This is an interview with Mr Tan Kin Lian on personal financial planning.
Mr Tan Kin Lian joined NTUC Income in 1977 as the general manager (later re-designated as chief executive officer). During a period of 30 years, he built up the business and grew the assets 600 times to reach $1.7 billion at the time of his retirement. He has written several books and is now the President of the Financial Services Consumer Association (FISCA).
What are the common money problems faced by Singaporeans?
Some of the common money problems are:
- Getting into debt. They do not have adequate savings and when there is an unexpected demand for money, e.g. to pay medical bills, to buy an expensive jewellery or vacation, going out for an expensive dinner, or losing money on a bet, they borrow on their credit card and incur a large interest burden. This can go into a vicious cycle, and the debts can accumulate and get worse.
- Loss of job. The regular income is disrupted and the installment payments on the house and car, daily expenses for transport and meals, and the regular bills for utilities, telephone and other expenses, and allowance for family members have to be paid. If there are insufficient savings to drawn down, the debts on credit cards can mount up quickly. Some people have to borrow from loan sharks or pawn shops after the credit line has been exhausted.
- Insufficient savings for retirement. This is caused by inadequate savings when they were working, or by investing the money in financial products, such as life insurance policies, investment linked policies and other investments, unit trusts and other investments that give a poor rate of return.
How should an average Singaporean plan for his or her insurance?
Here are some tips on planning for your insurance.
- Do not buy life insurance too early. Soon after starting work, many young people are approached by an insurance agent, usually a personal friend, and are convinced to put their savings into a policy to cover premature death and critical illness and to accumulate savings for the future. These policies usually provide a poor return on the savings. When they realize it a few years later and decide to terminate the policy, they will lose most of your savings. If they continue the policy, they would lose more.
- The priority for young people is not to have insurance too early, but to save for an emergency fund of six months of salary, say $18,000 for someone with a monthly income of $3,000. These savings should be kept in a bank account, so that it can be taken out in an emergency, without any loss on the savings. It can also be invested in a liquid investment that pays a higher interest rate, but allows withdrawal with a small penalty.
- They only need to think about life insurance at a later date, when they start their family. At that time, they should buy a 25 year term insurance policy to cover 5 to 10 years of their income. A typical sum insured for most people is $300,000. The annual premium for this policy should be less than $500. The purpose of term insurance is to cover premature death during the 25 years, when the savings are accumulated and invested to earn a yield that beats inflation.
- They do not need to worry about critical illness policy as the medical expenses are usually covered by the employer or by a low cost medical insurance policy. The chance of a critical illness is low, for a young person. They are more likely to get a critical illness at an old age, but it can be paid by personal savings, and by using the subsidized medical treatment provided by the government.
- Many insurance agents exaggerate the seriousness of critical illness, just to frighten consumers to buy insurance that they do not really need.
- Some financial advisers are ethical and give good advice for consumers. You should be prepared to pay a fee for good advice. It is worth spending this fee to gain much more in return.
How should an average Singaporean, with a full-time job, invest his or her savings?
The best investment for most people is in the Straits Times Index Exchange Traded Fund (STI ETF), which is available through the Singapore Exchange. It is offered by SPDR and by Nikko Asset Management.
Here are my reasons:
- The fund is invested in the 30 component shares of the Straits Times Index. These are the largest companies listed in the Singapore Exchange and are mostly the blue chip shares in Singapore, i.e. large, well-managed companies with a long track record.
- The average return of these blue chip shares was 9.2% per annum over the past 20 years. The return is at least 4% higher investing in high rated government or corporate bonds.
- By investing in the index fund, you do not have to worry about selecting the shares and keeping track of rights issues, dividend payments and other details. You leave it to the professional fund manager and their staff.
- The annual fee charged on the STI EFT is around 0.3% per annum, which is much lower than the fees of 1.5% to 3% charged by most actively managed unit trusts.
- The investor enjoys the benefit of diversification. Some of the shares may perform well; others may perform poorly. Through diversification, the risk of selecting the poor shares is reduced.
- After the consumer has become more familiar with the stock market, they can select the specific blue chip shares to invest in.
What do you personally invest in?
Most of my investments were in shares and in properties. The shares that performed well were the blue chip shares. I had invested in non-blue chip shares in the past, and have generally been disappointed with the results. I have also invested in the Straits Times Index ETF.
I have also made some good investment in properties, but was against the backdrop of a rising property market over the past thirty years. I upgraded from a condominium townhouse into a semi-detached house and rented out the earlier property. As it was bought at a low price many years ago, it was a good investment. I consider the property prices to be too high today, and advised people not to treat it as an investment, but as a place to stay. As I have been a conservative investor, I did not make a large capital gain over the past years, compared to other people who were more aggressive.
You opine that the property market is hot now and advises Singaporeans to buy for home stay and not for investment. Do you think that property is still affordable for the average Singaporean at current prices?
The current property prices are too high, and beyond the affordability level. The purchase price of the property should not exceed five years of salary (Minister Khaw Boon Wan wants to apply 4 years, which is better).
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CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.