“I still need growth on my investment for retirement. Should I avoid bonds?”

The following is my answer to a Quora question: “I still need growth on my investments for retirement. Should I avoid bonds?”

That really depends. As you age, and seek growth, you may give greater weightage to equity instead of debt instruments in your portfolio. This should have the involvement of your financial planner to decide on your weightage. However, you should also be aware that debt instruments such as bonds mitigate against volatility since their return is stable. Whilst equity gives greater potential returns, they are also more volatile, and should the market drop, the value of your portfolio will be affected.

We have bonds in our portfolio, particularly in anticipation of market turbulence, to mitigate against this drop in portfolio value when stocks tank. It saves you a heart attack. A person further away from retirement has time for the portfolio to claw back value. A person retiring a year later does not have that luxury.

Considering a projection of how the market will perform within that period of time to your retirement, you may reduce your bond holdings and increase weightage to equity, but never eliminate bonds from your portfolio entirely. They have their place in every balanced investment portfolio.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/06/quora-answer-if-i-still-need-growth-on.html?m=1 ]

Image for illustrative purpose only.

On a similar note, some consumers rely on retirement saving plans from insurance companies for their retirement funding needs.

While retirement plans offer some guarantee and stability, they do not offer much growth.

Striking a balance between stability and growth is key, and best with consulting a financial consultant/planner.

Understanding Whole life insurance

When buying personal life insurance, you’d be introduced to Term life insurance, Whole life insurance, Endowment/savings plans, as well as Investment-linked policies.

Each product type has its purpose, advantages and disadvantages.

Image for illustrative purpose only.

So what is Whole life insurance?

Whole life insurance provides coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate. These policies are also known as “permanent” or “traditional” life insurance.

Whole Life Insurance, Investopedia

Key benefits of Whole life insurance:

  • Pay premium for limited term, lifetime coverage (till age 99)
    • Do note that in Singapore, for most (if not all) whole life insurance policies, Total & Permanent Disability (TPD) coverage terminates at age 65 or 70 of the life assured.
  • Whole life insurance policies generally cost more than Term life insurance policies as part of the premium is invested to build cash value.
  • Policy loan is allowed.
    • Do note that it is to be repaid with interest.
  • Early termination would incur early surrender charges, which may result in losses.
    • If you have to cut down on premiums, you may consider converting to a Paid-up term policy. (I’ll touch on this in a different post.)

[Read more at: Understanding Whole Life Insurance, A Beginner’s Guide To Participating Whole Life Insurance VS Investment-Linked Policies (ILPs). I’ll be writing on ILP in a subsequent post.]

[Important disclaimer: the objective of this post is to provide a brief explanation of Whole life insurance for ease of understanding. Further details should be discussed with your financial consultant/planner, especially with regards to your own policy and your financial needs analysis.]

Investing in a volatile market

There is quite a bit of literature that the market is inherently volatile, punctuated by moments of seeming predictability. However, when viewed from a macro perspective spanning years, the market actually has predictable broad trends. That does not mean this volatility is inherently bad. In fact, these periods of volatility should be viewed as opportunities.

We embrace this volatility and adapt to it. What we recognise as volatility is the aggregated result of people being emotional and tied to sentiment, their hopes, their panic, their optimism, moving the market as an overreaction to events and trends. Sometimes this is the result of manipulation, even by state players, on a massive scale. At other times, it is the result of people seeing something in a news clip on a related counter, something on a very small scale.

Image for illustrative purpose only.

We ride the swells of this volatility by keeping to a few principles. We look for well-run companies, with good market fundamentals. The numbers do not lie, unless you are looking at them in the wrong context. We consider where these companies are positioned, and pay more attention to where they are going, and not invest on the basis of legacy. That is sentiment, and sentiment is an emotional connection, not a reality of the company position.

This is where investing over an extended investment horizon really works. What we are doing is utilising the magic of compounding. This is what real investment actually is. People trying to spot a bargain, or following a hot tip are not investors. They are gamblers. Often, they are leveraged, which means they are utilising compounding the wrong way. Compounding works for the investor when it is about taking and holding a well-researched position over an extended period, letting the compounded interest of the stock generate growth. A speculator, on the other hand, is borrowing, and compounded borrowings are a quick way to lose money.

Because of this compounding effect, the best time to take a position is often when the market is down, replete with bad news. Due to market sentiment, even good stocks are undervalued. The trick is sniffing out gold from the dross in all that. There is a method to this, and it based on logic.

Firstly, we identify growth industries. For example, in a pandemic economy, we expect growth in online retail, technology, and healthcare. It does not take a genius to figure that out. In certain markets, we all consider light manufacturing, because somebody has to make all that protective equipment, gloves and masks. And obviously, the stock with the greatest growth would be pharmaceuticals.

Secondly, we identify growth regions. Specific things are made in specific parts of the world. Some parts of the world have less potential than others, and we also factor in the political and currency exposure. This is obviously personal preference. For example, I am not too convinced on the growth of the British economy post-Brexit, considering they are losing access to the Common Market, with no viable replacement. For example, the nearly 40 million unemployed in the US means we need to consider the market with caution. It would take a massive restructuring of the US economy to fix that; it is no longer a case of simply opening the economy.

Finally, we look a all these factors, and consider where the market will be in a decade or fifteen years from now. This also means considering currency exposure. One of the considerations is also lifestyle changes in a post-pandemic economy. This means shorter supply chains, less emphasis on just in time, and a decline in the retail sector. People are used to having things delivered to their doorstep. It would take a very good reason for crowds to throng malls.

In all this, it is important to be diversified, across industries, markets, and demographics. It is a foolish investor who puts all his eggs in one basket, no matter how bullish he is on any company or country. Investment should be divested from sentiment. This diversification protects against market volatility and inflation, since there is always growth somewhere.

When it comes to entering the market, it is best to use strategies such as dollar cost averaging, instead of trying to time the market. Most people who time the market fail. Unless you have supercomputers, teams of analysts and algorithms, the average investor will fail. Investing is a science not superstition. This allows us to ride the volatility of the market. Ultimately, it is time that allows our investments to grow.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/investing-in-volatile-market.html?m=1 ]

Image for illustrative purpose only.
Image source: As the Straits Times Index turns 50, three experts weigh in and offer tips for investors

3 key takeaways:

  • Investing over an extended investment horizon works
  • Identify growth industries and growth regions
  • Use strategies like Dollar-cost averaging, instead of timing the market

I’ve listened to Aberdeen Standard Investments market and funds update earlier. And will be listening in to First Eagle Amundi market and fund update on Tuesday.

After which, I’ll share some additional thoughts.

What are the biggest lessons you have learned in the insurance industry?

The following is my answer to a Quora question: “What are the biggest lessons you have learned in the insurance industry?”

I have learned, over the years, that it is not just about the policies you buy, but how you structure them.

I have learned that the wealthy and the masses buy the same policies, but for different reasons.

I learned that there may be ways to get around having pre-existing conditions covered, at a reasonable cost.

I have learned that most people who buy insurance do not fully understand their coverage.

I have learned that the insurance industry in Singapore, is a lot different from the rest of the world, and that in certain other countries, such as the US, it is predatory.

I have learned that having good coverage is useless without understanding how to claim for it.

I have learned that insurance plans can function as financial instruments, creating immediate estates, as collateral for loans and credit lines, and as a means to move funds.

I have learned that the right sort of insurance coverage, particularly in large projects, saves a lot of money.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-what-are-biggest-lessons.html?m=1 ]

Image for illustrative purpose only.

Terence has more years in the line than I do; and some of these lessons I am still learning and continue to learn.

And yes, when you have understood these lessons, it can never be peddling of products.

You would learn the importance of consultation, planning and advisory. The real value of the profession.

What is the difference between stocks and bonds?

Here I’ll briefly summarised from The difference between stocks and bonds explained.

If you choose to invest in a company, there are two routes available to you:

  • Equity (also known as stocks or shares)
  • Debt (also known as bonds)

Shares are:

  • issued by firms
  • priced daily
  • listed on a stock exchange

Bonds are:

  • effectively loans, where the investor is the creditor
  • in return for lending money to issuer, the investor receives an annual income as well as the ultimate repayment of principal amount (unless issuer defaults or the bond is purchased at premium)
  • can be issued by both companies and governments
Image courtesy of Fidelity International.

What are the differences?

1. Shareholders versus bondholders rights.

When investors buy shares in a company:

  • they become one of many co-owners
    • significant shareholders can shape company’s strategy
    • right to veto and veto corporate proposals
  • Upside: share price can rise in value, allowing investors to sell their holding and make a profit.
    • Companies can also share their profits via dividend payments to shareholders
  • Downside: shareholders are not promised any economic returns.
    • Share prices can fall significantly; shareholders may have to sell at a loss or wait and hope the shares recober
    • Company can go into liquidation; shareholders are the last to be repaid.

Bondholders are in a more secure position if the company comes under bankruptcy. They fall under the category of creditors, and therefore are repaid before shareholders.

2. What about risk?

General rule of thumb in investing: the riskier the investment is, the higher the potential to make a gain, but the chance to make a loss is also higher.

  • Shares are generally deemed riskier than bonds.
  • Some bonds, issued by high-risk companies and governments, can be just as volatile as some shares. (Termed as high yield bonds.)
3. Complementary assets

Bonds and shares can work well together as part of a well-diversified portfolio. They tend to have low correlations with each other, meaning they respond differently to changes in the economic cycle.

If an economy is shrinking during a recession, interest rates are often cut, which tends to mean higher bond prices (and lower yields). This is a particularly good environment to invest in bonds.

Choosing the right investment

Before investing in either bonds or shares, it is important to ascertain your tolerance of risk. Do not invest what you cannot afford to lose, and it is a good idea to consult a professional financial adviser for guidance. And whatever your choice, it is worth considering a mutual fund where your investment is pooled with other people’s and invested in a wide range of assets. That means the effect of a default (in a bond fund) or share price fall (in an equity fund) is minimised.

The difference between stocks and bonds explained, Fidelity International

Read full article: The difference between stocks and bonds explained

Understanding Term life insurance

When buying personal life insurance, you’d be introduced to Term life insurance, Whole life insurance, Endowment/savings plans, as well as Investment-linked policies.

Each product type has its purpose, advantages and disadvantages.

So what is Term life insurance?

Term insurance is life insurance that provides insurance coverage only for a fixed period of time. An example of term insurance is the Dependants’ Protection Scheme.

Buy term insurance if you only need protection coverage for a fixed period of time. For example, if you want to be covered until your youngest child completes university or is financially self-reliant.

Understanding term insurance, MoneySense

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.

Term Life Insurance, Investopedia
Image courtesy of DollarsAndSense.SG

Term insurance is a policy that would cover you for a fixed period. The policy will pay out an insured sum of money in the event of death or terminal illness of the policyholder.

How to Understand A Term Insurance Illustration, DollarsAndSense.SG

In brief, Term life insurance:

  • Provides purely insurance protection coverage
  • For a fixed period of time
  • Hence, premium tends to be lowest amongst the different insurance product types

Preparing for a Post-Pandemic Economy – 2nd Half 2020 Market Outlook

According to World Meter tracking of coronavirus, we have passed 5 million cases of the infection, with over 350,000 death. Even then, we know these numbers are massively under-reported since many countries do not have the means to test much of their population. When we consider the expected deaths of select countries against actual deaths, we have anecdotal evidence that the death rate is as much as six or seven times above the historical average.

Image for illustrative purpose only.

Entire nations and regions are in various forms of lockdown, with restrictions on travel, gathering and businesses. This affects economic activities, and this is reflected in the balance sheets, the stock prices, and other indicators of economic strength, such unemployment reports, GDP, and debt to GDP. We are very much amidst a global recession, with many economies projected to contract for the year.

This economic slowdown on a massive scale has had a severe impact on several industries more than others. For example, oil wells were still pumping, partly due to the ill-timed spat between Saudi Arabia and Russia, leading to massive over-supply. This glut took up all available storage space, including FPSOs, and super tankers anchored at major ports. This affected the rollover of oil futures and options, leading to negative prices.

There have been major bankruptcy filings in the travel industry, the shale oil industry, and among airlines, leading to restructuring of debt. We should expect there to be more such filings for creditor protection, Of greater concern would be the default of sovereign bonds of petro-economies, such as Nigeria, Colombia and Venezuela. Even countries with better credit ratings such as Malaysia, Brazil and Saudi Arabia are to be viewed with concern. All these nations enacted budgets predicated on oil trading at US$60 and above. Oil is trading at the low to mid US$20s per barrel. We should expect a cascading sovereign debt default, shaking the market.

On a brighter note, we expect equities to recover as stimulus measure and quantitative easing in major markets take effect and put some optimism in the market. The Federal Reserve has slowed down their bond buyback, while the Treasury is considering issuing new debt, but the market is largely saturated. The US Government itself launched a US$2 trillion stimulus package, the biggest relief package in its history where Fed bought government debt of higher yield, injecting liquidity into the market.

Image for illustrative purpose only.

Putting aside the US, which still has to contend with the highest unemployment rate since the Great Depression peak of 1933, I expect a strong economic recovery to begin in the next 6 to 12 months, particularly in Asia and Europe. South America will still be buffeted by their inability to stem the pandemic due to lax public policy.

By the end of June, global GDP is expected to drop by 6% in the first half of 2020. We are looking at a long U recover, meaning that we are looking at mid-2021, at the earliest, before the economy returns to pre-pandemic levels. It may well be 2022 before we see a full recovery. The glut in bonds means that interest rates will remain low, with plenty of cheap credit available, but not enough businesses to take full advantage. Now would be a good time to lean heavily into select bonds because their yield will increase in time as the market balances out.

In general, market sentiment will drive the increase in equities, which is why the market is out of sync with the economy. There will be periods of strong rebound followed by correction as we go through cycles of opening up and lockdown with the waves of new infections. This will likely continue until we have a viable, widely available vaccine. Now is a good time to take up position in counters we expect growth in, such as light manufacturing and online retail.

Whilst a lot of analysts advocate a strong preference for the US market due to the strong policy response, I feel that this is dictated by sentiment. I expect the US to lag behind the EU and Asia in recovery because their pandemic response is inadequate, the jobs report is concerning, and the we have to contend with a contentious American presidential elections. I am betting on Donald John Trump’s administration self-sabotaging.

Asia, excluding Japan, is expected to recover the quickest. It is still the most dynamic region, with a lot of light manufacturing in place to take advantage of the need for PPEs, ventilators, and associated equipment. As the first region hit, it is also expected to be the first region to recover.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/02nd-half-2020-market-outlook-preparing.html?m=1 ]

How old should your children be before you name them executors of your estate?

The following is my answer to a Quora question: “How old should your children be before you name them executors of your estate?”

Image credit: Investopedia
(Image for illustrative purpose only.)

They may become executors of your estate once they have reached the age of legal majority, which varies from place to place, from as low as 16 years to as old as 23 years of age. Biological age aside, you must also consider that they should be of sound mind, and be credible and reliable. You should not have, as an executor of your estate, someone who has a conviction for fraud or any form of dishonesty, for example. It would be prudent, also, that your executor not be a bankrupt. Your executor should preferably, also not be in frail health since there is no point of an executor that dies before you.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-how-old-should-your.html?m=1 ]

Building an Emergency Fund

Why do you need an Emergency Fund?

An emergency fund is a sum of money set aside for accidents, sudden injury, or an unexpected loss of income. It’s essentially what you keep aside “for a rainy day”.

Unpredictable events can be life-altering as well as expensive, resulting in financial emergencies. An emergency fund gives you the buffer you need to pay out-of-pocket expenses, so you don’t have to turn to loans or credit cards to cover the short-term lack of cash.


How much should you set aside for Emergency savings?

Financial advisors have slightly varying views.

I would recommend 3 to 6 months’ of your income.

This is to provide some cushion should you be retrenched or out of job while you search for a new job or source of income.

You can start by setting aside 10% of your income or $200 monthly via GIRO (or you can do manual transfer) to a second savings account.

Banks like POSB and OCBC facilitate this with their eMySavings account and OCBC Frank account respectively.

Though it can be a better option to have the second savings account with a different bank; you can leave the debit card at home so as to avoid any urge to use it for spending.

Image for illustrative purpose only.

Read more: Why Every Singaporean Needs an Emergency Fund – And How You Can Build Yours

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