Investment Tips, April 2007

1. How should I invest a capital sum to earn a fairly attractive return with low risk (for a person who is above 50 years old)?

You have the following options:

* invest in fixed deposit to earn about 1.8% p.a.
* invest in a money market fund to earn about 3% p.a.
* invest in equities in a large, well diversified, low cost fund to earn about 6% p.a. over 10 to 20 years
* invest in a single premium endowment policy (to earn about 4% p.a. over 10 years)
* invest in a life annuity (if you are above 60 years)

Under normal circumstances, it is better to invest in equities in a large, well diversified, low cost fund. However, the global stockmarket is at a high level at the present time. It may be better to wait for the global stockmarket to correct to a lower level before you invest a large sume.

In the meantime, you can invest your savings in the money market and earn a modest rate of return. You have the flexibility to withdraw from the money market fund at any time, without any penalty, and change to another investment.

If you are above 60 years, you can invest in a life annuity to give you a monthly income (say $500 to $2,000) to meet your living expenses over your lifetime. The return from the life annuity is quite satisfactory (say 5% p.a. or more) and can grow with bonus. The remaining savings can be invested in the money market fund to
wait for the right time to move into equities.

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2. How should I invest my regular savings (for a person below 45 years old)?

You should save about 10% to 20% of your monthly earnings. You can invest it in a large, well diversified, low cost fund that is invested mainly in global equities.

Although the global stockmarket is at a high level, it is all right to start now, as you are investing a monthly sum for the next 10 to 30 years. You will be able to ride out the good and bad years, and get a fairly attractive rate of return. The average return for global equities is more than 7% p.a. over the past 10 to 30 years.

3. How should I select my investment fund?

You can invest in a unit trust or an insurance fund. Make sure that the initial charge is less than 3% and the annual charge is less than 1.5%. You should choose a large fund, with total assets of more than $500 million, so that is is well diversified. It is better to invest in a fund that is benchmarked to a global market
index, rather than a fund that is invested in a specific sector (eg technology, energy) or a specific country (eg China, India).

4. How do I get my insurance protection?

You should buy a decreasing term assurance that will expire when you are 60 years old or your youngest child reaches 25 years. For example, if you are 30 years now and you wish to be insured for $300,000 decreasing over 30 years, your insurance will start at $300,000 and will reduce by $10,000 a year. The cost of this insurance is very affordable.

It is all right for the sum insured to reduce each year, as this is offset by the increase in your savings. At any time, the total amount of your savings and the insurance should be more than your target sum of $300,000. Beyond age 60, you probably do not need any life insurance, as your children have grown up and are
independent.

You will need medical insurance to take care of your medical expenses. This can be secured through a Shield plan (available through the Ministry of Health or a private insurer). The plan should be sufficient to cover you against catastropic illness, including the cost of treating a critical illness.

5. Should I buy an endowment or whole life policy now?

If you are considering to buy a new policy, a better choice is:

* buy a decreasing term insurance plan for the protection
* invest your savings in a large, well diversified, low cost fund

This combination give you flexibility and a better return over the long term. The upfront cost is usually lower than buying an endowment or whole life policy.

6. Should I continue with the endowment or whole life policy taken previously?

You should check the current cash value and the projected cash value at the maturity date or when you reach age 60. You can work out the future yield on the policy, and compare it with alternative investments.

You should also find out how much of the projected cash value is guaranteed. For the non-guaranteed portion, you may have to apply an adjustment, in case the insurance company is not able to meet the projection.

Generally, it is better to continue the existing insurance policies that you have taken previously, as you have already incurred the high, upfront cost.

When you have retired from work, you may wish to convert your whole life policy into a paid up policy for a reduced sum insured. This will free you from continuing to pay the insurance premium. If you do not need the insurance cover, you can also terminate the whole life policy and receive its cash value.

Tan Kin Lian