Den of The Lion Investor

Question from a reader:

Dear Martin,

I am enquiring on behalf of my father who has been approached by an insurance agent in signing up an Endowment Plan.

The amount is $50,000 is single premium for 5 years term. The insured amount is $62,500. The part that I am uncertain is on the Projected at 2.80% and 4.30% on investment return (which both are non-guaranteed) described.

The agent explained that it is based on compound interest 0f 2.997% upon 5 years maturity. She also explained that the non-guaranteed investment return is required by MAS to provided.

Appreciate if you can advise on:-

1. Can I deemed the compound interest as 2.997% as the guaranted interest rate? Cos I have some concerns on the so-called non-guaranted is like too good to be that attractive.

2. Is this endowment plan similar to a fixed deposit? Which one would be a safer option, this or the recent fixed deposit with BEA over 2.125%?

Thank you for your time in reading and hope to hear from you soon!

My reply:

First of all, you might want to refer to my earlier post on participating funds.

In this case, the insurer is showing you the projected returns based on the figure of 2.8%pa and 4.3%pa for their par funds.

If their funds managed to achieve a 2.8% p.a. return, you will get back $54530 on maturity. This works out to be an annualised return of 1.75% p.a. On the other hand, if they can achieve 4.3% p.a., then your annualised returns works out to be 2.997% p.a. as correctly pointed out by your agent.

As you probably realised by now, this 2.997% return is not guaranteed. The only guaranteed portion is the return of $50000 on the maturity of the plan. Your actual returns might be higher or lower depending on the performance of the par fund.

Your benefit illustration will show you the track record of the par fund for the last three years as well as their asset allocation.

Insurers also usually practice a concept of “smoothing” to spread out the gains/losses evenly to policy holders. In layman terms, this means keeping some buffer (when they declare bonus) during good years to make up for bad years.

Lastly, an endowment plan is not the same as a fixed deposit. There is always a trade-off between risk and return. With an endowment plan, you stand a decent chance of getting a better return than a fixed deposit but you bear the risk of the par fund underforming. You also bear the liquidity risk (funds locked up for five years). 

Ultimately, it is up to you dad to decide which are the risks he wants to get paid for because ultimately that is what investment is - understanding the risks and being paid for those risks you are willing to take.

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Question for Lion Investor

Hi,

I like your blog. There is always a write up of the latest events happening in Singapore. As a Singaporean, it is very useful to be updated on all current issues. It provides a one-stop info centre.

Just wanted to check with you: about the current min. CPF sum requirement :
1) assuming I have less than the required min. cpf amt. at age 55
2) I sell my house at age 56 yrs.
3) Will the cpf auto deduct the min. cpf amt. from the sale proceeds?

Assuming:
1) I reach 55 yrs in 5 yrs time.
2) I used $250,000 CPF money to pay for my house, besides the cash portion. The house has been fully paid up.
3) I can sell the house at 1 million dollars.
4) I have $50,000 in OA, $40,000 in Special, $34,000 in medisave.

Appreciate your help on this so that I can plan when to sell my house.

Many thanks!

Elly

My Comments:

Hi Elly, assuming you continue to earn interest from the CPF board (at 2.5/4) and there are no further additions or withdrawals to your CPF accounts, you will have about a total of 144k in OA, SA and Medisave in 5 years time.

About 34k will be set aside in your Medisave as the Medisave Minimum Sum, with the balance 110k in your retirement account (RA).

The CPF minimum sum then will be about 120k, and you can pledge your property for half of this amount. This means you will withdraw 50k cash, keeping 60k cash in your RA. Your pledged property will make up for the other 60k of the CPF minimum sum.

If you sell your house at 56, 60k will need to be returned to the RA to make up for the property pledge. The amount to be refunded will increase due to the accumulated monthly interest on the pledged amount.

If you sell your house before you turn 55, you will need to refund 250k plus accrued interest to CPF. Then when you turn 55, 120k from your OA and SA will need to be set aside for your CPF minimum sum.

Since you will quite easily meet the CPF minimum sum requirement either way, getting a good price on your property might be a more important consideration for you in deciding when is the best time to sell it.

Hope this makes it clear for you.

I will be attending the AGM of Rickmers Maritime tomorrow morning. Rickmers is currently one of the three shipping trusts listed in Singapore.

If you have any questions on Rickmers Maritime that you like to ask the management, drop me a note or post a comment below and I will try to ask on your behalf.

I will be providing a summary writeup about the AGM proceedings in tomorrow’s post.

Question for Lion Investor

Dear Sir,

I would appreciate some advice for a complete idiot in stock investment who wants to take the first step in stock investing. What are the “must have” knowledge that one must pick up before taking the plunge?

Thank you.

Frank

My Comments

Before you even start to invest, you need to make sure your financial position is fundamentally strong. This means having a few things:

1. A postive cash flow every month.
2. Putting aside some cash that will tide you through in case of any emergency. Typically, this is 3-6 months of your salary or expenses.
3. Money you don’t need in the short to medium term that can be used for investing. We shall call this your investment fund.

Once you have your investment fund, you have to decide on an optimal asset allocation for it based on your needs. This will detemine what percentage of your investment fund goes to stocks, bonds, alternative investments, etc. You might want to do some reading on the topic “Asset allocation”.

Let us look more at stock investing since you asked about it here. There are two main schools of thought when it comes to stock investment.

The first group of people are the traders. To them, the stock market is like a casino.

Traders focus more on price movement more than anything else. If you intend to become a trader, you need to read up on technical analysis and trading methods.

The second (and smaller) group of people are the investors. They treat buying a stock as buying a business. If you think about it, that’s what a stock market essentially is. It provides a secondary market for the buying and selling of shares of companies.

At any one point in time, the quoted prices might be worth more, less or equal to the intrinsic value of the business.

The returns you receive will thus depend on both the performance of the company you bought, as well as how it’s price changed relative to its business value.

If you are going to focus on being an investor, a good place to start is to read Warren Buffett’s annual letters to his shareholders. They contain a chuck of his investing insights and ideas.

You will also need to be familiar with accounts so that you can analyse the financial reports of the companies you are researching.

For both groups of people, some economics macro background will also be useful.