Take risk to your advantage

Someone commented that the stock market is risky and that a single premium endowment can give an attractive yield for the risk averse investor.

Here are some facts to consider:

• The guaranteed yield for a single premium endowment is around 2% for 10 years or longer. The non-guaranteed yield may be higher, but is still less than 4% per annum.
• The yield on a low cost investment fund, such as the STI ETF, is likely to be around 5% over the long term. By accepting a higher risk, you can get a higher return.
• If the market is weak and your actual yield is lower than 5%, you have the choice (as a long term investor) to wait for a few years for the market to recover. Time is on your side. Wait for an appropriate time to achieve your long term yield.

When you buy a single premium endowment, the insurance company also invest your money in shares and other investments that are subject to the same risks that you have in a low cost investment fund. After deducting the expenses and profit margin, you get a lower yield on the single premium endowment. If the reduction in yield on the single premium endowment is less than 1% per annum, it is all right to invest in it. If the reduction is more than 1%, you should avoid it.

Tan Kin Lian