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07-08-2011, 07:57 AM
Lorna Tan of Straits Times will be leaving her job in one week's time. This is her parting advice to all of us!
Aug 7, 2011
7 investing rules to live by, as I say goodbye
My parting gift to readers: Some lessons I've learnt in my years of financial reporting
By Lorna Tan, Senior Correspondent
After 11 years, I will be moving on to a new career in a week's time.
While I'm excited about my next venture, the last few weeks have been agonising knowing that with each article I write, I'm reaching the end of a very eventful and fulfilling chapter of my life.
At The Straits Times/The Sunday Times, I've covered the property, corporate and personal finance sectors. A book that compiled my financial articles - Talk Money - has sold about 5,000 copies, and a secod volume is in the pipeline.
It has been a real privilege to be in the hot seat uncovering various financial and consumer-protection issues, such as mis-selling and fraud, which I hope have made a difference to your lives.
Just to highlight two of these issues:
There was the AIA's 'critical year' saga back in 2003 when thousands of affected policyholders were allegedly told they could stop paying premiums when they reached this 'critical year' because by then, the policies would have become self-funding.
But this did not happen because of the failing investment market. As a result, policyholders had to continue paying, leaving them feeling cheated, which led to a public outcry. Eventually, AIA offered compensation packages to affected policyholders.
In 2005, I wrote that regular investment-linked insurance plans (ILPs) were unsuitable for older policyholders. This was because they might be unable to continue with premium payments if they had a short investment horizon, as insurance charges would rise to outstrip the premiums and might also eat into the value of the investments.
To help consumers, a guide to ILPs was issued by the Life Insurance Association and Consumers Association of Singapore, and some affected policyholders were compensated.
Personally, I have benefited tremendously from talking to financial experts and investors. I would like to share some of the lessons I've learnt.
1 Knowing your investments
From my conversations with newsmakers and readers, I realise that many do not know and understand their own investments. For some, it boils down to complacency or ignorance. But be forewarned that the consequences can be very serious. How can you protect your family financially if you are not aware of the investments you own, including your insurance policies and their benefits? Worse still, what happens if you have over-estimated your net worth and are unable to cough up the cash when the need arises?
Take my uncle for instance. His wife died of breast cancer on May 20. A retiree, Uncle Philip, 73, realised only after talking to his insurance adviser early this year that she was insured under a severe disability ElderShield policy with insurance cooperative NTUC Income. In her case, the plan provided for a monthly cash payout of $300 for up to five years if she was unable to perform three out of six pre-determined activities such as feeding and bathing. As that was her situation as confirmed by Income's panel of doctors, my aunt received the $300 payouts in March, April and early May before she died.
In fact, my aunt had been severely disabled for the past two years and could have claimed from her ElderShield cover earlier. After her death, Uncle Philip appealed to Income and submitted medical reports from my aunt's doctor and the Singapore Cancer Society. My uncle was fortunate that Income was willing to review the case and it subsequently awarded my uncle an ex gratia payment of $5,400, which was the sum of the ElderShield payouts from late 2009 till February this year.
When I checked with Income, it told me that it wanted to be fair to its policyholders and not avoid paying a claim because of a technicality. Furthermore, it was satisfied that the medical reports submitted proved that my aunt met the criteria while the policy was in force. The insurer added that it would have paid had the claim been filed when my aunt was alive.
2 Importance of health insurance
In my view, the most innovative insurance product in the past decade is the 'as charged' hospitalisation Shield plan which is provided by some private insurers such as AIA, Aviva, Great Eastern, NTUC Income and Prudential.
Departing from traditional hospitalisation plans, the 'as charged' plans do away with any sub-limits on medical limits, although there is an annual limit. You will still have to pay for the deductible and co-insurance portions unless you buy a separate cover for them.
Unless your current hospitalisation plan with your employer is a portable one, you are doing yourself a favour when you buy a private 'as charged' Shield plan while you are still healthy. This is because the plan will go a long way in absorbing the inevitable rising health-care costs.
Just looking at my personal experience, my mother has claimed from her private Shield plan at least twice in the past five years. Last Tuesday, she underwent open surgery to remove her infected gall bladder, and her hospitalisation bill is likely to cross $10,000. At least I will have peace of mind that her plan will cover the bill entirely as she also has a rider to cover both the deductible and co-insurance payments.
3 Understanding your risk profile
It is a common practice for all financial intermediaries to assess your risk profile before they can sell you investment products. Risk profiling is usually done via a questionnaire and in discussions with your financial adviser. It attempts to gauge the amount of risk you are comfortable taking and the degree of uncertainty you can handle.
Such assessment ensures that you do not put your money into investments which do not match your objectives.
Broadly, investors differ in their investment risk appetites and they may be conservative, balanced or aggressive. Each risk tolerance level helps determine the percentage of equities and bonds to hold. Equities are deemed riskier than bonds.
However, bear in mind that risk profiling may not take into account your risk capacity, which refers to how much risk you need to take to achieve your financial objectives.
Your risk capacity is a useful indicator because you may realise that you do not really need to take the risk of investing in a product after all, because you may already be close to meeting your financial goals.
Risk profiling may also not consider your ability to take risk. So if you have a lot of debt, you are unable to take high risks even though your risk profile says otherwise.
So instead of chasing after high returns blindly, know how much is enough for you and do not invest beyond your risk appetite, capacity and ability.
4 Doing due diligence prior to investing
Blinded by greed and a short-term investment mentality, many of us make the mistake of rushing into an investment before we have done the necessary due diligence. This can mean several things, from analysing a prospectus, checking the fine print and understanding the worst-case scenarios to confirming the credibility of the seller.
While investigating multi-level marketing firm Sunshine Empire in 2007, I was blown away by the sight of elderly investors queueing up at Sunshine's Toa Payoh office eager to participate in its 'lifestyle' plan. They had been lured by generous cash rewards but would find out too late that the returns simply came from funds pumped in by new investors.
And people continued to be lured by the potential returns even after I reported that Sunshine was on the Investor Alert lists here and in Malaysia. In Singapore, the list details the entities the Monetary Authority of Singapore has not authorised to conduct regulated activities here. Sunshine amassed more than $180 million in a Ponzi scheme before the law caught up with it in late 2007.
About a year later, some 9,900 investors suffered losses from their investments in Lehman Minibonds during the credit crisis. I had decided to steer clear of the products because I felt uncomfortable after reading the fine print in the product's advertisement. It had stated that I could lose all or part of my principal amount, which immediately set off warning bells. To me, that sounded too dangerous for something that was perceived as a low-risk investment tool by virtue of the product name.
5 Not all debts are bad
I used to be wary of incurring debts but I've realised that not all debts are bad. Debt is good when you can use it to earn a return that is higher than the interest on the debt. For instance, keep your mortgage if it makes financial sense. In fact, a housing loan is the cheapest loan anyone can ever get, thanks to the current low-interest rate environment.
In the past several years, I've deliberately maintained the housing loan of my investment property and switched to a floating rate when rates plummeted. While I patiently wait for the property to appreciate, I channel the rental income to fund my annual family vacations.
Taking a loan for a responsible need like education, which can in turn lead to higher qualifications and an enhanced future income, is also an example of a good debt.
On the contrary, debt is bad when it is incurred to fund your consumption of say, a car, or through personal loans or credit card spending. Avoid this type of debt or settle it as soon as possible.
At all times, it is prudent to keep an eye on your debt servicing ratio, which should not be more than 35 per cent of disposable income. So if your monthly take-home pay is $5,000, you should not be paying more than $1,750 to service debts.
6 Cutting my losses
For the longest time, I would hold on to my investments even after I have lost money and have the nagging realisation that it would be impossible to recoup money from them. Some studies say it is because we refuse to admit our investment failures.
I remember investing $50,000 - split equally - in two technology funds at the peak of the Internet craze just before joining The Straits Times. When the Internet bubble burst in 2000, my investments headed south. It took me about five years before I took the painful step of exiting the two funds. I've since learnt that it is better to cut my losses early.
Hanging on to these 'bad' investments is like having a boyfriend or girlfriend who is bad for you. Better to call it quits and start anew than to hang on and sink.
At the same time, it is prudent to ensure that my portfolio is rebalanced over time. This means buying or selling the components so that the bond and equity proportions in my portfolio are back to the initial weighting if it was considered optimal for my risk profile.
7 Being responsible
Finally, there is much we can learn from past financial scandals and mistakes of consumers. Besides equipping ourselves with more financial know-how, we should learn to understand our own attitudes to risk-taking and greed. Above all, let us be responsible for our own investment decisions.
And while we are chasing our financial goals, let us not forget the other things that matter, like our family and friends.
Let me end with a quote:
'It is good to have money and the things that money can buy, but it's good too, to check up once in a while and make sure you haven't lost the things money can't buy' - George Lorimer, an American writer and former editor of The Saturday Evening Post.
lorna@sph.com.sg
Aug 7, 2011
7 investing rules to live by, as I say goodbye
My parting gift to readers: Some lessons I've learnt in my years of financial reporting
By Lorna Tan, Senior Correspondent
After 11 years, I will be moving on to a new career in a week's time.
While I'm excited about my next venture, the last few weeks have been agonising knowing that with each article I write, I'm reaching the end of a very eventful and fulfilling chapter of my life.
At The Straits Times/The Sunday Times, I've covered the property, corporate and personal finance sectors. A book that compiled my financial articles - Talk Money - has sold about 5,000 copies, and a secod volume is in the pipeline.
It has been a real privilege to be in the hot seat uncovering various financial and consumer-protection issues, such as mis-selling and fraud, which I hope have made a difference to your lives.
Just to highlight two of these issues:
There was the AIA's 'critical year' saga back in 2003 when thousands of affected policyholders were allegedly told they could stop paying premiums when they reached this 'critical year' because by then, the policies would have become self-funding.
But this did not happen because of the failing investment market. As a result, policyholders had to continue paying, leaving them feeling cheated, which led to a public outcry. Eventually, AIA offered compensation packages to affected policyholders.
In 2005, I wrote that regular investment-linked insurance plans (ILPs) were unsuitable for older policyholders. This was because they might be unable to continue with premium payments if they had a short investment horizon, as insurance charges would rise to outstrip the premiums and might also eat into the value of the investments.
To help consumers, a guide to ILPs was issued by the Life Insurance Association and Consumers Association of Singapore, and some affected policyholders were compensated.
Personally, I have benefited tremendously from talking to financial experts and investors. I would like to share some of the lessons I've learnt.
1 Knowing your investments
From my conversations with newsmakers and readers, I realise that many do not know and understand their own investments. For some, it boils down to complacency or ignorance. But be forewarned that the consequences can be very serious. How can you protect your family financially if you are not aware of the investments you own, including your insurance policies and their benefits? Worse still, what happens if you have over-estimated your net worth and are unable to cough up the cash when the need arises?
Take my uncle for instance. His wife died of breast cancer on May 20. A retiree, Uncle Philip, 73, realised only after talking to his insurance adviser early this year that she was insured under a severe disability ElderShield policy with insurance cooperative NTUC Income. In her case, the plan provided for a monthly cash payout of $300 for up to five years if she was unable to perform three out of six pre-determined activities such as feeding and bathing. As that was her situation as confirmed by Income's panel of doctors, my aunt received the $300 payouts in March, April and early May before she died.
In fact, my aunt had been severely disabled for the past two years and could have claimed from her ElderShield cover earlier. After her death, Uncle Philip appealed to Income and submitted medical reports from my aunt's doctor and the Singapore Cancer Society. My uncle was fortunate that Income was willing to review the case and it subsequently awarded my uncle an ex gratia payment of $5,400, which was the sum of the ElderShield payouts from late 2009 till February this year.
When I checked with Income, it told me that it wanted to be fair to its policyholders and not avoid paying a claim because of a technicality. Furthermore, it was satisfied that the medical reports submitted proved that my aunt met the criteria while the policy was in force. The insurer added that it would have paid had the claim been filed when my aunt was alive.
2 Importance of health insurance
In my view, the most innovative insurance product in the past decade is the 'as charged' hospitalisation Shield plan which is provided by some private insurers such as AIA, Aviva, Great Eastern, NTUC Income and Prudential.
Departing from traditional hospitalisation plans, the 'as charged' plans do away with any sub-limits on medical limits, although there is an annual limit. You will still have to pay for the deductible and co-insurance portions unless you buy a separate cover for them.
Unless your current hospitalisation plan with your employer is a portable one, you are doing yourself a favour when you buy a private 'as charged' Shield plan while you are still healthy. This is because the plan will go a long way in absorbing the inevitable rising health-care costs.
Just looking at my personal experience, my mother has claimed from her private Shield plan at least twice in the past five years. Last Tuesday, she underwent open surgery to remove her infected gall bladder, and her hospitalisation bill is likely to cross $10,000. At least I will have peace of mind that her plan will cover the bill entirely as she also has a rider to cover both the deductible and co-insurance payments.
3 Understanding your risk profile
It is a common practice for all financial intermediaries to assess your risk profile before they can sell you investment products. Risk profiling is usually done via a questionnaire and in discussions with your financial adviser. It attempts to gauge the amount of risk you are comfortable taking and the degree of uncertainty you can handle.
Such assessment ensures that you do not put your money into investments which do not match your objectives.
Broadly, investors differ in their investment risk appetites and they may be conservative, balanced or aggressive. Each risk tolerance level helps determine the percentage of equities and bonds to hold. Equities are deemed riskier than bonds.
However, bear in mind that risk profiling may not take into account your risk capacity, which refers to how much risk you need to take to achieve your financial objectives.
Your risk capacity is a useful indicator because you may realise that you do not really need to take the risk of investing in a product after all, because you may already be close to meeting your financial goals.
Risk profiling may also not consider your ability to take risk. So if you have a lot of debt, you are unable to take high risks even though your risk profile says otherwise.
So instead of chasing after high returns blindly, know how much is enough for you and do not invest beyond your risk appetite, capacity and ability.
4 Doing due diligence prior to investing
Blinded by greed and a short-term investment mentality, many of us make the mistake of rushing into an investment before we have done the necessary due diligence. This can mean several things, from analysing a prospectus, checking the fine print and understanding the worst-case scenarios to confirming the credibility of the seller.
While investigating multi-level marketing firm Sunshine Empire in 2007, I was blown away by the sight of elderly investors queueing up at Sunshine's Toa Payoh office eager to participate in its 'lifestyle' plan. They had been lured by generous cash rewards but would find out too late that the returns simply came from funds pumped in by new investors.
And people continued to be lured by the potential returns even after I reported that Sunshine was on the Investor Alert lists here and in Malaysia. In Singapore, the list details the entities the Monetary Authority of Singapore has not authorised to conduct regulated activities here. Sunshine amassed more than $180 million in a Ponzi scheme before the law caught up with it in late 2007.
About a year later, some 9,900 investors suffered losses from their investments in Lehman Minibonds during the credit crisis. I had decided to steer clear of the products because I felt uncomfortable after reading the fine print in the product's advertisement. It had stated that I could lose all or part of my principal amount, which immediately set off warning bells. To me, that sounded too dangerous for something that was perceived as a low-risk investment tool by virtue of the product name.
5 Not all debts are bad
I used to be wary of incurring debts but I've realised that not all debts are bad. Debt is good when you can use it to earn a return that is higher than the interest on the debt. For instance, keep your mortgage if it makes financial sense. In fact, a housing loan is the cheapest loan anyone can ever get, thanks to the current low-interest rate environment.
In the past several years, I've deliberately maintained the housing loan of my investment property and switched to a floating rate when rates plummeted. While I patiently wait for the property to appreciate, I channel the rental income to fund my annual family vacations.
Taking a loan for a responsible need like education, which can in turn lead to higher qualifications and an enhanced future income, is also an example of a good debt.
On the contrary, debt is bad when it is incurred to fund your consumption of say, a car, or through personal loans or credit card spending. Avoid this type of debt or settle it as soon as possible.
At all times, it is prudent to keep an eye on your debt servicing ratio, which should not be more than 35 per cent of disposable income. So if your monthly take-home pay is $5,000, you should not be paying more than $1,750 to service debts.
6 Cutting my losses
For the longest time, I would hold on to my investments even after I have lost money and have the nagging realisation that it would be impossible to recoup money from them. Some studies say it is because we refuse to admit our investment failures.
I remember investing $50,000 - split equally - in two technology funds at the peak of the Internet craze just before joining The Straits Times. When the Internet bubble burst in 2000, my investments headed south. It took me about five years before I took the painful step of exiting the two funds. I've since learnt that it is better to cut my losses early.
Hanging on to these 'bad' investments is like having a boyfriend or girlfriend who is bad for you. Better to call it quits and start anew than to hang on and sink.
At the same time, it is prudent to ensure that my portfolio is rebalanced over time. This means buying or selling the components so that the bond and equity proportions in my portfolio are back to the initial weighting if it was considered optimal for my risk profile.
7 Being responsible
Finally, there is much we can learn from past financial scandals and mistakes of consumers. Besides equipping ourselves with more financial know-how, we should learn to understand our own attitudes to risk-taking and greed. Above all, let us be responsible for our own investment decisions.
And while we are chasing our financial goals, let us not forget the other things that matter, like our family and friends.
Let me end with a quote:
'It is good to have money and the things that money can buy, but it's good too, to check up once in a while and make sure you haven't lost the things money can't buy' - George Lorimer, an American writer and former editor of The Saturday Evening Post.
lorna@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
