Need for financial discipline

Dear Mr Tan,

You advocate the strategy of buy term and invest the rest in your blog.

While I personally practise this as well, I wish to add a word of caution as well.

This strategy is not suitable for everyone. People who are spendthrifts may not be able to execute this strategy well. People who are naturally risk-adverse (to the point they avoid risk) are not suited too.

Another group who is more 'greedy' should not use this strategy as well. This is because they will not win in the emotional game of investment. It is likely their investment portfolio will be overly focused and carry too much unsystematic risks.

I hope you can add this word of caution in your blog and spur some discussion on this topic.

My worry is that people may just read your blog and make a decision without a deeper assessment of whether they can execute buy term and invest the rest well.

MY REPLY:

Thank you. Let me see how to encourage people to exercise more financial discipline.

A life insurance policy (such as whole life or endowment) is supposed to force people to have the financial discipline. But, it has not worked well.

If the policyholder is not able to continue paying the premium, the policy will lapse, and they will lose part or all of their savings. A high percentage of policies does not reach the maturity date, causing loss to the policyholders.

In my view, the solution is:

* educate the consumer
* design products with low upfront load and low expense ratio
* offer terms that are fair to consumers.

The Central Provident Fund fits into this criteria.