and can be used to buy Medishield, a low cost insurance scheme that covers medical expenses of major illnesses. However, Medishield will still leave you with a significant portion of your medical bill to cover, and will only pay for expenses in a Class B2/C ward. Should you want treatment in a Class A ward or a private hospital, Medishield suddenly begins to look threadbare.

As such, having a comprehensive personal health insurance plan is especially important. It prevents you and your family from enduring any financial suffering when you face a health crisis.

The truth is, only the indigent or large families living on very modest incomes cannot afford some kind of basic health insurance these days. A family of four could probably get a private Shield plan for as low as $300 a year. To put it in perspective - that is less than a cheap holiday for four, and certainly cheaper than a couple of nights out every week.

Health insurance actually comes in several different forms, and knowing the difference goes a long way in getting you the appropriate coverage

Integrated Shield Plans

If you are looking for higher medical expense coverage than what your Medishield provides, you can consider Integrated Shield Plans that are offered by some insurance companies.

These are suitable if you plan to use Class B1, Class A wards or private hospitals and the best part is that they are combined with your basic Medishield so that you only pay one premium for coverage under both the private plan and the basic Medishield.

To make things even easier on your pocket, you can actually use Medisave to pay for your premiums, up to the prevailing withdrawal limit set by the Ministry of Health.

Medical Expense Insurance

If you are looking to cover your medical expenses, then you may want to consider Medical Expense Insurance.

It will pay medical expenses incurred as a result of an accident or illness as well as cover expenses for inpatient medical treatment or surgery, some outpatient charges for day surgery, consultations with specialists before and after the hospital stay and x-rays and laboratory tests.

Note, however, that medical insurance will not pay you more than the actual medical expenses incurred, regardless of the number of policies you have.

Also, you should be aware that there are limits to the amounts you can claim, as each policy will have varying criteria. Some medical expense policies may also have deductible and co-insurance features.

Hospital Cash Insurance

If you want to receive a fixed amount of cash while you are in hospital, then Hospital Cash Insurance is what you are looking for.

This kind of policy actually pays you a fixed amount of benefits for each day that you are in hospital, regardless of the actual expenses incurred for your stay.

The point to note with this type of policy is that the total amount you are paid may be more or less than your actual expenses.

Critical Illness Insurance

On the other hand, Critical Illness Insurance reduces your burden in the unfortunate incidence that you are afflicted by a major illness or disease.

While the types of diseases covered by these policies vary from one insurer to the next, there is a list of major illnesses that are covered by almost all policies. These include cancer, heart attack, coronary artery bypass surgery, stroke and kidney failure.

It is important to note that benefits are paid only if the disease or surgery exactly meets the definitions stated in the policy. These definitions are fixed across all insurance companies in Singapore and can be found in website of the Life Insurance Association (www.lia.org.sg).

As long as you can prove that you are diagnosed with one of the diseases, as it is defined by your policy, you are entitled to the payout, which usually comes in the form of a lump sum. The amount paid does not depend on being admitted into hospital or the actual medical expenses you incur.

Disability Income Insurance

One of the main concerns of the breadwinner of the family is where the money will come from should they be unable to work. This underscores the advantage of disability income insurance.

These types of policies pay out a fixed amount of money, usually up to 80 percent of your monthly salary, on a monthly basis to ease the burden on those you who were dependent on you. The monthly payout income benefit will usually be paid for up to five or 10 years, or until you are 60 or 65 years old.

The most important point to note with disability income insurance is the definition of disability used in the policy. Some policies define it as not being able to perform your usual work while others define it as not being able to work at all, so be sure to check with your financial adviser on the definitions before taking on the policy.

Long-Term Care Insurance

For rapidly ageing Singapore, long-term insurance care is becoming increasingly relevant. For these policies, benefits are paid when you cannot perform 'activities of daily living', which include bathing, dressing and moving around.

However, these policies have strict definitions and may vary from one policy to the next. To qualify for payment benefits, you must meet those definitions and the minimum number of activities you are unable to perform. Should the number of activities you are not able to perform fall below the minimum required number, payment of benefits will stop.

Pinpointing your healthcare needs

Of course, it is more likely that more than one of these policies might apply to you. It is not unusual to have more than one - but the first thing you should do is check the extent of your current private coverage, and any coverage that your employer might be providing before making a choice.

You may want to approach a financial adviser who will be able to perform a fact-find process. It is a detailed analysis that assesses and identifies your insurance needs so that your financial adviser can then recommend the suitable products to meet your healthcare needs.

The outcomes from discounting can be very dear so don't risk it - for the sake of your family.