A true story about life insurance and grapes.

There are a few big ticket items in life. The biggest is probably the apartment or house we stay in. Another one is a car, for those who choose to have one. 

I know this may not sit well with some of you going by some of the response my blog post on the topic got but children are big ticket items too. 

Another thing that could become a big ticket item for some is the cost of insurance.

In all these, consume because we have to but if we over-consume, we are jeopardizing our finances. Do the necessary research before committing to any big ticket items. 

An apartment, a car, children or insurance. You name it. 

Don't just jump into it and think that things will sort themselves out.

The following is an email from a reader who wants to share with us why it is important to know what we are buying and if we have all the facts before making a decision:



Reader:
It's been a while since I last emailed you - I hope you have been keeping well.

I saw that you were getting a bit of flak in the comments section of your recent ILP blog entry. I just wanted to share with you that I thought it was a well written, informative and balanced post (no matter whoever who keeps challenging you to show figures that ILP investments ain't great).

Just thought i should let you know that i wished that i had read such a post like your four, five years ago as I was just graduating from school and entering the workforce.

You see, the first piece of advice we hear as we are entering the workforce is: you gotta buy some insurance. 

Everyone was doing it, my parents told me to do it. But at that time I was seriously misinformed - I had no idea at all what the difference was between endowment plans, ILPs or term (in fact my agent did not even bring up term insurance!). 

I signed what I believe to be an endowment plan that had some cover on dread diseases, death etc. There were funny things like yearly bonuses (if the market did well cos the plan was linked to some share investments too). 

Well it has been 4 years since and I have no idea how the plan is doing in terms of returns/yields at all. I suppose it is probably hard to distill out a yearly return because there is an element of health insurance to it (see how confusing it is for me).



So what I'm saying is: I wish I had read such a post like yours just as I was starting out. I wish I had been more informed. I would have bought term, invest the rest. Seriously.

But I'm not blaming anyone. We could look back and say that my insurance agent should have laid down the variety of plans for me, but at the end of the day, they work for commissions - so why would they bother to explain more, if not required as such by regulations? I don't blame them either.

And while I cant go back in time and buy term insurance, I'm really glad that somewhere out there a young person entering the workforce will hear about term insurance and the possible downsides of ILPs from your blog post and make an informed decision.

I guess financial sale persons are up in arms when they read postings like that because they feel they are being vilified as agents who put their own interest ahead of their clients. But but but, isn't that true? Don't all salespersons do that? 

That day, on the outskirts of a Japanese village, I chanced on a roadside store selling Kyoho grapes. I selected a bunch of juicy grapes and handed it to the store owner for payment. 

She put down the bunch I selected, motioned to another bunch and said it was better. And she packed it. Initially I was like, "Wah, so honest!", thinking that she was trying to help me select better grapes. 

When I came back home and opened the packaging, turned out that the hidden grapes behind were all rotten and giving out a foul smell. I had to throw half away.





So the moral of the story is: unless it is obvious to the sales person that you are going to be a repeat customer/ going to intro more customers to them, you are better off selecting your own grapes. 

And you best be knowing a thing or two about grapes, before buying grapes.

Related posts:
1. FREE Investment Linked Polices or Term Life Polices?
2. Slaving to stay in a condominium?
3. Sophisticated consumers lease cars, not buy.
4. What is our attitude towards having children?
5. Financially prepared to be married?

OUE Limited: An asset play that could be cheaper?

I have been eyeing OUE Limited since May this year but I haven't bought its stock. What attracted me is the big discount to NAV (NAV/share is $4.04) although its earnings per share is nothing to shout about. In fact, I estimated the PE ratio to be about 30x when I was crunching some numbers.

So, if the NAV is realistic, to me, OUE Limited is an asset play and with asset plays, the question is really whether the value will be unlocked at some point in the future. There is a likelihood that this would happen as OUE Limited hold stakes in OUE H-Trust (43%) and OUE C-REIT (42.5%).



Regular readers know I scribble my research on scrap paper.

A bug bear for OUE Limited now is Twin Peaks. This 99 year leasehold project (from 2010) is a luxury condominium they are developing near Orchard Boulevard in Singapore. They are having a hard time moving unsold units and of the 462 units available, only 20% or so have managed to find buyers.

The condominium is near completion and I think OUE Limited will then have 2 more years to sell all units or face yearly penalties. Already, they have written down the value of Twin Peaks by $105 million in the face of a challenging environment this year.

At an average selling price of about $3,000 psf and a GFA of about 436,000 sq ft (including balconies), I estimate the value of Twin Peaks to be about $1.3 billion, if fully sold. However, I doubt that it is going to happen without a deep price cut if the big discount given by Bukit Sembawang to sell its completed condominium in Cairnhill recently was anything to go by.

To be fair, however, Twin Peaks is just one part of OUE Limited's portfolio. The company owns many commercial properties and if their values are realistic, OUE Limited could turn out to be a very rewarding asset play for investors in time to come when their values are unlocked. When will it happen? Your guess is as good as mine.

Click to enlarge.

Technically, OUE Limited's share price is in a downtrend and it is one that shows no sign of weakening. So, although already trading at a big discount to NAV, I wonder if its share price could sink lower for me to get a dollar for fifty cents.

I wasn't going to blog about OUE Limited until I have initiated a long position, if I do at all. However, reading a blog by Brian Halim gave me a little push to share my thoughts.

Read Brian's blog on OUE Limited: here.

Related posts:
1. OUE H-Trust.
2. OUE C-REIT.

Develop habits now that will ensure we retire comfortably. (How to have a comfortable retirement?)

(Even when we are richer, keep our frugal habits acquired during leaner times.)
There are many ways to have enough money to retire comfortably from active employment. Win the top prize in the national lottery or inherit a similar amount from a rich relative, perhaps? Unfortunately, the chances of either case happening for the vast majority of us would probably be quite low.






However, this does not mean that a comfortable retirement is beyond us?

In an earlier blog post, I suggested that all of us have a chance to save 100% of our earned income and although it sounded unrealistic at first, after going through some numbers, it wasn't so unrealistic after all. Now, how does that blog post tie in with a comfortable retirement?

The beauty of the idea behind that blog post is that it isn't discriminatory. A person could be 25, 35 or 45 years in age, it simply doesn't matter. A person could put the plan in motion today and 13 years later, as long as the conditions are met, he would be receiving income from his investments that equals his earned income today.

So, if we think that we are able to retire quite comfortably with our current level of earned income, put the plan into action and 13 years later, we would be ready for retirement as we would be receiving an income from our investments that is equal to our earned income today.

For readers who are new to my blog and who have no idea what I am talking about, please read: Save 100% of your take home pay! What? Oh, I should have included people who have a bad memory. Er, ok, I will read it too.

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Read it? Then, let's continue.

So, if we are sure that our current level of take home pay is good enough to provide us with a comfortable retirement, we have to start saving 50% of this sum every month. That is one of the assumptions for the plan to work.

Probably, for people who have yet to enter into any big financial commitment, this would be an easier task. For most people who are married with a kid or a few, who have a huge mortgage or (heavens forbid) a few and a car or two, it could be quite difficult. I like to think that it is never impossible but it could be very difficult.

The biggest problem that I see is that people get used to lifestyles which are too expensive and scaling back would mean much discomfort which probably includes a loss of face which could be unacceptable to many people.







For example, I know a friend's dad who lived the high life, had expensive cars like SAABs and BMWs, had expensive watches, dined at fine restaurants, went to casinos and bet on horses. Today, he doesn't have much savings and if not for mandatory contributions to his CPF account, he wouldn't even have any money in his old age. Is he having a comfortable retirement? He doesn't think so.

Money not enough. What to do?

I have readers of different ages who write to me and, from my observation, I feel that readers in their 30s and 40s feel the most stressed out. They could be making $6,000 to $10,000 a month but many of them are not able to save more than 10% of their take home pay. So, asking them to save 50% of their take home pay is a tall order.

What would AK say to them?







The first thing that I would tell them is to go through all their expenses and decide which of them are needs and which of them are wants. The wants ought to be cut out and, then, see if there are alternative options which are less expensive to meet the needs. 

The second thing I would tell them to do is to stick to this simplified lifestyle and do not scale up with the next salary increment which they might get. The reason why many people don't ever seem to save any money is that they upgrade their lifestyles as they make more money in life.

Recently, a reader in his early 40s who makes more than $8,000 a month told me that he used to save about $500 a month of his take home pay but now he saves $2,000. This is not 50% of his take home pay but it is already a vast improvement.

Most of his annual bonuses were spent on family trips to faraway places and "don't know what" (his words) but he has decided to save these in future. This would increase his annual savings to be about 50% of his take home pay.

So, how did he achieve an additional $1,500 in savings a month?

1. He downgraded his car. He is used to having a car but he didn't need a luxury European make. It was a want. All in, he estimates that he now saves $700 a month because of this.

2. His family used to dine in restaurants every Sunday. This is now reduced to only once a month. This helps him save more than $200 each month.

3. He discussed with his wife on whether some of the enrichment classes they sent their two children to were necessary. He knew they were spending a lot of money on such classes but he was surprised at how much they actually spent. So, apart from classes which were deemed essential, lifestyle classes such as tennis lessons were axed. This helped them save about $600 a month.

The reader has also decided to cancel plans to buy a condominium and to stay put in his HDB 5 room flat. He feels more confident now about his ability to retire comfortably with his wife when he turns 55 and, by then, his children should be working and supporting themselves.

Of course, I reminded him that he would be getting some money from his CPF savings at age 55 and also a lifelong income from CPF-Life at age 65. That will certainly help fund his retirement.







While we are still able bodied and making plenty of money, our expensive lifestyles might seem affordable but get used to such expensive lifestyles now and we might not be able to retire comfortably many years later when things become more expensive.

Related posts:
1. A common piece of advice on saving.
2. Do you want to be richer?
3. Tea with AK71: A three point turn.
4. Free e-book: Retiring before 60 is not a dream.
5. To retire by age 45, start with a plan.

Marco Polo Marine: A price I would not sell at.

This is an email exchange with a reader on Marco Polo Marine:

From Y:

AK, 

marco polo drop to 33 cent, you think good value to average down somemore?

actually i have quite a lot, 65 lot already. paper losses 13%. :(

My reply:

Hi Y,

I first got into Marco Polo Marine at 31.5c and 32c. I kept buying even at 42c as I believed that the stock was undervalued even at that price.

Later on, I blogged about how I reduced my long position given the developments in the company. I lost some money in the process. However, it was the right thing to do.

At 33c a share now, it is not a price that I would sell at. It is a price I would think of getting some at. This is simply because it is at such a huge discount to NAV.

However, given the weakness of its tugs and barges business and also the lack of certainty with regards to its pending rig business, I want to make sure that my exposure to its stock is at a level that will not cause me to lose sleep.

Best wishes,
AK

Related posts:
1. Managing exposure in AK's investment portfolio.
2. Portfolio review: Unexpectedly eventful.
3. Reason for price weakness.

One day flash sale at BetterWorldBooks.

If you have yet to get your copies of "The Little Book that Still Beats the Market", "One Up on Wall Street", "Buffettology", "The Millionaire Next Door", "Rich Dad, Poor Dad" or "The Cashflow Quadrant", now, there is a chance for you to get them pre-owned and shipped free to your home at much lower prices:




I saw Kinokuniya selling "One Up On Wall Street" at $26.00 a copy. I paid about $8.00 for my pre-owned copy that's still in very good condition.

See "Food For Thought" in the right sidebar of my blog for more recommended titles and take advantage of the sale at BetterWorldBooks.

How should we approach REITs as investments for income now?

All good things come to an end and although it is debatable whether the many rounds of quantitative easing (QE) by The Federal Reserve have been good for us, they are definitely coming to an end as the Fed cut their bond buying program to US$15 billion a month and indicated that QE will end in October. That's next month. Money supply will stop growing and interest rates could rise 6 months later.

Of course, for quite a while now, this is something that I have been talking about too and how I have been taking action to have a portfolio of investments that is going to be less easily affected by rising interest rates. How is this being achieved? Simply, it latches upon the idea that companies which have less debt will have a relatively lighter debt burden when interest rates rise, which they will.

Having said this, I am not saying that companies which have more debt will not do well when interest rates rise. Heavily leveraged companies which are growing their earnings rapidly could still overcome their higher cost of debt and deliver good results. These are probably some high growth companies.

However, as I am investing mostly for income and maybe a little bit of growth, I would like to have more predictability and I like companies with less debt which have shown themselves to be consistent payers of meaningful dividends. I like them even more now that interest rates are set to be higher in the near future.

Now, what about REITs?

REITs have conventionally been looked upon as an asset class that is somewhere in between stocks and bonds. The regular income distributions make them bond-like but when we hold REITs, we are investors and not lenders. When we hold bonds, we are actually lenders of money. This is, of course, an interesting bit of trivia for most people and what they are probably more interested in knowing is how rising interest rates would affect their investments.

Well, if interest rates should rise, as investors in REITs, we want to think of the following:

1. Cost of debt.
2. Distributable income.
3. Unit price.

Quite simply, if interest rates go up, the cost of debt goes up. More income will have to go to servicing debt. When this happens, the amount of income available for distribution to unit holders will reduce, everything else remaining equal. If distribution per unit (DPU) should reduce, then, unit price would fall accordingly as Mr. Market demands a distribution yield that makes sense to him.

So, does this mean that as interest rates rise, REITs become pariahs and we should avoid them at all costs? I am inclined to believe that if we are income investors, REITs remain relevant assets to own. However, we will have to pay more attention to the issue of debt. Specifically, we want to be mindful of the following:

1. Percentage of debt with fixed interest rates.
2. Debt maturity profile.
3. Average cost of debt.

In an environment of rising interest rates, home owners who have loans with fixed interest rates will worry less about the possibility of a higher cost of debt. For REITs, similarly, if a bigger percentage of their debt are of the fixed interest rate type, then, they have less to worry.

Eventually, all REITs will have to refinance but those which have most of their debt due for refinancing in the next 12 to 18 months will see their cost of debt increasing ahead of the pack. Of course, this will put downward pressure on their available income for distribution, all else remaining equal.

Finally, REITs with very low average cost of debt now would probably see a big percentage jump in their cost of debt when they refinance eventually. So, investors in such REITs must be mindful of this as the REITs' interest cover ratio (i.e. the ability of a REIT to pay interest on its debt) could take a relatively big hit.

Basically, a higher interest rate will result in weaker cash flow and balance sheet, all else remaining equal.

However, remember that REITs are not bonds. REITs could improve the amount of income available for distribution by getting cheaper loans which are less likely in future but they also have the ability to improve income by raising asking rents.

The question is whether the health of the economy and the sector which the REITs are found in will support higher rental rates or not although it is believed that in an inflationary environment (which is why interest rates should increase), asking rents should rise too.

So, there you have it. How should we approach REITs as investments for income in an environment of rising interest rates? We should be thinking about debt.

Related posts:
1. ST Engineering: Wealth accumulation.
2. NeraTel: What is a sustainable dividend?
3. SATS: A nibble.
4. SPH: Mystery of extra money.
5. Building an income portfolio is like building a house.
6. Gear up and receive more passive income.
7. Bonds, REITs and the instant gratification of yield.

Tea with Solace: Mapletree Greater China Commercial Trust.

This is a guest blog from a regular guest blogger, Solace, on a REIT in his portfolio. I always appreciate Solace's guest blogs which show how much thought he puts into every single one of his investments in the stock market. I hope you find Solace's guest blogs beneficial like I have.

So, here is Solace's Review of 
Mapletree Greater China Commercial Trust (MGCCT):

MGCCT got listed on March 2013. It was oversubscribed and the general feeling of the stock market at the time was bullish. I subscribed to this IPO and was one of the lucky people who received allocation of shares. I did a quick flip on the first day of IPO and realized a gain of about 11%.

The reason for selling during the first day of trading and my subsequent relook at the stock more than a year later will be discussed further.

Asset Portfolio

MGCCT consists of just two mixed use assets - Festival Walk and Gateway Plaza.

Festival Walk

A landmark territorial retail mall and lifestyle destination with an office component, comprising a seven-storey retail mall with a four-storey office tower and three underground car park levels, located in the upscale residential area of Kowloon Tong, Hong Kong.

Gateway Plaza

A premier Grade A office building with a retail atrium, consisting of two 25-storey towers connected by a three-storey retail atrium and three underground floors, located in the established and mature prime Lufthansa Area in Beijing, China.

The two properties cover a gross floor area of approximately 2.4 million square feet and the total net lettable area is about 1.9 Mil square feet.

With only 2 properties, it is easier to do an analysis but it also presented a problem of its own, Concentration Risk.

One has to take note that Festival Walk alone contributes to 75 per cent of the asset value and gross revenue of the Reit. The performance of the REIT is tied to the fortunes of the Festival Walk. As an investor we should do our homework to ensure that we can predict the earning power of the mall or we might be in for a big surprise if the earnings tumble down the road along and, with it, the share price.

Portfolio Performance thus far

Gross revenue and Net Property income has shown to be beat initial forecasts in prospectus and reported to outperform Y-O-Y comparing FY Quarters to Quarters.

Festival Walk remained fully occupied at 100% for both retail and office sectors. Shopper traffic and tenant sales in 1Q FY14/15 increased slightly at 0.5% and 0.1% respectively year on year. Of the retail leases expiring in FY14/15 at Festival Walk, 90% have been renewed or re-let with rental uplift of 21%. Weighted Average Lease Expiry (WALE) by Gross Rental Income of Festival Walk is 2.9 years. Do take note that for FY16/17, 22% of Gross rental income is due to be renew.

The committed occupancy at Gateway Plaza was 98.6% as of 30 June 2014. These committed leases represented tenants from the automobile and machinery sectors. As of 30 June 2014, 80% of the leases expiring in FY14/15 have been committed, with a significant rental uplift of 33% against preceding rental rates. WALE for Gateway Plaza it is 2.5 years.

Key Financial Indicators and Capital Management.

Gearing Ratios: 38.6%

Interest Coverage Ratio: 4.8 x

Total Debt Outstanding: HK$11,455 m

Weighted Debt Maturity: 2.7 years

Annualised DPU (cents): 6.257 cents

Distribution Policy: Semi- Annual Basis

Gearing Ratio is definitely on the high side. A silver lining would be in order to mitigate the risk of rising interest rates; more than 70% of MGCCT’s debt has been fixed for FY14/15 and FY15/16.

To ensure stability of distributions, MGCCT has hedged 90% of HK$ Distributable Income forecasted for FY14/15 and is actively monitoring the market to progressively convert RMB Distributable Income to SGD when the rates are favourable.

Management Fees Structure.

How Reits pay their manager through fees has been questioned from time to time. MGCCT is one of the first Reits to adopt DPU-based fee model rather than the traditional asset based fee structure that most S-Reits use. This is touted to be superior as most of the return from a Reits is delivered via DPU yield.

However, some would argue tying fees based on DPU may or may not necessarily better align the interests of the management and unit holders. A group will believe that fees tied to assets are more stable and makes it easier to pursue asset enhancement activities. There is also a possibility of managers using the DPU based model to focus on short term gain through increase use of gearing to boost DPU, but set itself up for disaster over the long term.

There is no evident of MGCCT behaving this way currently. I do not have opinion on this matter as I believe no fee structure is fool proof. Concentrating on the track records of the manager seems to be a wiser choice.

Solace's Recent Actions.

At Listing Date of 7 March 2013, issue price was $0.93 (NAV/unit $0.91). It had a projected dividend yield of 5.6% for FY 13/14 and 6.1% for FY 14/15. I sold the shares when the price reached $1.04. Translates to about 11.8% gain.

At the price, I felt that it makes sense to cash in. It was above NAV, the projected yield of 5.6% didn’t justify the concentration risk and high gearing in my opinion. I needed to have bigger safety margins and want to see that the management can achieve its DPU while paying close attention to the performance of Festival Walk.

When prices break below 90 cents towards the end of last year, I decide to the put the Reits back in my watch list. Also during the waiting period, it has shown that the Mapletree pedigree had delivered again with reports of DPU and NPI beating forecasts in prospectus.

It was a game of waiting patiently to see if the price would drop to a level where the dividend yield was more acceptable to me with the concentration risk in mind.

I pick up some shares in at prices from 83 cents to 85 cents a unit. Average entry is about 84 cents. This gives me a dividend yield of about 7.5% which is more acceptable to me. It was revealed that some of the senior managements also bought shares in recent months at $0.805 and $0.80. It is always a plus point if one can load up at about the same price as the board of directors.

If the share price declines to a level close to dividend yield 8% again, I might be interested to increase exposure again.

Read some of Solace's other guest blogs:
1. Frasers Centrepoint Limited (FCL).
2. King Wan Corp. Ltd.
3. Common Sense Investing.

Tea with TheMinimalist: Financial planning? Start with why!

This is a guest blog by a mysterious and wise man with the codename: TheMinimalist.

Many of us reading financial blogs such as ASSI understand the importance of planning our finances. The maxims of “Spend less than you earn”, “Invest in ETFs/Index Funds” and “Protect ourselves with insurance” immediately come to mind.

We KNOW it is critical to do all the above yet we DO NOTHING about it. Why?

It wasn’t until I met a university friend that I finally got my answer.

Recently, I was looking through my FB news feed and saw that one of my university friends changed his job recently. I didn’t really talk much to him back in school but was curious about how he is doing. It has been about 3 – 4 years since I last saw him. I decided to arrange a nice dinner with him after work.

While I was waiting for him at Raffles City Starbucks, I saw a guy that somewhat resembled him but he looked “bigger” so I looked away. Then, that guy started messaging on his iPhone. “Ok, I think that’s him” and I was spot on when I received the whatsapp on my phone. “Oh wow, you look more prosperous since I last saw you huh…” I commented. “Yeah, I have gained 6-7 kg since I started work, haven’t exercised much you see…” he explained.

My Body Mass Index (BMI) is 21.7 and falls within the normal range. However, the fear of becoming a “fattie” motivated me to take steps to lead a healthier lifestyle by:

• Exercising more frequently after work
• Opting to eat fruits and nuts for my dinner
• Controlling the amount of food intake for each meal

The ongoing efforts of such a healthy lifestyle have paid dividends and I am currently feeling “lighter” and better.

So what is the lesson here?  

 

“Humans are VISUAL creatures, we ACT by EMOTIONS, not so much with reason.”

We can read millions of books on investing, read every single blog post by AK71 and, yet, NOT be motivated to do anything about our money. However, when we SEE our peers doing much better than us during the class reunion, do we not feel something stirring in our hearts? Yes, that feeling that we are not good enough and that there’s so much more we can do in our lives. 

Now, if you are currently struggling with motivations in personal finances, I think I might just have the solution for you.

Here are two simple things you can do immediately to start turning your financial life around:

1.     Find someone who is more successful than you financially (Psst…AK71). Ask him out. Buy him a nice dinner at Tim Ho Wan. Learn as much as you can from him about budgeting, investing and insurance. Most successful people will happily oblige. After all, people LOVE to talk about themselves. Fact of life. 

2.     Find someone who is doing not so well in his or her finances and ask them out for coffee. They can be knee-deep in debt, spending more than they earn, invested in “scams” etc. Your intention is neither to mock them nor to sympathise with them.  Instead, be curious and figure out what got them into such trouble in the first place. Most of the time, it’s due to bad decisions and not by circumstances.

Ask yourself and decide (out of the two) who you want to be like in 3 years' time.  

Next, take out a piece of A5 paper and write down ONE specific thing you will DO from today onwards to better manage your finances. Then DO it.

If you need some inspiration on actionable items, here are some resources you can turn to:

Achieving level one financial security for Singaporeans.

Save 100% of your take home pay! What?

If we are not rich, don't act rich! 

Every single time you find yourself faltering, think back to the two people you have just met. Who do you want to be like in three years’ time? The answer (to your future) is in your hands.

Go try it and share your experience in the comment box below or FB. I look forward to your response to my debut guest blog! J 

AK's note:
I think I have been blogging too hard lately. I might take a long trip overseas to take a break. I should be un-contactable by all modern communication devices then. So, unless courier pigeons are available, invitations to have dinner at the atas tim sum restaurant might not reach this fatty.  -.-"

FREE Investment Linked Policies or Term Life Policies?

I took down this blog post after it was put up for only slightly more than an hour at 8am this morning. 

In that short period of time, it received about 400 page views and several comments from readers, a couple of which were more than unpleasant. 

After deleting the blog post, I received a few comments and PMs from readers in FB who missed reading it.

Often, we are presented with charts and tables by advisers which do not show the complete picture. I am not claiming that I am presenting the complete picture here. 

I most certainly am not but I believe I have illustrated quite simply in the blog post why ILPs are not cost efficient for consumers. 

They are overpriced life insurance products and as investment tools to help grow our wealth, they are mediocre at best.

I am quite mindful of my blog's louder voice and the potential backlash I might be subjected to. 

Despite what some people might think, I am not crazy. I wouldn't want to get into trouble. 

However, sometimes, we just have to say it as it is and this is what AK is known for doing. Right?





Feel free to disagree but please be civil about it.

However, if you think that what I have done is worthwhile and if you agree that more people should know about this, please share this with your family and friends. 

So, come what may, resurrected, here it is:

----------------------------------

A reader told me that his classmate from school who is trying to get him to buy an ILP told him that, basically, after 20 years, he will break even on that ILP. It means that he would have received 20 years of life insurance for FREE! 

Sounds really attractive when the word FREE is thrown in, doesn't it?

$1,000,000 life insurance coverage with a premium of $13,000 a year. That is quite a bit of money.





Anyway, because I have been blogging so much about buying term life insurance lately, the reader was quite torn as to what should he do.

So, my simple brain churned out some simple numbers.

If he were to buy a $1,000,000 term life insurance instead, he would pay less than $2,000 a year, being in his early 30s, for the next 20 years. 

That means a savings of more than $11,000 a year.





For ease of calculation (i.e. my ease of calculation), let us assume that the term life insurance premium is $3,000 a year and that the savings is only $10,000 a year. 

Yah, only $10,000.

It is time for some magic!

Now, assuming that the reader were to invest the yearly savings of $10,000 into stocks of fundamentally sound businesses that have a dividend yield of 5%, he would, in 20 years, receive in dividends, from year 1 to year 20, the following:

$500
$1000
$1500
$2000
$2500

$3000
$3500
$4000
$4500
$5000

$5500
$6000
$6500
$7000
$7500

$8000
$8500
$9000
$9500
$10000

Total pocket money (nothing reinvested) collected in 20 years: $105,000.







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Sinking in.

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Sinking in.

Pause.

Sinking in.

Stunned? Banana...

$105,000 is more than enough to pay for 20 years of premiums for a $1,000,000 term life insurance! 

In fact, it is about twice as much as the hypothetical premiums and probably thrice as much as the real premiums! 

So, isn't this a FREE life insurance as well? 





In fact, it is better than FREE since there is a lot of money leftover!

Chances are that the $200,000 worth of investment would still be intact 20 years later and it would continue to generate income year after year. 

That is $10,000 a year, year after year.





I know this is a simplistic example but it makes the whole matter of why an ILP is not a good choice so much easier to see. 

I believe that the assumption of a static 5% yield on investment is not over the top either. In fact, it could be quite unrealistic, in a good way.

Anyway, I believe I created another problem for the reader after our chat. 





He said:

"thanks, and i having some headaches how to reject my friend now..."

Oh, dear. Sorry. -.-"

Related posts:
1. Term life insurance: Some lessons.
2. Term life insurance: Why buy term?
3. Whole life insurance and investing.
4. Investing for income: An important element.
5. The best insurance to have in life.

SATS: A nibble while learning from Rusmin Ang.

I have shared here in my blog on a few occasions that I am increasing my investments in companies which are going to be less affected negatively in an environment of rising interest rates.

Although interest rates are still low, it stands to reason that they will have to rise in future. When interest rates do rise, businesses and individuals who are heavily leveraged will be the ones to feel its direct impact more severely.




In view of this, one business which I have accumulated a small long position in recently is SATS as its stock price became significantly lower at $2.94 a share upon the counter going XD.

A price of $3.00, give or take a few bids, gives us a PE ratio of almost 19x. Of course, if the company is a grower, then, it might not be considered expensive. Otherwise, I would feel more comfortable buying more if the PE ratio is lower.

Although sometimes SATS pay more dividend per share (DPS) than its earnings per share (EPS), a more normalised payout ratio is 70% of earnings. So, I believe that an annual DPS of 11c is realistic. Based on $3.00 a share, that is a dividend yield of 3.67%. Not anything to scream about.

Technically, there seems to be some support at $2.95. This is probably due to the fact that SATS have been buying their own shares in the open market each time price goes to $3.00 a share or so. Technically, it is also easy to see that if support at $2.95 were to be lost, we could see $2.50 tested.

My friend, Rusmin Ang, at The Fifth Person is hardworking. You might want to read what he has to say after attending SATS' AGM:
12 quick things I learned from SATS' AGM 2014.

Related posts:
1. Portfolio review: Unexpectedly eventful.
2. NeraTel: What is a sustainable dividend payout?

Tea with Ms. Y: 3 points to share with fresh graduates.

A regular reader graciously agreed to contribute a guest blog and here it is:

I'm very honoured to have AK71 request for a guest blog post from me. I would like to share some of my experiences and hope that people would benefit from these.

1. Get a job before graduation.

In my last semester in university, I was busy writing resumes and sending them out. My goal was to get a job ASAP. To me, the ability to secure a job at graduation or before demonstrates how good a student is. It is not just the grades we get.

Moreover, a few months of unemployment would set me back financially. We all have some living expenses to take care of, right?

2. Save money: Keep it away until you forget you have it.

I'm not inclined to save money. I find going the extra mile to hunt for cheap deals or reduce spending is quite troublesome and tiring. I like to spend money. I like to go for holidays, shopping trips etc. 

However, I do know the importance of having savings. One thing I learnt from my mother is to keep some money away until I forget I have it. So, I have some endowment plans and monthly savings accounts.

These tools are very useful especially in terms of timing my savings to prepare for my resale flat purchase. Of course, this method might not be good for everyone but it forces me to save.

3. Invest in yourself.

Take courses to improve yourself. The journey just started.

I believe that if I am not giving real value in my job, my employer has no incentive to give me an increment that is beyond inflationary rate. My real wage will be stagnant.

Plan your career path. Invest in yourself to cross disciplines. Employers pay good money for people who can bridge gaps.

I realized that when I took courses, I had less time to spend money. That resulted in more savings for me.
                     
Focus on doing what will secure higher pay for us. Seriously, because it's just going to get more difficult when the bigger demands of life kick in later on. For examples, getting married, setting up a family, buying an apartment and taking care of parents who are aging with medical needs.

Related posts:
1. Do you want to be richer?

2. The very first step to becoming richer.
3. How much life insurance should a fresh grad have?
4. Be a plumber or be unemployed?
5. A fast track to wealth building!