During this time of economic crisis, in particular when even established financial institutions are affected, one really has to assess the risk of all the financial products held. The most obvious instance will be that of Lehman mini-bonds, which prior to the crisis, have been marketed as a low risk structured product. Another instance of structured products are Structured Settlement Annuities, where for instance in an accident when certain conditions are satisfied for a payout, the payout is made on a regular basis and works like an annuity. An annuity is defined on the U.S. Securities and Exchange Commission’s website as ‘a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date’.
Sometimes the holder of such structured settlement annuities may wish to obtain a lump sum payment upfront instead of waiting for the periodic hand outs from the insurance company. In this particular crisis, whereby even insurance companies are not spared, one may be motivated to “liquidate” such structured settlement annuity rather than to wait. Especially for these products, there is no upside unlike shares but rather the downside of holding seems to be higher in a situation where even established financial institutions could go under.
There are a number of companies that provide liquidity to owners and holders of such STRUCTURED SETTLEMENT ANNUITIES. For instance, companies like Settlement Capital buy the annuity payments from the holders of insurance or lottery winnings so that these people can have a lump sum upfront. If you are interested, just ask for a free quote and find out how much of the future payments are being discounted in these settlement transactions.
Recently I have been looking at insurance plans that insure for the loss of employment income. What these plans do is pay you x amount of dollars for every year that you cannot have employment due to the accident that you suffered. Of course, these plans also require regular payments to be made to them while the insured is employed and is usually recommended for employees whose main asset is their ability to work.
When an accident does happen and the conditions are satisfied for a payout, the payout is usually on a monthly basis and hence works somewhat like an annuity which as defined on the U.S. Securities and Exchange Commission’s website is ‘a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date’. Of course, there are also other insurance plans which provide periodic payments upon the satisfaction of certain conditions.
What I wanted to know is whether there is the flexibility to obtain a lump sum payment instead of waiting for the monthly/ annual handout from the insurance company?
I was introduced to this company Settlement Capital that provides liquidity to owners and holders of periodic payments resulting from structured settlements, annuities and even lottery winnings (lottery winnings in the US is typically paid over a certain number of years rather than a one time payment). There are also a couple of other competitors that have emerged in this niche market. What companies like Settlement Capital do is that they buy the annuity payments from the holders of insurance or lottery winnings so that these people can have a lump sum upfront.
If one is interested, they can ask for a free quote and find out how much of the future payments are being discounted in these settlement transactions. However, should there be any emergency need for money or the holders of these annuities are confident of obtaining a higher rate of return elsewhere through receiving the lump sum upfront (versus waiting for 20 years and considering the impact of inflation), then it will make sense to explore this early settlement option.
- Do something about the money in the savings account
The Consumer Price Index increases at 2.1% in July for Singapore (you may refer to http://www.singstat.gov.sg) and CONTRAST this with the 0.25% interest rate for a savings account (http://www.dbs.com.sg/ratesonline/dddd.html). This means that you will have to earn 1.76% more income in order to meet the same basic needs (rather than earning the same to consume the same).
- Know how much money you have now
First, calculate how much money you have. That is, if you have a credit card loan, pay it off first. If you have a mortgage loan, bear in mind that if you do not intend to pay it off now (assuming you can) then you have to be earning more on your investment to justify not paying if off now. For Singaporeans, the concessionary loan rate from the housing board is 2.6%, which 0.1% above the prevailing provident fund interest rate.Second, include what fairly liquid investments you have. That is, do you have some fixed deposits or some bonds? Include all these as they will make up part of your portfolio (which may be reallocated later).
- Know how much money you will need
Determine how much money you will need. Savings rate ought to be 10% of your income but we know from above that money needs to be grown at a rate faster than putting in your savings account in order to keep up with inflation. Furthermore, there is a limit to working life and you have to plan for retirement including being realistic about the lifestyle you want. And do not forget that housing, insurance and children all cost money. There are many retirement calculators out there to help you with this, just Google! (http://www.bloomberg.com/invest/calculators/retire.html)!
- Find your required rate of return
Determine how much return your money needs to make. The earlier you intend to retire, the higher the rate of return which you may have been SHOCKED at how high it will need to be if you have done Step 3 above and dabbled in the retirement calculator. For instance, the difference between retiring at age 48 versus 62 demands a 13% points higher!
- Allocate your portfolio
Determine how your assets should be allocated. So now you know that the 0.25% interest on savings just WILL NOT get you to your retirement. There are a few considerations in portfolio planning, as below:
- When do you need the money?
For emergency funds, it is safe to buffer 6 months worth of living expenses. This amount can be kept in savings account, fixed deposits or money market funds.
For money that you will need within 3 years, you can put it into fixed income assets that guarantee principal with interest.
For money that you need from the 3rd to 5th year, you can put them into bonds or non stock-based mutual funds.
Money that is not required within 5 years can be put into stocks as the share market shows an upward trend if viewed over a long period of time.
- Balancing with the rate of return (i.e. your risk tolerance level)
If say all your money is meant for retirement, then you can actually hold everything in stocks except for your emergency fund. But is that too risky for you?
If you prefer lower risk investments (and willing to take a lower return), then how should you allocate your assets?
You can search for asset allocation tools that will give a rough estimate. Here’s one that I like after doing some search:http://www.forbes.com/tools/calculator/asset_alloc.jhtml – this tool is useful to visualize your mix of assets to achieve your desired rate of return. For instance, to achieve a rate of return of about 20%, you will need to invest about 70% in stocks (given my assumptions of 0.25% for cash in savings, 2.5% for government bonds and 11.5% for stocks).
If you can take a lower rate of return, say 16%, you can reduce your stock holdings to 60% of your portfolio.
So NOW we are ready to get started to figure out what we should actually invest in!
Beside looking at Technical Analysis which looks at the trend of past events to forecast future events, long term investors may also want to look at Fundamental Analysis.
In many books and papers, Fundamental analysis is often presented as an direct opponent of Technical analysis. Typically the introduction would focus on the drawback of one method and highlight why the favored method is better.
Do not be confused. It need not be this way.
Fundamental analysis can co-exisit prefectly with Technical analysis. I often use both of them in my investment analysis. Oftentime while looking at the chart, I would also look at how the fundamental factors like the economy and market looks like.
In order to use them however, you would need to understand how each of them is applicable and to use them to the fullest effect.
I did some introduction to Technical Analysis and now let me do the same with Fundamental Analysis.
Continue reading ‘A visit to Economic class and Fundamental Analysis’
Often we heard or read the headline – “Internet stocks is hot”, “Biotechnology is poise for explosve growth” “Nanotechnology is the next mega trend”.
As a lay investor I often ask myself, how do I participate in these trend?
I do not have sufficient fund to buy into a single stock, let alone a portfolio (which, incidentally, should be the preferred way).
So, how can I participate in the trend? The answer for me lies with unit trust.
Continue reading ‘Unit Trust as subsititute to Investing directly into theme?’
The Time I referring to here is the amount of time on hand, not the period of time commonly spoken of in investing.
What I am trying to get at here is that in order to be successful in investing, one not only need to invest money but also invest time as well.
Regardless of the form of investment – whether stocks, shares, bond, unit trust, options, futures, commodities and what have you, time is required to understand the basics and learn the details.
There is no shortcut to investing. So what happen when you have limited time?
My experience taught me 3 things.
- Educate yourself
- Get to know yourself
- Set aside time
Continue reading ‘Investing and Time’
A recent hot topic in the China market is the easing of QFII investment rules by the Chinese government that will come into effect on 1 September. The object is to attract more non-speculative overseas investment to the stock markets.
So far, more than 40 banks and asset managers have obtained permission under the QFII scheme to invest over 7 billion US dollars.
Summary of major changes
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Halves the asset requirements for the scheme from USD 10 billion to USD 5 billion with an exception of securities firms and commercial banks which will remain unchanged.
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Investors will also be allowed to repatriate their funds sooner than the present 3 months to one year lock up period.
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Quota of foreign investment in the Chinese stock markets will also be raised.
This is believed to have major impact on China themed funds as well as China A-shares. Already many stocks has reacted positively to the news.
The long term in the Straits Time Index
A lot had been said of the value of by and hold in the long term. Many investment book in the market talk about the US market, so the example commonly encountered is the Dow Jones Industrial Average (DJIA).
Take a look at this long term chart:
The continuous long term up trend is easy to see. Despite some major interruptions the buy and hold strategy offered excellent rewards over the years. (If one had brought during the peak of 1930, it would have taken over 25 years to recover the initial capital),
How about the Singapore market? Take a look at the Strait Times Index (STI).
Continue reading ‘The long term in the Straits Time Index’