“What is the secret to not losing money in the stock market?”

The following is my answer to a Quora question: “What is the secret to not losing money in the stock market?”

The secret to not losing money in the market is to not invest. However, money that is not invested anywhere still loses purchasing power over time due to the effects of inflation. Losses are not the problem. When you put money in the market, and that debt or equity instrument loses value, that loss is a paper loss. You can hold for long term, and allow it to eventually appreciate in value if the fundamentals of the underlying asset is good; or you can switch over to something else, which may compound that loss in the short term. However, if you take that money out of the market, that paper loss becomes a realised loss. There is no recovery from a realised loss, except by covering it with profits earned elsewhere.

It is possible to not make a realised loss if you have picked your counters carefully, and have an extended investment horizon since the market historically rises with time. That is the natural state of the market, even with cyclical crashes. It is also important to diversify to minimise risk, so that a fall in one sector of the economy, or one part of the world does not lead to an overall decline in your portfolio.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What is the Secret to Not Losing Money in the Stock Market?]

Image for illustrative purpose only.

Things all beginners should know about insurance

Perhaps you’ve read Before you buy: things all beginners should know about insurance by The Woke Salaryman.

SNACK_ThingsToKnowAboutInsurance_001
Image courtesy of The Woke Salaryman.

It is overall a good article, in simple language that helps laymen easily understand.

However, I’d like to comment on a particular point of concern:

Mistake 3 is itself a mistake. Covering yourself for up to 10 times your annual salary is basic coverage, not high, especially in the event of permanent disability.

And it doesn’t factor in inflation.

It also runs contrary to news articles that around 80% of Singaporeans are underinsured.

The poll also showed that 85% of Singaporeans are potentially under-insured, with only five times their annual earnings set aside for emergencies.

7 out of 10 Singaporeans have inadequate insurance cover, Insurance Business Asia

As for Mistake 2: Jumping straight into investing with insurance, I would like to mention that:

  • yes, one shouldn’t skip to cover the essentials first
    • however, one’s essential coverage varies over time and age. It is common to meet customers who’d opt for basic coverage first while setting a budget for savings or investment plan (ILP).
    • there is no hard and fast rule. A balance or a middle-ground can be struck, and that would be ideal.
  • yes, there are various investment instruments out there.
    • however, not all customers are investment-savvy.
    • ILP tends to be a safer choice, if it is advised properly, with its limitations highlighted along with its strengths.
    • there is a strength and advantage in an ILP that is not in any other investment instruments out there, especially when it comes to estate planning. (This would require a post on its own.)
    • one article available online that’s relevant to this: Why investment-linked insurance policies should be given a chance. (While it may seem to promote AXA’s Wealth Accelerate plan, the article is quite balance in presenting the pros and cons. And to the best of my knowledge, Manulife has a similar plan called InvestReady.)

Engage a trustworthy financial planner/consultant to advise on your insurance coverage needs. Not any Tom, Dick or Harry can explain insurance, especially when individual coverage needs varies.

“At what age should I buy life insurance?”

The following is my answer to a Quora question: “At what age should I buy life insurance?”

You should get it as early as possible. There are two primary reasons.

The first is that you want to lock in your coverage when you are healthy, before the documented development of any medical condition. Once a condition is medically documented, it becomes a pre-existing condition, meaning that any condition related to that part of the body, that system, or organ, is not likely to be covered; and there will most certainly be loading, meaning that you will pay more premium. In the case of certain conditions, once you have it, even if you are willing to pay the substantial premiums, you will not get coverage.

The second is because level premiums are calculated based on your life expectancy. There is a specific number that is divided by the number of years since your policy inception. That means the earlier you get coverage, the more years your policy may be amortised, and the lower the regular premium. As such, assuming a life expectancy of 84 years for men, as in Singapore, a policy incepted when the life insured is 24 years old means the overall premium and distribution cost is amortised over 60 years. In the case of a policy incepted when the life insured was 44 years old, the amortisation takes place over 40 years, which increases the cost of the regular premium.

Terence K. J. Nunis, Consultant

(Shared with permission from: Quora Answer: At What Age Should I Buy Life Insurance?)

Image for illustrative purpose only.

This is a simple illustration why insurance premiums are lower when you’re younger, and higher as you get older.

Fun(ds) Investing was born…

Yesterday, my team conducted our first webinar on investment, a private session.

I used to be lost and clueless when it comes to investments, as I listened to monthly updates from Sani Hamid and Victor Wong back in Financial Alliance.

I only started to focus on investment in late 2018, reading and understanding.

Moving to AXA-Audentia Alliance Group, I decided to focus on investment, especially with AXA’s suite of investment products, attending almost every fund house updates.

I’d also thank Terence Kenneth John Nunis for the occasional questions and discussions on investments, market and economy, in which he helps provide clarity.

My manager, Zainuden, saw my interest and entrusted me and Ahmad Faris to share with the team on investment basics and updates.

“Fun(ds) Investing” was born, to reflect my conceptualisation of investments.

Yes, I was nervous last night.

And to receive that message from my manager, a compliment from our BDM in Malaysia (Audentia has a Malaysian team) who spent time to sit in our webinar last night, is heartwarming.

It’s a personal breakthrough, al-Hamdu lillah! To be “go-to person” for investments, when I used to be clueless about it.

A new milestone, progressing!


Why traders should stay invested amid the market’s latest downturn

Perhaps you’ve read The world’s largest wealth management explains why traders should stay invested amid the market’s latest downturn – and offers 3 specific recommendations from Markets Insider.

Image for illustrative purpose only.

Quoting a colleague in the industry:

Last Friday’s hotly discussed investment topic: Will the sell-off from tech continue and spill-over to other sectors or it is merely a healthy correction?

The good news is that it doesn’t matter in the grand scheme of things. Prepare for both.

The point of 2 and 3 is similar. Diversify across regions and asset classes.

Amir Hamzah, Team Director, iFAST Global Markets (Singapore)

That’s the quick takeaway for you.

And to recap the 3 recommendations:

  1. Ease into markets
  2. Diversify for the next leg
  3. Protect against the downside

I’ll give my brief commentary in the next post.

“Why do insurance salespeople pitch life insurance as an investment?”

The following is my answer to a Quora question: “Why do insurance salespeople pitch life insurance as an investment?”

Whole life insurance is not an investment. A fully paid-up policy may function as a financial instrument, or as a form of leverage, but that does not make it an investment. A way that high net worth policies are financial instruments is when the client buys the policy with premium financing. Such policies are single-premium plans, not regular premium. This means that there is a minimal payment from the client, and the rest is paid for by the bank. The client then pays back the rest of the premium in instalments, at low interest. For example, if the premium is $100,000 for $10 million coverage, and the minimum down payment from the policy owner is 20%, the client has paid $20,000 upfront for that $10 million coverage. The rest of the premium is covered by the financing bank, and the client then pays the bank back in instalments.

This policy is now considered fully paid up, and may be borrowed against, should that need arise. That client, if he has a relationship with the bank, may then take out a credit line that is, for example, 1.1 times the policy value. In this case, that would mean a credit line of $11 million. This means, in effect, the client has paid $20,000 to create liquidity worth $11 million. This does not work for every single whole life plan. This is a simplistic illustration to illustrate the point. Finance works differently when you have money. Wealth grants you access to options not available to the masses.

Terence K. J. Nunis, Consultant

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/09/quora-answer-why-do-insurance.html?m=1 ]

Image for illustrative purpose only.

This is a good illustration in addressing the question. A life insurance policy is a financial instrument with a specific purpose, not an investment.

One should be wary of such a pitch; it could possibly reflect ignorance of the salesperson.

“Is diversification really the key to a good investment?”

The following is my answer to a Quora question: “Is diversification really the key to a good investment?

Image for illustrative purpose only.

The primary purpose of diversification is to mitigate exposure to any one section of the economy and spread the risk.  It is about risk management, and not growth.  It is not the key to good investment.  It is a hedge against loss.  The key to a good investment is relative to your investment horizon.  A good investment needs to have sound fundamentals on the underlying asset.  This is especially important for leverage products, and wrappers.

It is true, however, that sound diversification allows you to take advantage of growth in other areas when you are experiencing a loss of value in commensurate asset classes.  For example, bonds and debt instruments tend to rise when stocks and equity fall, and vice versa.

Diversification also affords you some flexibility since some asset classes are more liquid than others, and have a ready secondary market. This allows you some flexibility when managing your portfolio. You may also diversify across risk categories, which allow to take advantage of growth, yet mitigate losses in a general downturn.

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/08/quora-answer-is-diversification-really.html?m=1 ]

“What are sukuk bonds? How do they work, and how are they Islamic?”

The following is my answer to a Quora question: “What are sukuk bonds? How do they work, and how are they Islamic?”

Image credit: bixmalaysia.com

Sukuk is not, despite its name, a bond. A bond is a fixed-income security, a debt instrument for the sole purpose of raising capital. They are a loan agreement, between the bond issuer, and the creditors, the investors, where the bond issuer is obligated to pay a specified amount of money at specific dates.

Sukuk is an financial certificate, that is created to comply with an interpretation of shari’ah. They circumvent the general prohibition against debt security, and concerns of usury. In this case, the issue sells investors a certificate, using the proceeds to purchase the asset, whereby the investors have partial ownership. Here, we have debt that is not a debt. Capital is still raised. The issuer is contractually obliged to buy back the certificate at par value, at a future date.

While the bond has a yield, the holders of a sukuk certificate receive profits generated by the underlying asset. This is because the sukuk certificate is actually a certificate of ownership of the underlying asset. If the underlying asset appreciates, the sukuk certificate appreciates. If it depreciates, then we have to consider the terms of issue. Thus, the valuation of the sukuk certificate is calculated on the value of the backing assets, while bonds prices are determined by its credit rating, and demand on the secondary market.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/08/quora-answer-what-are-sukuk-bonds.html?m=1 ]

Understanding Consumer Staples and Consumer Discretionary in Investment

If you are investing in unit trusts (or mutual funds) or Investment-linked Policies (ILP), you would notice the terms “Consumer Staples” and “Consumer Discretionary” under Sector allocations when reading the fund factsheet.

What are Consumer Staples?

Consumer staples are essential products that include typical products such as foods & beverage, household goods, and hygiene products; but the category also includes such items as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.

Investopedia
Image for illustrative purpose only.

What are Consumer Discretionary?

Consumer discretionary is a term for classifying goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Examples of consumer discretionary products can include durable goods, high-end apparel, entertainment, leisure activities, and automobiles.

Investopedia
Image for illustrative purpose only.

Hence, the key difference is in demand:

  • Consumer Staples are essentials that we will buy regardless of how the economy is doing
  • Consumer Discretionary are items or services we would only buy when the economy is well and we can afford to spend

How does knowing this influence your investment decision?

If you are an investor who seeks stability and lower risk, you would consider a fund that has a strong allocation in Consumer Staples, as you can be assured the fund would do reasonably well despite the economic situation.

If you are an investor who would take risks, you are likely to have less allocation in Consumer Staples and more in Consumer Discretionary. Yet, you would also evaluate if it is a good time to have a strong allocation in Consumer Discretionary, especially in the current pandemic where:

  • Entertainments like cinema are running at less than 10% of normal operations
  • Integrated resorts have been badly hit the past few months. Yet, on the other hand, there are campaigns to encourage local tourism.
  • Malls selling high-end apparels are seeing low footfall, yet some are slashing prices to encourage buying.
Extracted from Aberdeen Standard Pacific Equity Fund factsheet (dated 30 June 2020) to illustrate an example: heavier weightage in Consumer Discretionary (10.5%) compared to Consumer Staples (4.9%) could indicate the fund is higher risk.

These are some factors to consider before getting into Consumer Discretionary. Many mutual funds/unit trusts would have an allocation in Consumer Discretionary, though the percentage allocation would vary.

Read more:

Investors See Buying Opportunities in Tech Healthcare and Consumer Staples (dated Mar 27, 2020)

Some pointers to avoid being pushed or mis-sold an insurance product… (part 1)

It seems I have become a magnet for people enquiring on being pushed or mid-sold insurance products, occasionally getting such enquiries.

So I thought perhaps I should write some pointers for customers out there:

Image for illustrative purpose only.

1. Savings plans may not be for you

Savings plans, though seemingly safe, may not be for you.

“But savings is good for you, for future needs.”

Yes, it is good.

“Plus, there’s no investment risk..”

Yes, it would seem so. So where does the problem lie?

  • Premium commitment. Often, customers are led to sign up a 20-year or 25-year plan. (Can you commit that long?)
  • Inability to withdraw when needed. While it is a strength to discipline yourself to save regularly, it is also a weakness. (Is liquidity a concern for you, especially for the next 5 to 10 years?)
  • High cost of early surrender. Life can be uncertain. Your commitment to the plan can be affected. (Will you be able to sustain the plan or flexibility to adjust is an important consideration? Is liquidity, again, a concern?)

I will continue in 2 or 3 subsequent posts touching on the other types of insurance products that can be mis-sold or pushed to the customers to buy.

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