Showing posts with label Insurance. Show all posts
Showing posts with label Insurance. Show all posts

Saturday, May 23, 2020

Finance 101: What is a portfolio?

Hi friends, 

 I bet that you have heard of it before. "I have a portfolio of blah blah blah", or "How big is your portfolio?" So... What is this "portfolio" that everyone who is investing/ planning their finances is talking about? Today I shall be tackling this question:

 Definition:
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly tradable securities, like real estate, art, and private investments. - Investopedia

A portfolio refers to a collection of investments or financial assets held by an individual, investment company, financial institution or hedge fund. This grouping of financial assets can include everything from gold and property to stocks, bonds, and cash equivalents. In essence, an investment portfolio acts as a big briefcase-carrying all of these financial assets. - Capital

These are the essential points.

1. Group of financial assets (Financial instruments that can be anything that we discussed and more, like real estates, arts, whiskey, etc)

2. Held by an individual, company, funds. 

For today, we will be talking about your individual portfolio. As per the definition, your portfolio is a combination of the different financial instruments that you are holding. A portfolio is also something that you should build based on your preferences. It should be in line with your investment beliefs and your risk appetite

Here are some of the things you should consider before setting off to build your portfolio:

1. What is your risk tolerance? 
How much gain/loss are you able to tolerate? Are you ok with a portfolio that can give you large returns and losses?

2. What is your time horizon?
A longer time horizon would mean that you can create a portfolio that has a higher potential for appreciations. 

3. What assets are you comfortable/ familiar with?
If you are competent and have a lot of experience with a particular financial instrument, you can consider having more of your portfolio allocation to the instrument that you are familiar with. 

Here are some of the financial instruments that you can have in your portfolio. We have actually gone through the majority of them in the other Finance 101 articles:

1. Stocks, etfs, mutual funds, index funds, Reits 
2. Bonds, bond funds
3. Gold, precious metals
4. Crypto (Bitcoin, ethereum)
5. Real estates 
6. Other financial instruments like alcohol, art, etc
7. Commodities like copper, steel, oil
8. Insurance

As we are talking about the personal portfolio, in which I would assume that you do not have the need to invest in commodities, alcohol, art etc. We will focus on 1,2,3,4,5,8 I will analyse it from the POV of a) Aggressive investors (with a long time horizon) b) Conservative investor (with a shorter time horizon) c) Investor who is looking to pass intergenerational wealth d) ultra-aggressive investor

Do note that the allocations are just for example. You should do your own research. 

a) Aggressive Investor (For those who wants :
1. Stocks (85% in etf, individual stocks)
2. Bonds (0%)
3. Precious metals (4% in gold)
4. Crypto (1%, treat it as a gamble)
5. Real Estates (5%)
8. Insurance (5%, to protect against sudden events)

b) Conservative Investor (For those who wants to have some returns but cannot take too many losses)
1. Stocks (20% in etfs, and reits etfs)
2. bonds (60% in bond funds)
3. Precious metals (5% in gold)
4. Crypto (0%)
5. Real Estates (5%)
8. Insurance (10%)

c) Generational Wealth Investors (For those who wishes to pass to their offsprings without incurring taxes)

We do not have inheritance tax in Singapore. But do know that if you pass on properties, your offsprings might need to pay property taxes on it, or pay for the maintenance fees. 

Hence, you might want to consider holding on to stocks and bonds. 

d) Ultra-aggressive Investors (me, with about 30-40 years of investing)
1. Stocks (95% in etf, individual stocks/ reits)
2. Bonds (0%)
3. Precious metals (0%)
4. Crypto (0%)
5. Real Estates (0%)
8. Insurance (5%, to protect against sudden events)

I will reiterate this again. Your portfolio would be reflective of your investment beliefs. Your portfolio should be tailored to your needs. Of course, with a portfolio, you should always look at it every now and then to rebalance it. The rebalancing would allow your portfolio realigned with your chosen allocations. This rebalancing should be around once per 3 months. 

As always, do take note that the allocations are just examples, you should always do your own research before making any financial decisions. 

Also, now that we have settled a majority of the financial instruments, I will be moving on to the most famous financial portfolios that are held by famous investors like Warren Buffett, Ray Dalios, etc. It will be named "Finance 201". I am an Engineer for goodness sake. How creative do you think I am :')  Don't worry. Finance 101 series will still run on, just keep sending in request so that I know to explain some of the basic terms that I have used in my posts

With that, 
I end today's topic

Stay vested, Stay frugal my friends,
Dionysius




Wednesday, April 15, 2020

Finance 101: What is an Insurance?

Hi friends, 

 In the 3rd part of my Finance 101 series, I shall be talking about insurance. Oh, I would like to reiterate that I do not receive any commission or money from any financial institutions for my post. I am also not a financial agent or a financial consultant. I do not sell any products/ insurance/ investment plans. Hence, you can expect objective opinions. The finance 101 series is an educational series to spread awareness of the financial instruments available to us.

 By definition 
Protection against loss for which you pay a certain sum periodically in exchange for a guarantee that you'll be compensated under stipulated conditions for any specified loss by fire, accident, death, etc - Entrepreneur.com

 Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. -
Investopedia

 Term insurance: No cash values insurance
Whole life insurance: Cash value
Participating insurance: Entitled to the profits of the insurance company
Non-participating insurance: Not entitled to the profits of the insurance company 

 The keywords are: 
1. Protection against losses
2. Pay a certain sum periodically

 So insurance works as a form of protection against losses (Death, accidents, critical illnesses, income replacements, hospitalisation, fire, car, etc.) by a periodic (monthly, quarterly, half-yearly, yearly) payment to the insurer. 

 How I think of insurance is like this: 
For different types of fire, we would use different types of fire extinguishers right? Hence, for different types of losses, we would also have different types of insurance. If I feel that I have a higher susceptibility to cancer due to family history, I would purchase critical illness insurance to protect myself. 

 Here are the different types of insurance available in the market. I will be judging them in terms of 5 Midas’ touch. The categories are Price, Payout, Ease of application. I will also write about the protection purpose of the particular insurance type:

 Category A: (Term Insurance)

 1. Term Life (Against death, terminal illness and Total Permanent Disability (TPD))
  •  It covers for a chosen period of time, usually up to a certain age - 65,70 etc. It does not have cash values.
  • There can be an option to convert term life to a whole life plan
  • A recommended coverage would be how long it will take your dependents (children) to reach an age where they can earn their income. 

 2. Term Personal Accident (Against loss of income due to an accident that results in loss of body parts, death, and permanent disabilities.)
  • It can also cover up to a certain age.
  • A recommended coverage amount should be around 5 times of your yearly expenses

 3. Term Critical Illness (Against loss of income or to seek alternate forms of treatment not covered by hospitalisation plans)
  • The payout would occur if the insured is diagnosed with a defined critical illness under the policy (It is possible that a critical illness occurs and there is no coverage because the critical illness does not fall in the definition 
  • A recommended coverage amount should be around 5 times of your yearly expenses
  • There can be features like coverage for early forms of critical illness (Stage 1, 2 cancers etc.), continued coverage after the first diagnosis.

 4. Hospitalisation ( Price - 2/5, Payout - 0/5, Ease of application 4/5, Against the cost of sudden hospitalisation due to many reasons)
  • This plan covers your hospitlisation fee upon checking into a hospital, up to a certain period after your discharge, up to a certain annual amount. 
  • You can opt for "better" coverage by paying more. The plan covers private hospitals too.
  • How you choose this plan would be highly dependent on your preference. It is hard for me to make a recommendation. For me, I would go for the private hospitalisation coverage. 

 #This plan is only appliable to Singaporean/ Singapore PR. 

 5. Loss of income (Price - 2/5, Payout - 3/5, Ease of application 3/5, Against daily living cost if you are unable to perform your original role due to an accident/illness)

 # I am unable to give an adequate opinion about this as I do not have this
You may look at this link if you want to:
https://www.moneyline.sg/disability-income-insurance/

 Category B: (Whole life / Participating Insurance)

 1. Whole Life ( Price - 5/5, Payout 5/5, Ease of application 5/5, Against death, accident, critical illness using riders)
  • As the name implies, this is a life plan that covers you for your whole life. 
  • There is also a cash value component to the plan as well. 
  • You can customise the plan to your needs by adding accidents, critical illness and multipliers riders to your plan.

 2. Endowment ( Price - 3/5. Payout 3.1/5, Ease of application 5/5, Think of it as a saving plan)
  • Essentially: You hand a sum of money to the insurance company every year, you will receive guaranteed and non-guaranteed return after a while. 
  • There are two major types in Singapore, one where you can receive "cashback" every year and towards the end of your policy, and the other where you receive return at the end of your policy or near the end of your policy. 
  • There are also death benefits to it (Usually 105% of the amount that you paid)

 3. Investment-linked policies - ILPs ( Price 5/5, payout 1.1/5, Ease of application 5/5, think of it as linking investment to insurance)
  • There are two components to this plan; Insurance (Which acts similar to a whole life plan) and Investment (Which you are able to choose mutual funds that you believe would give you good returns for your money)
  • ILPs can include attractive sign-up bonuses, loyalty bonuses - These differ from insurer to insurer, hence, I shall not talk about them. 
Thoughts and comments:
From my point of view, insurance should serve as a form of protection. If you wish to invest, you should take matters into your own hands and invest yourself. With that logic, you should choose the best price-coverage insurance, such that you may get the best protection for the least amount of money.


 Here are some of the objections that I have heard when I voice this opinion of mine to different insurant agents:
  1.  What if the company that you choose yourself goes bankrupt? Ans: What if I buy my insurance from you and your company goes bankrupt? If they try to convince you by saying that their company is AAA-rated and it will definitely not fail. Avoid them at all cost, they do not understand how these ratings work.  
  2. How do you know that your investment will make money? Ans: How do I know if I put my money with you guys that it will confirm make money? (Shameless reference to my active vs passive investment article. Do take a look at that)
  3. All the products in the market are similar because it is governed by MAS, there's no need to choose? Ans: Just run far far away. To compare insurance, you can use some of the websites available or seek advice from an independent financial consultant. They can help you compare insurance across different insurers. Compare yourself and see if there is a difference. 
  4. Would you do your own heart surgery? You need someone to be with you on this "journey" Ans: -Facepalm Even heart surgeons would not do their own heart surgery. 
Limitations of this post:
  • I have mostly dived into life insurance and not general insurance (Simply because I do not have a need to research into them.). 
  • I have written this post from the POV of someone that knows how to invest, the financial instrument out there to reach my goals and risk management. If you do not know all these things, I would recommend buying the endowment insurance rather than allowing your money to lose value to inflation
In my belief, you should learn to take your own personal finance into your own hands. I am speaking from my own personal experience, having family members cheated by insurance agents who preyed on their ignorance. That is one of the reasons why I started this blog, to teach you about finance and such that you may take your money in your own hands. 

From what I can see: there is a generation of more financially-savvy people entering the workforce who are more willing to understand their own finances. This would force insurers to come up with competitive/ more comprehensive policies. This would be great for consumers.

With that, 

Till next time, 
Stay vested, stay frugal my friends. 




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