Financial Planning Central

Don’t Miss The Big Picture

Tiang Chuan — Fri, 05 Mar 2010 13:07:22 +0000

Instead of making money, many investors have done exactly the opposite. One of the reasons is the focus on the returns instead of the outcome. Read the Don’t Miss The Big Picture why an investor should focus on the big picture.

Simplicity Is Beauty

Tiang Chuan — Fri, 01 Jan 2010 13:03:13 +0000

Like a stunned rabbit starring into the lights of an oncoming truck, investors are left bewildered in the wake of the ‘perfect storm’ that swept the world of investments. An investment portfolio constructed with simplicity in mind can go a long way in helping investors manage and maintain their portfolios. Read the article – Simplicity Is Beauty to know more!

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Getting Legal Threats For Trying To Expose Scams

Tiang Chuan — Sat, 21 Nov 2009 03:23:51 +0000

With the explosion of user generated contents like blogs and forums in the development of Web 2.0, many consumers will search the web before buying something. This has not gone un-noticed by service and product providers. Some have tried to get positive reviews by giving rewards, be it by cash or in kind. In the United States, bloggers have to make ‘clear and conspicuous’ disclosures if they have been rewarded in any way. The Media Development Authority (MDA) is also looking at stricter disclosure rules.

On the flip side, some bloggers have been threatened with lawsuits for giving negative comments. In a report on the 19th Oct ‘09 edition of The Straits Times – Food bloggers face legal heat over reviews, some food bloggers have been threatened with legal suits for posting poor reviews.

Providers certainly have the right to correct a defamation, but don’t consumers have the right to voice their displeasure? The difficulty is in determining who is right and who is wrong.

Due to the high legal cost, many of those who are threatened with legal suits end up removing their comments. Those who have the financial backing would be in a better position to take up the legal challenge. Scammers in Singapore have taken advantage of this to suppress those without the financial muscle to take to the courts. When faced with a mighty opponent, usually a big newspaper publisher, scammers would think twice about engaging them in court.

I have personally seen a legal threat from a scammer issued to a friend. Without the financial resources, my friend have to take down the postings.

The next time you search the web for information on some investment schemes, do not assume that all is well when you do not find negative information. For such truths may have been removed, ironically through the system that is supposed to embody ‘the Truth, the whole Truth and nothing but the Truth’…

Sounds To Good To Be True? It Probably Is

Tiang Chuan — Mon, 16 Nov 2009 07:37:10 +0000

Investment scams have become more creative. No longer can the investor just rely on tell tale signs of unrealistic returns to separate the sheep from the goats. We offer some questions to ponder before investing. Read the article – Sounds To Good To Be True? It Probably Is to know more

CPF LIFE – How It Works

Tiang Chuan — Mon, 14 Sep 2009 13:40:02 +0000

CPF Board has recently released more details on the CPF LIFE Scheme. The CPF Life Payout Estimator and Information Booklet can be found on their website here – CPF LIFE Website. I’ve done some comparison between the CPF LIFE vs Commercial Annuity already, I’ll do some simple comparison between payouts under the new CPF LIFE vs Minimum Sum Scheme (MMS).

The Minimum Sum Scheme

Depending on your birthday, the corresponding Minimum Sum (MS) will be different for different ages. This MS would provide a monthly payout that would last approximately 20 years. The prevailing Minimum Sum (MS) is $117,000.

The Draw Down Age (DDA), ie when you can start receiving the payout, is different for different ages.

Table 1 MMS DDA

Assuming a CPF member aged 55 having the MS of $117,000 fully in cash, he can start receiving a monthly payout of $1,040 for about 20 years. The interest rate is assumed to be 4% per annum.

Payout under CPF LIFE

Certain CPF members will automatically be included under the CPF LIFE scheme while others can opt to join in. Table 2 below indicates the various scenarios.

Table 2 CPF LIFE Eligibility

Upon joining CPF LIFE, depending on the age, gender and plan selected, a certain percentage of the RA savings will be transferred to the CPF LIFE account as premium for the annuity. The Table 3 shows some figures derived from the CPF LIFE Payout Estimator. As the LIFE Plus and LIFE Income plan deducts ALL of the RA savings as premium, only LIFE Basic and LIFE Balanced plan is shown.

Table 3 CPF LIFE Premium Rate

In addition to the Annuity Premium deducted upon joining CPF LIFE, the extra 1% interest earned first $60,000 in the SMRA savings and and top ups (if any) will also be deducted as Annuity premium around 2 months before DDA in the same ratio as the initial deduction when first joining CPF LIFE.

Payout will start with whatever amount that is left in the RA account after deducting the annuity premium plus earned interest. Payout from the CPF LIFE Annuity will begin after the monies in the RA account exhausted. Figure 1 shows how the payout is derived from the RA account and the CPF LIFE Annuity.

Figure 1 CPF LIFE Annuity Payout Graph

The Table 4 shows the annuity payout starting age for the different ages. Only 3 of the plans; LIFE Basic, LIFE Balanced and LIFE Plus provides a refund of any unused premium. LIFE Income does not provide any refund of annuity premium.

Table 4 Annuity Payout Start Age

Interest gain from the annuity premiums is paid into the Lifelong Income Fund and pooled together with interest earned from the annuity premium from other CPF LIFE participants to fund the life long payout. Meaning to say, participants will potentially loose the interest if he/she pass away too early. However, the participant will gain more than his/her rightful share of the interest by living beyond a certain age. The Table 5 illustrates the estimated amount of interest lost at different passing age for a 55 year old make with $117K in the RA. Note that for LIFE Income, the ‘loss’ includes the annuity premium as this plan does not provide any refund of unused premium. Calculations do not take into account the extra 1% interest for the first $60K from the SMRA account nor any top-ups. Negative figures indicate a ‘gain’ for the participant. Also note that the red region does not indicate the exact age of end of premium refund as the table only illustrate ages in 5 year increment. The calculations are from my own understanding of the scheme and is very much a rough estimation. Readers should be mindful that there could be errors in my assumptions and/or calculations.

Table 5 Estimated Interest Lost

The following table shows the estimated break-even age for the various plans in order to get back all the principal and rightful interest for a 55 year old male with $117K in the RA account with a 3.75% annual interest . As the monthly payout is different, different plans will give a different break-even age. Dying before the break-even age will result in a ‘loss’. Again, the extra 1% interest from the first $60K from the SMRA account is not taken into account. Figures shown are rounded to the nearest whole number.

Table 6 CPF LIFE Estimated Break-even Age

Compared to the MMS payout, CPF LIFE plans (other than LIFE Income) give a lower monthly amount but provides a lifelong income, unlike the MMS which lasts around 20 years. For MMS, there won’t be any ‘loss’ of principal or interest as any balance in the Minimum Sum will be refunded to the beneficiaries. CPF LIFE participants face a possible ‘loss’ of principal and/or interest as only the unused annuity premium is refunded for 3 plans. CPF Income does not refund any annuity premium at all. CPF LIFE participants take on this risk of loss in exchange for a lifelong income. However, as the interest rates and mortality rate are not guaranteed and subject to change, any changes to could impact the payout amount.

As there are too many permutations to the payouts depending on gender, age, interest and RA amount, the above comparison for CPF LIFE are done for a 55 year old Male with $117,000 in the RA account. Interest rate is assumed to be 3.75% pa. Also, limited information relating to how the payout calculations are arrived at is clouding the understanding of CPF LIFE.

Principal Protected & Capital Protected Banned By MAS

Tiang Chuan — Wed, 09 Sep 2009 06:19:22 +0000

In the Monetary Authority of Singapore’s (MAS) Part I Response to Feedback Received for Policy Consultation of the Regulatory Regime Governing the Sale and Marketing of Unlisted Investment Products released yesterday, the use of the terms ‘Capital Protected’ or ‘Principal Protected’ for mass market products familiar to retail investors will soon be banned. This decision follows the failure to come to a standardized definition for ‘Capital Protected’ or ‘Principal Protected’ that is easily understood by investors. Investors may not understand the difference between ‘Capital/Principal Protected‘ and ‘Capital/Principal Guaranteed‘.

Investors should note that even when the terms ‘Capital/Principal Guaranteed‘ are still allowed, it does not necessary meet that they will get back their initial investments no matter what happens. The question to ask is: Who provides the guarantee? Investors are still exposed to the credit risk of the party providing the guarantee. For example, if a bank provides the guarantee, investors may not get back their principal if the bank goes bankrupt.

The Realm of Alternative Investments

Tiang Chuan — Mon, 07 Sep 2009 09:42:24 +0000

Hedge Funds come to mind when one talks about Alternative Investments. But there are much more to Alternative Investments than just hedge fund. Alternative assets promises non or low correlation to traditional assets and can be beneficial to one’s investment portfolio. However, investors must be mindful of the possible issues with this class of investments and not be blinded by their impressive historical returns. We offer some examples in the article – The Realm of Alternative Investments.

Investing With A Gambler’s Mentality

Tiang Chuan — Sat, 05 Sep 2009 14:18:38 +0000

“Do you play the stock market?” “Which stock are you playing now?” Do these sentences sound familiar to you? Many ‘investors’ invest (speculate is a better word..) with a gambler’s mentality, attempting to ‘play’ the market through series of buy and sell. By associating investing with the word ‘play’, investment becomes a game, just like gambling. In any game or sport, different players come with different level of skills and thus, they can be ranked accordingly. Unlike a sports player whose level skills can be evidently displayed in a couple of hours, it could take years to tell apart an investor with ’skill’ and an investor with luck.

A colleague shared with me during a discussion that her client was looking for an IPO fund, ie a soon-to-be-launched fund that is still collecting money. A private banker has recommended such an IPO fund before to the client and he has made money buying into such an IPO fund and selling after a few months. Many stock punters like to bid for IPO stocks and sell them to earn a quick buck. especially during a bull market. No though is given to the fundamentals or asset allocation considerations. This particular banker has successfully sold the idea of a new fund having similar features to an IPO stock. And why sell such an IPO fund=IPO stock idea? The fund can be sold after a few months. And the reason for this type of frequent buying and selling should be very clear…

There is no such thing as a IPO fund=IPO stock. The fund’s performance comes from the underlying holdings. Any upside or downside comes from the holdings and not because the fund ‘IPO-ed’. In fact, buying a new fund carries more risks as the fund may not collect enough money and close down, before it even started. This was quite common recently due to the financial crisis. Other risks would include lack of track record and dangers of the fund being a copy cat me-too fund in some hot theme that has gone up considerably.

Asian investors are more likely to have a gambler’s mentality compared to the Europeans. A ex-analyst with a global bank shared her experience during a fund training for her new job at a fund house. Asian clients do not want to do proper asset allocations and prefer funds in hot themes, unlike their European counterparts. This creates a situation with ‘2 willing parties’ – a client willing and eager to buy a hot fund and another party willing and eager to sell one to meet sales quotas. In Chinese, this ‘2 willing parties’ situation is called ‘一个愿打，一个愿挨’.

Do not ‘play’ the market. If you want to ‘play’, be prepared to lose in the long run.

Scientist Sues Bank for Accumulator Structured Product

Tiang Chuan — Thu, 03 Sep 2009 05:41:36 +0000

Just after posting on The Return of Accumulators, The Straits Times today reported that a well-known scientist is suing Deutsche Bank for breach of legal duties and misrepresentation.

For a period of 4 months between November 2007 to February 2008, 34 accumulator contracts involving 4 banks, Citigroup, UBS, Societe Generale and Washington Mutual, were sold to the Dr Chang . Facing a potential loss of US$78 million, Dr Chang had to pump in more money, US$48 million in total from an initial investment of US$22 million. After unwinding the contracts, he ended up with a balance of US$1.6 million owing ot the bank. The bank has sued him for the US1.6 million. Now, Dr Chang is counter-claiming from the bank.

This is not the first legal suit involving Accumulators here. In November 2008, an Indonesian couple sued UBS Singapore over US$8.6 million loss involving Accumulators linked to currencies. The article can be found here.

Being a co-founder of the asthma drug Xolair, Dr Chang is no ordinary man in the street. The Indonesian couple mentioned above is involved in “textiles and construction, among other things”. Despite being extremely smart and successful, investors can still get burned in investment products. According to The Straits Times, “Mr Chang said:”As I had neither the time nor the expertise to manage my wealth, I relied heavily on the bank’s… advice for my investment decisions.”“. “The benefits of the product were highlighted, says Dr Chang, but the impact of the market price falling below the strike price was not… If the market price plunges, the loss is magnified.” Did that rang a bell?

If what Dr Chang said were true, then private banks might just work just like any salesworm. Adding fancy names like Priority, Privileged, Private in front of the word ‘bank’ might just become a marketing tool and has no meaning.

No matter the result of the legal suit and who’s proving right or wrong in the courts of law, investors, served by private banks or not, should be wary if only the benefits are highlighted while the downside is not.

The Return of The Accumulators

Tiang Chuan — Wed, 02 Sep 2009 03:10:18 +0000

Just like what Arnold Schwwarzenegger promised in the science fiction thriller The Terminator, Accumulators are back!

The Straits Times carried a report “‘Killer’ stock derivatives make comeback” on 01 Sept 09 edition of The Straits Times. The original article was report by Wall Street Journal which can be found here. It showed a slightly different version compared to the one I posted – How does a Share Accumulator Structured Product Work. Although the structure is slightly different, the results are similar: upside is limited while there the risk of downside are much higher. It is not a fair product.

As noted in the articles, such products are sold through private banks to High Net-Worth Individuals (HNWI). It makes us wonder – Haven’t HNWIs learned their lessons last year?

Many HNWIs are businessmen or professionals bogged down by work and do not have much time to do research on their investments. They too rely on their advisers (called Private Bankers or Relationship Managers in private banks). If the advisers are under pressure to meet sales targets and the interest are not aligned with the clients, product sales and churnings could easily happen. And from what I have heard from clients, such happenings are a common sight. For example, one client shared with me that his banker has recommended selling a variable annunity plan after the market rallied since March. The policy was linked to an underlying portfolio and the payout would depend on the performance of the investment. While not going too much into the policy and performance (which we think is a lemon), this plan was meant to be a long term investment. And the banker recommended selling the policy? After a few months? And where do you think the money will go?

Unlike in the show The Terminator, things that do come back may not be good for mankind. Period.