Azure School

Financial Planning Lesson 3

Reading materials

• Read chapters 11 to 18 of the book, Practical Guide on Financial Planning, written by Mr. Tan Kin Lian

Invest through an Exchange

• It is better to invest through an exchange, such as the Singapore Exchange.

• As there are buyers and sellers, you are assured that the prices are fair and transparent

• You can opt to be a buyer or seller• The exchange offers many products - shares, bonds,

exchange traded funds (ETF) and real estate investment trusts (REIT)

• Information is provided transparently to all market participants

Diversification of risk

• It Is better to invest in many shares, so that you are not badly affected by the poor performance of any single share.

• If you do not have a large amount of savings, you can invest in a unit trust or index fund.

• You should choose a fund that has low expense ratio, such as the STI ETF.

Life insurance products

• You should choose a policy that gives you a yield that is almost as good as blue chips shares.

• Study the yield on the life insurance policy from the benefit illustration. Make sure that the reduction in yield, due to the charges, is less than 1.5%.

• Most life insurance polices have a reduction in yield of more than 3%; this is unattractive for consumers.

Poor yield on life policies

• Most life insurance policies provide a poor yield due to – High marketing cost– High administrative cost– High profit margin

• These high charges are reflected in the “effect of deduction”; this is the total cost, including interest, borne by customers.

Effect of deduction

• Look at the “effect of deduction” shown in the benefit illustration.

• A good policy has a reduction of less than 20% compared to the accumulated premium.

• Most policies have a reduction of 40%, which is too high.

• If the accumulated premium is $500,000, the deduction takes away $200,000, leaving only $300,000 for the consumer.

Financial adviser

• The financial adviser (or insurance agent) is paid a commission on the policy that you buy.

• The adviser is likely to recommend a policy that pays a good commission. The commission comes from you, as the consumer.

• The distribution cost can take away as much as two years of premium. This is too high.

Deal with inflation

• Most insurance policies give a yield of 2% to 3% per annum.

• This is not enough to cover inflation.• When investing for the long term, you should

look for a yield that is 2% higher than inflation.

Review of financial plan

• You should review your financial plan every 3 or 5 years. Be ready to pay a fee to the financial adviser for a proper review.

• If your existing life insurance policies has a poor yield, you can terminate it and invest the cash value and future premium to get a better yield.

• You can discontinue insurance policies that provide cover that you do not need now.

Investing on your own

• You can invest the savings on your own, instead of investing in an index fund.

• Be aware of the following risks– You can lose out, if you fail to apply for rights issue offered

at a discount– You may be tempted to engage in trading, which will lose

money in the long run– You may be picking the wrong shares and the wrong timing

• You need to spend time to keep track of your investments.

Health insurance

• You can buy the basic Medishield from CPF and pay a lower cost for this medical insurance. This covers treatment in subsidized wards.

• If you buy a Private Shield, the premium can cost 2 to 3 times of Medishield. It covers treatment in private wards.

• The shield plan covers treatment in hopsital but is subject to co-payments (that have to be paid by the patient).

• Buy the insurance cover that you really need and do not pay higher premium just to get “the best cover”

End of lesson 3

• Read the chapters of the book again in more detail.

• When you are ready, you can do the Quiz.