Hi anon,
This is going to be a long one. It is still an opinion and everyone has the right to have one, so to anyone who doesn't agree fully or partly, please don't turn the comments section into a slugfest. And of course, I can be wrong too. Anyway, here goes:
- Assuming they are young and healthy and won't need insurance. Sure, you are healthy now, but anything that can happen will happen. Buying insurance after you discover an existing condition is akin to jumping out of the airplane forgetting the parachute and only realizing it after you are in free fall. You realise that just that one second too late. And time cannot be reversed.
I have seen one too many people ask hopefully if they can get covered after a routine medical check up uncovered a condition and they start to panic. Most likely, there will be an exclusion or a loading of some sort if it is a condition of concern to the insurer. Insurance is the seatbelt/air bag/shock absorber in your drive down the road of life. You just wear it, it stays there invisible and silent, but when something unforseen happens, it is there to mitigate the shock and prevent massive financial distress to you. The Titanic still sailed with lifeboats (just too few). Why? Because the unexpected can happen. I don't even want to get started on the incident where someone who signed a policy through me and died the next day (this was a few years back). Yes, it happens. He wasn't even 30.
- Chasing yesterday's winners. Nope, I am not saying that TESLA won't continue to grow. Nor am I saying that you should or should not buy TESLA. But if you are all-in on a single stock, you are either speculating (in my opinion) or have extreme conviction in that company. And you had better be very correct or pray that lady luck is on your side. If it's the former, congrats. If it's the latter, congrats. And if it is neither, then what is your backup plan?
Don't go all in on the chase for yesterday's winners. Diversify. Across sectors, regions, countries. Even if you are totally bullish on the stock market, you don't just buy one stock. And no, buying OCBC, DBS and UOB is NOT diversifying.
And while I'm on that topic, it's important to note that there is nothing wrong to go for capital gains. But when you are approaching retirement, there really isn't too much room for error. One wrong move can wipe out your portfolio....except that this time you are already in your 50s and don't have much resources and time to recover from it. Approaching retirement, it is about preserving what you have build up, not trying to chase the winners.
- Buying something they don't need for freebies (or extra interest) or not understand what they buy. Time and again I have seen one person too many buy a savings plan or such from a financial institute on the premise of extra interest for their savings account. Yes, it's nice to have an extra 1% interest for 12 months....but that savings plan is something that you are going to commit for the next 10-15 years! Now if you needed that, that's great. But if you weren't sure, 1% extra interest on your savings is not going to change your life dramatically. Neither is that $500 shopping voucher. But servicing a $1000/mth policy might put a strain on you. And if you were going to buy it, did you remember to compare across similar plans from various insurers? After all, it is your hard earned money.
Don't buy something for freebies. That's putting the cart before the horse. Ask if you needed the policy first. And if you do, then go ahead. The extras are just that, extras.
And please understand what you are buying. I met a lady once who asked if she had sufficient coverage as she already had 3 policies which she bought years ago and had been servicing them for a while now. Turned out, they were all saving plans. That's not coverage. But she simply didn't know what she bought nor how they worked, and couldn't remember what they were about. Needless to say, she was very, very underinsured.
- Not realizing that income is at the core your finances. Ok this one isn't really a mistake that people make, but I wish people realised it more. Just take a moment to think about this: Your income is at the heart of your life. It determines the food you eat, the house you stay in, even the clothes you wear.
And one day that income will stop. You will retire. Or fall sick and become unable to work. Yet your income must keep coming to you. That is why you need assets that produce income. And linking back to my 2nd point, diversify those sources. Why did the CPF board set up CPF LIFE? Because that's INCOME for LIFE. It's still about income here.
Build your income streams, both guaranteed and non-guaranteed. Guaranteed ensures that you always have income coming to you. Non-guaranteed ensures that in good times, you have an abundance, and in lean times, you can still fall back on your guaranteed income (just see how many companies cut or stopped dividends in the past year). Last I checked, Cai Png aunties don't accept BTC or shares of DBS as payment. They want cash. And cash in your hand is a result of payouts from your income producing assets.
- Overemphasis on fees. This is probably going to be controversial. But let me state this. Fees are NOT everything. Lower fees don't mean higher returns. Sure, if you have 2 STI ETFs from two fund houses, a lower fee from one fund house should result in a higher return, ceteris paribus.
But what if I told you that, based on the fact that we are looking at Singapore Equity, the Nikko AM Singapore Dividend Equity Fund outperformed the Nikko AM STI ETF? Just look at the 3 year and 5 year performance. The fund lost lesser than the ETF over 3 years, and had a higher annualized return over 5 years. And factsheet returns are nett of fund level fees like management fee, trustee fee etc. Both are invested in Singapore Equity and both are distributed by the same fund house, so why is the ETF underperforming the fund, despite the fund having a higher management fee? Simple. Active management is NOT dead. Markets are still inefficient, especially in A/P.
It's not about finding the investment/advisor offering the lowest fee, but rather finding the investment/advisor worth the fee. And while I'm on it, we are all paying fees even when we buy stocks and shares. Nope, I am not referring to brokerage and SGX clearance fees. When you buy into a REIT, for example, don't the REIT managers take a fee for running the REIT? And some REITs have far higher fees than others despite underperforming in their respective sectors against their peers. I don't often seen anyone blasting REITs for their fees, but I see that happen a lot with unit trusts.
There's a fantastic article by Ruimin from TWS here. More people should read it. In conclusion, low fees does not always equate to better performance.
- Not optimizing their coverage and too frequent 'reviews'. No, this is not about the term vs whole life debate. This is about cash flow and personal finance. I have seen a client take a term plan with a company to support his friend, despite that company being the most expensive (and by around $500/yr too, may I add). That's actually almost $20K extra that he has to pay for the exact same coverage! Why did he do that? I don't know. I couldn't understand his reasoning. And the reason I say $20K is because the plan was 40 years long. He needed it, but I don't know why he wanted to go for the most expensive one.
The next is cash flow. I have seen people over commit on their savings/endowments, thinking that they would be able to afford their premiums down the road. Personally, going by my 4-3-2-1 budgeting, I would look at allocating 20% typically to invest or save, but not ALL of that 20% goes into commitments that must be kept, such as a retirement income plan. Things can and will go wrong, people get retrenched or take a pay cut, etc, and suddenly the situation can become very very tight.
And no, there is no need to review your insurance every single year. If nothing much has changed, why would your needs change drastically year on year? I met a lady who was at her wit's end once, as she had 40% of her income being spent on insurance every month. She told me that her advisor had been reviewing with her yearly since 2014, and true enough, every single year she got sold a policy, to the extent that all her policy anniversaries were in October. Needless to say, it was a great financial burden on her.
If you aren't having a major change in life (getting married, buying a house, starting a family, massive salary jump, massive change in expenses due to commitments such as supporting retired parents), and your last review was within the past 2-4 years, you are probably going to be fine.
- Lack of understanding and lack of urgency/action for retirement planning (or planning in general). We are only going to live longer and longer. Just by saving and investing and maximizing CPF, is not going to work unless you have done your numbers and know if they actually are realistic or not. And retirement planning is not something you do the year before you retire. Starting early allows compounding to kick in. Starting early allows you to know your targets and whether you are on track or not to maintain the lifestyle you envision in retirement. If you don't build a holistic plan to tackle all aspects and risks of retirement, life could throw you a curveball right before you retire.
Many people also fail to understand that as much as it is about increasing your wealth, it is also about how you distribute it in retirement. How will you structure your layers of income such that you receive what you need, when you need it?
And on the topic of urgency, the ball is actually in people's court most of the time. Not the advisor. If you sit on something too long, the situation changes. No sir, the CI plan you were "thinking about" last year is not $1200/yr any more. You became one year older, and the premiums have gone up to $1300/yr, assuming the plan is still around. And that 2.5% p.a. guaranteed return retirement plan you asked about last year? It's no longer on the market because it was withdrawn while you were "thinking about it". So if you intend to take action, then take action. Sitting around doesn't achieve anything, other than you losing out on one year (or however long you were thinking about it).
If you were certain that you wanted to do something (sort out your retirement, get your insurance settled, open an account to start investing etc), then see it through. Don't stop halfway, or else the end result is that you are back to square one. And if you weren't certain you wanted to do something, that's okay too. Take action only when you are certain you want to do something, but see it through.
Well, there you go. That took an hour to type, but five years to accumulate. I'm sure there's more, but I am hungry and I need to eat my dinner. Maybe in five years, I can update this.
Hi anon,
This is going to be a long one. It is still an opinion and everyone has the right to have one, so to anyone who doesn't agree fully or partly, please don't turn the comments section into a slugfest. And of course, I can be wrong too. Anyway, here goes:
I have seen one too many people ask hopefully if they can get covered after a routine medical check up uncovered a condition and they start to panic. Most likely, there will be an exclusion or a loading of some sort if it is a condition of concern to the insurer. Insurance is the seatbelt/air bag/shock absorber in your drive down the road of life. You just wear it, it stays there invisible and silent, but when something unforseen happens, it is there to mitigate the shock and prevent massive financial distress to you. The Titanic still sailed with lifeboats (just too few). Why? Because the unexpected can happen. I don't even want to get started on the incident where someone who signed a policy through me and died the next day (this was a few years back). Yes, it happens. He wasn't even 30.
Don't go all in on the chase for yesterday's winners. Diversify. Across sectors, regions, countries. Even if you are totally bullish on the stock market, you don't just buy one stock. And no, buying OCBC, DBS and UOB is NOT diversifying.
And while I'm on that topic, it's important to note that there is nothing wrong to go for capital gains. But when you are approaching retirement, there really isn't too much room for error. One wrong move can wipe out your portfolio....except that this time you are already in your 50s and don't have much resources and time to recover from it. Approaching retirement, it is about preserving what you have build up, not trying to chase the winners.
Don't buy something for freebies. That's putting the cart before the horse. Ask if you needed the policy first. And if you do, then go ahead. The extras are just that, extras.
And please understand what you are buying. I met a lady once who asked if she had sufficient coverage as she already had 3 policies which she bought years ago and had been servicing them for a while now. Turned out, they were all saving plans. That's not coverage. But she simply didn't know what she bought nor how they worked, and couldn't remember what they were about. Needless to say, she was very, very underinsured.
And one day that income will stop. You will retire. Or fall sick and become unable to work. Yet your income must keep coming to you. That is why you need assets that produce income. And linking back to my 2nd point, diversify those sources. Why did the CPF board set up CPF LIFE? Because that's INCOME for LIFE. It's still about income here.
Build your income streams, both guaranteed and non-guaranteed. Guaranteed ensures that you always have income coming to you. Non-guaranteed ensures that in good times, you have an abundance, and in lean times, you can still fall back on your guaranteed income (just see how many companies cut or stopped dividends in the past year). Last I checked, Cai Png aunties don't accept BTC or shares of DBS as payment. They want cash. And cash in your hand is a result of payouts from your income producing assets.
But what if I told you that, based on the fact that we are looking at Singapore Equity, the Nikko AM Singapore Dividend Equity Fund outperformed the Nikko AM STI ETF? Just look at the 3 year and 5 year performance. The fund lost lesser than the ETF over 3 years, and had a higher annualized return over 5 years. And factsheet returns are nett of fund level fees like management fee, trustee fee etc. Both are invested in Singapore Equity and both are distributed by the same fund house, so why is the ETF underperforming the fund, despite the fund having a higher management fee? Simple. Active management is NOT dead. Markets are still inefficient, especially in A/P.
It's not about finding the investment/advisor offering the lowest fee, but rather finding the investment/advisor worth the fee. And while I'm on it, we are all paying fees even when we buy stocks and shares. Nope, I am not referring to brokerage and SGX clearance fees. When you buy into a REIT, for example, don't the REIT managers take a fee for running the REIT? And some REITs have far higher fees than others despite underperforming in their respective sectors against their peers. I don't often seen anyone blasting REITs for their fees, but I see that happen a lot with unit trusts.
There's a fantastic article by Ruimin from TWS here. More people should read it. In conclusion, low fees does not always equate to better performance.
The next is cash flow. I have seen people over commit on their savings/endowments, thinking that they would be able to afford their premiums down the road. Personally, going by my 4-3-2-1 budgeting, I would look at allocating 20% typically to invest or save, but not ALL of that 20% goes into commitments that must be kept, such as a retirement income plan. Things can and will go wrong, people get retrenched or take a pay cut, etc, and suddenly the situation can become very very tight.
And no, there is no need to review your insurance every single year. If nothing much has changed, why would your needs change drastically year on year? I met a lady who was at her wit's end once, as she had 40% of her income being spent on insurance every month. She told me that her advisor had been reviewing with her yearly since 2014, and true enough, every single year she got sold a policy, to the extent that all her policy anniversaries were in October. Needless to say, it was a great financial burden on her.
If you aren't having a major change in life (getting married, buying a house, starting a family, massive salary jump, massive change in expenses due to commitments such as supporting retired parents), and your last review was within the past 2-4 years, you are probably going to be fine.
Many people also fail to understand that as much as it is about increasing your wealth, it is also about how you distribute it in retirement. How will you structure your layers of income such that you receive what you need, when you need it?
And on the topic of urgency, the ball is actually in people's court most of the time. Not the advisor. If you sit on something too long, the situation changes. No sir, the CI plan you were "thinking about" last year is not $1200/yr any more. You became one year older, and the premiums have gone up to $1300/yr, assuming the plan is still around. And that 2.5% p.a. guaranteed return retirement plan you asked about last year? It's no longer on the market because it was withdrawn while you were "thinking about it". So if you intend to take action, then take action. Sitting around doesn't achieve anything, other than you losing out on one year (or however long you were thinking about it).
If you were certain that you wanted to do something (sort out your retirement, get your insurance settled, open an account to start investing etc), then see it through. Don't stop halfway, or else the end result is that you are back to square one. And if you weren't certain you wanted to do something, that's okay too. Take action only when you are certain you want to do something, but see it through.
Well, there you go. That took an hour to type, but five years to accumulate. I'm sure there's more, but I am hungry and I need to eat my dinner. Maybe in five years, I can update this.