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How to be a successful investor

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Last year, during a meet up with the man behind BeMoneySavvyToday.com, Brendan Yong shared with me his insights on how to succeed in investing. Brendan works in the financial industry for 11 years and is a veteran when it comes to insurance matters.

First and foremost, most Singaporeans tend to rely on tips from friends and investment bloggers on when is the best time to invest and which are the best stocks to invest in. Most of them either are not financially savvy or have no time to do research. But to succeed in investing, there is no shortcut and you need to put in a lot of hard work. Half the game is won if you make the effort to analyse and take care of the downside risks.

Secondly, you must understand your character and priorities. Your personality and behavior determine the outcome of your investment decision, not the market. Over time, you would realize that your greatest enemy is yourself because managing your emotions is key to winning the investment game. On priorities, many of us have family commitments or hectic careers, so not many people can have the luxury of time to do stock research. For this group of people, choosing a reliable financial planner would make sense.

A third point he made was that to be successful, you must experience at least one cycle of market boom and market crash. Such experience would enable an investor to validate his investment thesis. Otherwise, no amount of reading can level up your investment competency.

When touched on the topic that there was an initiative by MAS to promote online direct purchase for insurance products, Brendan commented “Of course I knew as I work in the industry and as a matter of fact, MAS had a round of consultation on the proposed move”. However, Brendan dismissed that such a move reflected that consumers are ready to purchase insurance products directly from the insurers. He shared that financial planners and insurance agents still has a role in helping consumers make the most informed choice when it comes to buying the most suitable insurance products.

BeMoneySavvyToday
Brendan Yong

Brendan went on to share that his concern was Singapore consumers making the wrong decisions when it comes to purchasing insurance policies. He revealed that many Singaporeans were led into buying investment-linked insurance policies that were not meant for protecting the financial welfare of the policy holders and he even described these products as “time-bombs”.

In addition, he also added that Mr Tan Kin Lian, ex-CEO of NTUC Income admitting “ALL ILPs are bad”. Sound sobering but just how bad are investment-linked insurance policies? Personally for me, I had been approached by many insurance agents to buy ILPs before but I had never buy one because I don’t really understand the mechanics of such product. Brendan patiently explained to me how ILPs work.

Traditional life policies pool premiums from policy holders and injected the fund to a fund manager who will then invest in a portfolio of stocks and bonds. Expenses and claims are then deducted before the profits are distributed to holders in the form of declared bonuses. Typical, the credit rating for the industry is $1 per $1000 sum insured, plus 1% per year. Once declared, the bonuses cannot be reversed and hence over time, the cash value will gradually build up.

Investment-linked insurance policies work differently as the premiums are used to purchase unit trusts instead. In the first few years, not all the premiums are channeled to buy unit trusts but instead used to cover distribution costs. The remaining fund is then used to buy unit trusts, less sales charges typically 5%. The most important thing to note is that insurance charges are deducted, along with policy fees, by selling units, on a monthly or yearly basis. The most outrageous thing is that the insurance charges do not increase linearly over the years, but exponentially. What this means is that the policy holder may face the situation of having to top up his policy to pay his insurance coverage because the units in his policy might have all been deducted to zero.
Thus, consumers who bought into ILPs must have a clear idea of what they are buying into and whether ILPs fit into their wealth objectives. If their objective is to seek protection, then term or whole life insurance policies may be more appropriate. If the objective is to enhance wealth and seek higher returns, then it may be better to buy other form of financial products instead of insurance. At the end of the day, it is important to decouple the need for protection and the want for higher returns. This is because the primary objective of insurance is more for protection, rather than wealth creation.
In my point of view, besides the above three traits highlighted, a successful investors should have the discipline to diversify his assets and to maintain a portfolio covering different class of assets. A smart investor would know that he would not be able to beat the market consistently over time. Thus, one way of reducing the risks would be to develop a diversified portfolio consisting of quality stocks, bonds, properties, cash and gold. Term life insurances offer the opportunity to protect your wealth while participating life insurances allow for bonus and cash distributions. Putting all your monies into ILPs may be a risky move because you don’t want to put all your eggs in one basket.

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Magically yours,

SG Wealth Builder

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