Why Buy Term And Invest The Rest Is Bad Advice

Why Buy Term And Invest The Rest Is Bad Advice

Why Buy Term And Invest The Rest Is Bad Advice Ferrari Joke

Why Buy Term And Invest The Rest Is Bad Advice: Ferrari Joke

Most of you might have read this joke before. Personally, I think it is easy to give a “good advice” like “stop smoking, invest the money and you will get a Ferrari in 15 years”. Realistically, is that true? I discovered that most people do not take context or circumstances into account before giving  “good advice”. This “good advice” might serve as no practical value at all if it is not applicable to the person.

In the financial world, we have many “good advice” around. In this article, I hope to debunk one “good advice”: “Buy Term And Invest The Rest”.

Speaking about advice: I’m a financial planner and here are 3 pieces of money advice no one ever wants to hear.

 

What is ‘Buy Term And Invest The Rest”?

John (imaginary figure) wants to plan for his financial journey. He read a few articles online and discovered that there are many people recommending “Buy Term And Invest The Rest”.

Buy Term: He can consider buying a Term policies for his insurance needs. A Term policy’s regular premium are generally cheaper than Whole Life Policies or an Investment Linked Policies (ILP) that serves his insurance needs (broadly speaking).

Invest The Rest: Because his regular premiums are generally cheaper, he now has more budget to invest in the stock market. He wants to invest in low cost ETFs (exchange traded funds) to reduce any fees. With low charges, this will take care of his wealth accumulation needs.

This sounds great. Personally, I think this is a great advice and a possible strategy for John to consider in his investment journey.

 

Then Why Do I Think It is “Bad Advice”?

Why Buy Term And Invest The Rest Is Bad Advice

Why Buy Term And Invest The Rest Is Bad Advice

This very simplistic advice often do more harm than good. One example that I would like to draw reference is giving advice to someone to lose weight. The secret to losing weight is very “simple”. All you need to do is just “Eat Healthy Food, Eat Less, Exercise More”. Yet, adult obesity rates in the USA (2017) is a shocking 42.4%. If people already knows this secret, then why are there still so many people who are obese?

This is because everyone’s circumstances and context is different! Duh.

Do you know that price of healthier food is around 2X of unhealthy food? For a person who is living from paycheck from paycheck, how would he/she be able to afford this new diet?

Do you know 95% of diets fail? For a person who has been on a donut diet for most of his/her life, would it be easy to follow this diet?

The conversation today is not about diet. By using the example of weight lost, I hope to be emphasize that everyone is different. This same advice could work for someone with a certain set of mindset and circumstances (maybe he is rich, having a 6 hours work week and a can-do mindset). But not for everyone.

 

So Why Is Buy Term and Invest the Rest “bad advice”?

Frankly, this advice works. But it only works with a given set of circumstances and context. You can consider this advice if you resonate with the following.

Balanced/Adventurous Risk Profile

I have the privilege of speaking to many people in my career. I have came across some partners and clients who are risk adverse in nature. They do not enjoy fluctuations in their asset prices nor do they like to see losses in their assets. Their favorite asset classes are typically fixed deposits, endowment or bonds. A stock portfolio may not be very suitable for this person’s character. Imagine if you force this individual to buy the ARK K ETF, I willing to bet that he/she will not be able to sleep well at night.

Long Holding Period

In theory, we should all be like Warren Buffett who has an “infinite” holding period. Buy term, invest the rest works ONLY if the person invest the rest and continues to invest the rest. However, this is something we don’t see practically.

A simple question to ask yourself or your friends would be this: when was the last time you sold a stock?

The average holding period of US stocks is 5.5 months. The average holding period for SGX stocks is 10 months. ETFs are slightly better. The average holding period for ETF is 6 years. If statistics shows that an average someone is only willing to hold for that short a period, then wouldn’t you be “investing the rest” temporarily? Will this help you achieve your financial goals?

I do acknowledge that there is a combination of factors that contribute to the short holding period. One example is cheap transactional cost. This seemingly good benefit actually destroyed wealth all around the world. In the past, transaction costs to trade was relatively higher that people are more willing to do it only when necessary. Because of the cheap transactional cost now, people are entering and exiting the market as if they are buying groceries in the market. Where did the long term investing go?

But my favourite is the “fear of market crash”. From 2008 until 2020, there have been thousands if not millions of articles/youtubers/gurus world wide calling for market crashes every single year. This keeps people from “investing the rest” into the stock market because they are afraid the market will crash every other month (read this again). Missing the five best days when you’re otherwise fully invested drops your overall return by 35%! Missing the best 10 days will more than halve your long-term returns. Research has again shown that not fully invested will have disastrous effects in the long run. Are you really investing in the long run?

Strong Emotional Stability (in the market)

Investing in the market is not easy. It does not matter if it is a passive strategy or an active one. Imagine if you open your brokerage account one day to see your robo-investing strategy lost 20% of your capital, will you feel afraid and fear that it will continue to drop?

I know there are some who will feel excited. However, I doubt this will apply to the general population.

Investment/Financial Planning Knowledge

When you buy term and invest the rest, there is a strong assumption that you know very specifically the kind of coverage you want and the structure for your insurance needs. At the same time, it also suggests that you know enough about stocks or ETFs to invest appropriately for the long run.

I do acknowledge that there are indeed talented individuals out there that really can do it. They don’t spend hours, they spend decades of their lives to master their financial planning.

Are you spending enough time to acquire these knowledge?

So What Is A Better Advice?

An advice is only good when an individual is able to act upon it in his unique circumstances and context. The best advice are often discovered through brainstorming, asking and answering good questions and also working with someone who is good at doing that.

Just like the best companies in the world hire the best minds in their strategy department, you should also “hire” the best minds to help you in your financial journey.

“Buy term and invest the rest” is a great strategy. However, it only works for a very specific group of individuals. You may or may not be suitable for this strategy. Remember, everyone is different.

 

Final Thoughts

I believe it is more important to focus on your priorities and your financial needs instead. It would be wise to rethink if these heavily blogged strategies (buy term and invest the rest) can serve you in your financial needs in your unique circumstances and context.

 

Chengkok is a licensed Financial Advisor since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

He will be happy to provide professional advice to you personally.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

Wealthdojo Annual Report 2021

Wealthdojo Annual Report 2021

To our partners, clients and readers:

Wealthdojo passed many milestones in 2020. Some of which personal, some of which professional and some of which are hearing stories of how Wealthdojo has impacted your lives.

Wealthdojo was created to serve you as an knowledge base, an inspiration and also a place to make informed actions for your financial journey. I have thought deep and at length of how to impact the personal finance scene in Singapore before creating “The Daily Learning” from Telegram.

But this is still Day #1 for personal finance in Singapore. I aspire to be the thought leader of personal finance in Singapore and partner you through your financial journey.

It is all about the long term:

I think that people underestimate – until they get older – they underestimate just how important habits are, and how difficult they are to change when you are forty-five or fifty, and how important it is to form the right ones when you are young.

Quote from Warren Buffett.

I believe that habits are the building blocks for success. My own personal finance started when I first controlled the desire to buy a playstation 3, the ongoing urge to drink bubble tea and temptation to mindlessly watch youtube during my free time. I don’t not have a playstation 3. I confess I do drink bubble tea (maybe twice a year). I make extra effort to ingest as much financial information during my free time (though I spend a lot of time reading manga).

I believe that heading in the right direction in a simple, sensible and consistent pace is more important than optimizing and being extreme. Those rarely work in the long run.

In Wealthdojo, I aim to make it AS SIMPLE AND AS TIME EFFICIENT AS POSSIBLE for you to work on your financial journey.

Working on your financial journey is not a “one-time off” like a house renovation. It is a like a grass patch that requires you to work on it constantly to create a beautiful garden full of flowers. It is my aim to help you create the bed of roses. Here, we start with habits.

By many measures, we came a long way:

Here are some key matrixes (unaudited) that I take pride in my journey in 2020.

  • Protected the wealth of 37 families through their insurance program
  • > $100,000 paid out in claims through their insurance program
  • 31 new families embarked on investment or insurance program
  • 82 articles written (2020 till 21Jun21)
  • Read 6 new books (I believe there was more)
  • 6 Online Webinars
  • Awarded Top 75 Singapore Investment Blog
  • Featured on Singapore’s Finest
  • Awarded MDRT (Top 5% Financial Consultants World Wide)
  • Top Article: 5 things you need to know about SRS when you are 40 and older
  • 100th article milestone

Goals of 2021:

I believe Wealthdojo (and myself) are still at the early stages of learning how to create more value to our partners, clients and readers. I want to thank the many of you who have given invaluable feedback on how to make it better and it will be done.

To improve the quality and value to you, these will be a few projects, goals and certifications I will be embarking this year.

  • The Institute of Banking & Finance: IBF (Advance) Level 2
  • The Institute of Banking & Finance: IBF (Qualified)
  • 10 new books (Only books worth reading will be introduced)
  • Inspire 50 new families to work on their financial journey
  • 12 High Quality articles (one longer article a month)
  • 3 High Quality Webinars
  • Continue being MDRT in 2021

One Final Story:

In 2019, I met Joyce (the name has been changed). She was not working at that moment of time. She has been feeling lost in her financial journey and also in life. At that time, she was spending more than she earns, accumulating credit card debts and also relatively close to retirement age. The financial scene is a very noisy scene. She always felt handling money was very complicated and she was too busy to handle them.

When she first read articles, it felt like an epiphany came upon her. She contacted me and the rest was history. In a simple, sensible and consistent manner, we worked on her financial portfolio from scratch (she started with $20,000 in her bank not including credit card debts). I’m glad to say that she is currently credit card debt-free, have a solid insurance portfolio and also managing a 6 digit investment portfolio.

She wants to impact the younger generation of her mistakes that she made over the years. She now spends her free time impacting youth in church. We still remain close in contact till today.

Joyce is an example that is not too late to start. I look forward to impact the lives of more “joyces”.

 

2020 was indeed an incredible year. I’m extremely grateful to my partner, clients and readers for your business and trust. I look forward to writing this annual report in 2022.

Wealthdojo Annual Report 2021

Wealthdojo Annual Report 2021*Photos Taken Pre-COVID19

Chengkok is a licensed Financial Advisor since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

He will be happy to provide professional advice to you personally.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Your Daily Learning]
Reviews: About Me

Participating Funds Singapore Moving Forward

Participating Funds Singapore Moving Forward

Insurance companies will be showing lowered illustrated rates after 1st July 2021. Although there is no real impact because the rates are illustrated after all, you might be wondering why is this happening? I think the most important question that you have will be this.

“Will this affect my returns in the years to come?”

Participating Funds Insurance Singapore 2020

Participating Funds Insurance Singapore 2020. Source: Business Times.

 

What is a Participating Fund?

To understand your returns better, you first need to understand what is a participating fund. You can take a look at LIA: Guide to Participating Fund. I will be summarizing some of the points in the guide.

Participating policies (such as endowment, life, retirement) are life insurance policies which provide both guaranteed and non-guaranteed benefits. The aim of a participating policy is to provide stable medium to long-term returns through the combination of guaranteed benefits and non-guaranteed bonuses. Participating funds can invest in a range of assets, including equities, in search of potentially higher returns.

This means that the participating fund need not be conservative. Equity positions in the 5 companies (as shown above) is around 30% of the entire fund. However, we need to note that insurer need to provide a guaranteed benefits.

 

The Search For Guaranteed Benefits

To back the guaranteed returns of participating policies, insurers typically invest around 70% with bonds (Side note: investing in bonds does not mean that having guaranteed returns). In the persistent low interest environment (plus the RBC2), it becomes an problem for insurers. I believe (this is my guess) that insurance companies might offer newer plans with lower guaranteed benefits in future.

Participating Funds Singapore Moving Forward

Participating Funds Singapore Moving Forward

 

Will It Affect My Overall Returns

That being said, I believe the overall returns for participating funds will improve. This is because insurers has already shown trends to shift more of the assets into equity (read my last article on the data).

However, this would mean that we need to be understand returns on a participating policy may also be volatile in future.

 

Final Thoughts

I do not think that having a lower guaranteed benefit is necessarily bad. This is because when the participating policy has a lower guaranteed benefit, it means it only needs a lower proportion of assets goes into bonds. This will free up some capital to invest in other assets such as equity. This investment mix might provide greater potential/returns for long term investment.

As mentioned above, we need to be understand returns on a participating policy may also be volatile in future. You should be instead focus on your financial needs and whether these plans (participating or not) can serve you in your financial planning.

 

Chengkok is a licensed Financial Advisor since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

He will be happy to provide professional advice to you personally.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

Technical Mambo Jambo: RBC2

This section is only for those that are interested in the technical stuff.

Insurer are required to adopt RBC2 from March 2020. Monetary Authority of Singapore (MAS) expects the guaranteed cash flows from assets invested by the Par Fund to match the guaranteed insurance liabilities, i.e. the guaranteed benefits of the par policies. Insurers are required to hold higher capital requirements if that is not the case.

As we are in a persistent low interest environment, it would mean that the insurer have to hold even more bond positions to match the guaranteed benefits. Thus, reducing their ability to invest in the equity market. Thus, potentially reducing overall returns.

As a result, we might see new participating policies with lower guaranteed benefits. As explained above, it may be a good thing and a blessing in disguise.

Here is a 1 hour video to explain the mambo jumbo.

3 pieces of money advice no one ever wants to hear

I’m a financial planner and these are 3 pieces of money advice no one ever wants to hear

I remember my mom telling me to eat more vegetables when I was younger. At that time, I absolutely hated broccoli and only ate it because I can only play with my playstation after that. Years later, I can only assume eating broccoli was a great decision because I don’t really fall sick as often as my peers. I did not appreciate my mom’s nagging advice (I mean who did at that time) until years later.

Turns out that nagging found its’ way into adulthood. As a financial planner, I’m constantly giving money advice that no one wants to hear. But those who listened and applied the concepts tend to have better cashflow, protection and investment portfolio.

You might not like it, but it is for your own good.

3 pieces of money advice no one ever wants to hear

3 pieces of money advice no one ever wants to hear

 

#1: You Got To Save To Have Money To Invest

“I want to invest but investing more than $100/month is too much because…”

To set the context, these are people with good monthly income of around $3000 to $6000. I find it scary to have so many conversations with people who have issues setting aside money every single month BUT wants to invest. It is like wanting to bake a chocolate cake with no chocolate. Often, not having a Level #2: Abundant Surplus Creator set up is one of the main cause of failure.

Saving more than you need will buy you opportunity and freedom in the future. The usual guideline is to set aside at least 25% of your take home salary. This 25% will buy you opportunity and also freedom that you desire.

 

#2: Have A Backup Plan

“You will fail in life 33% of the time. Do you have a backup plan?”

Cancer hits 1 out of 3 people in Singapore. Each and every of us have a 33% chance of our income source robbed away when we are unable to work when we are ill. If you are lucky and detected it early, the effects may be temporary. However, if it is a major critical illness, the effects will be longer term in nature.

With COVID-19 still looming over our heads, I think it is clear that the next war we will be fighting is a Health War. No one likes to imagine the worst cause situation but if something really happens, you will be glad that you have a backup plan Level 4: Aegis Of War aka insurance especially medical and critical illness coverage.

Other forms of backup includes having adequate emergency funds.

 

#3: Don’t Time The Market. Invest For The Long Term

“I want to wait until the market crash (like in March 2020) and invest.”

You will be waiting for a long time. Before March 2020, it was Sept 2008. Before Sept 2008, it was April 2000. From 2000 to 2021, S&P500 is up roughly 189% with a CAGR of around 6%. It is certainly very easy to look back in 2008 or 2020 to say that it is the best time to invest BECAUSE it has already happened.

It is virtually impossible to predict the market. Investing may be all sunshine in 2020. However, it is not as fun and sexy as you think it is. The recent pull back has shattered some confidence in the market and you might be wondering what to do next.

Build a strategic investment plan and stick to it. We want to invest in companies that is of value and growing and hold it until it rewards us. You can take a look at some of the largest companies now that is rewarding investors. Companies such as Apple and Facebook are rewarding investors with price appreciation and also dividends over the last 10 years whether it is market crash or not.

 

Final Thoughts By Wealthdojo

Eat your veggies. Trust me, it is good for you.

 

Chengkok is a licensed Financial Advisor since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

He will be happy to provide professional advice to you personally.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

5 Things You Need To Know About Your CPF

5 Things You Need To Know About Your CPF

Central Provident Fund (CPF) is a compulsory comprehensive savings and pension plan for working Singaporeans and permanent residents primarily to fund their retirement, healthcare, and housing needs in Singapore. It started in 1 July 1955 and just like our Integrated Shield Plans, there have been many changes over the years.

Like with most changes, some will appreciate it, others will not appreciate it as the “rules changed”.

Love it. Hate it. It is an asset class that we will have with us for the rest of our lives.

5 Things You Need To Know About Your CPF

5 Things You Need To Know About Your CPF

To help you understand CPF, the opportunities and optimization better, I have put together a free webinar to share my knowledge on it. Limited seats only. Join us with the link here.

 

Fun Fact #1: You cannot use your CPF to pay for your house in the past

Before 1968, CPF cannot be used to pay for a house. In 1968, the government finally allowed the use of CPF for the downpayment and to service the monthly mortgage loan instalment. Fast forward to 2021, majority of the people around me are using their CPF to pay for their downpayment and their monthly mortgage loan servicing.

This liberation allowed Singapore to have one of the highest house ownership levels in the world. However, as more money is used for housing, the original intend of CPF to help us retire may have taken a back seat. There is also the cause of concern for accrued interest.

Most of you might be servicing your mortgage with your CPF and worry that you do not have enough money in your CPF for retirement. For that purpose, I use a CPF Projection Calculator for my clients. This allow me to accurately measure the amount my clients will have in their CPF at age of 55. So far, they have found this insightful.

5 Things You Need To Know About Your CPF Retirement Age 55

5 Things You Need To Know About Your CPF Retirement Age 55

 

Fun Fact #2: Special Account (SA) was started in 1977

To help you with retirement, the special account was created in 1977. Tons of literature has been written on the special account. Among my favorites are the following. If done correctly, the following opportunities will help you in your retirement.

  1. Transferring Ordinary Account (OA) monies to Special Account (SA) to have a higher interest (up to 5%)
  2. Retirement Sum Top Up Scheme (RSTU): Top up up to $7000 into your CPF for tax deductible benefits.
  3. CPFIA: Using CPF-SA to invest (with limitations)

However, it is worth noting that the higher interest that the SA earns is not guaranteed. The floor rate of 4% has been extended by the government until 31 December 2021. The SA and Medisave (MA) rates are reviewed quarterly. The 1M65 movement takes the assumption of these rates being at 4%.

5 Things You Need To Know About Your CPF Floor Rate

5 Things You Need To Know About Your CPF Floor Rate

 

Fun Fact #3: Medisave was started in 1984

Medical inflation isn’t new. Medisave was created to help you to pay for our healthcare cost. It is not hard to understand that one of the The Hidden Cost Of Retirement is Healthcare. With healthcare cost escalating at more than 10% per year, tons of measures have been implemented to help you pay for our healthcare cost.

Among which, you can use your medisave to pay for (part of) our integrated shield plans. There are some outpatient treatments that can be paid using medisave. You also have to set aside a Basic Healthcare Sum (BHS) in your CPF. The BHS is adjust annually to keep up with inflation. This is one initiative to help with medical cost.

BHS 2021

BHS 2021

With the new co-payment medical plans now, you will have to plan for your retirement a little differently.

 

Fun Fact #4: Minimum Sum Scheme Was The First Version of CPF-Life

CPF is still about retirement. Before CPF-Life, there was the minimum sum scheme (MSS). However, as your life expectancy increase, you run a risk of outliving your MSS. Hence, the retirement scheme was updated/upgraded to become the CPF-Life. The retirement account (RA) is created at age 55. Your OA and SA monies will be transferred into the RA during then.

CPF Life Full Retirement Sum 2020

CPF Life Full Retirement Sum 2020

Assuming that you have $181,000 (FRS) in your Retirement Account (RA), you will get between $1390 to $1490 per month for the rest of your life starting from age 65. This will form part of your retirement cashflow. There are 9 options for you to choose from at age 55.

 

Fun Fact #5: There is a maximum amount of money you can put into CPF a year

You can’t just simply top up everything into your CPF. There is a maximum of $37,740 of mandatory and voluntary contributions that a person (employee or self-employed person) can make in a calendar year is subject to the CPF Annual Limit.

 

Final Thoughts By Wealthdojo

I personally like the CPF scheme because it really helps a lot of people including myself plan for our retirement seriously. I contribute to my SA every single year so that I can make use of the tax incentive and also hit my FRS in the years to come. Having enough in my medisave gives me the confidence to pay my integrated shield plans yearly and usually the interest on my medisave pays for my shield plan.

To each his own. Love it. Hate it. It is an asset class that we will have with us for the rest of our lives.

If you would like to benefit from CPF more, I have put together a free webinar to share my knowledge on it. Limited seats only. Join us with the link here.

 

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.