Benefiting from Market Corrections

Investors have seen significant volatility in the equity markets over the last few weeks as they worry over the Euro-zone debt issue and slowing global economic growth along with the downgrade of USA’s credit rating.

Has the equity market really lost its value?

We are currently seeing a huge dislocation of price and value which suggests a highly oversold stock market, and this presents an attractive investment opportunity for investors.

Also, in light of the ongoing market volatility and general weakness in stock markets, investors could consider implementing the dollar cost averaging strategy - for the same fixed amount that you invest regularly, more units are bought when prices are low, and fewer when prices are high.

We have attached 2 articles here: "Value, Prices and Volatility" and "Benefiting from Price and Value Dislocation" to keep you updated.

http://www.samfp.com/Value_Prices_and_Volatility.pdf

http://www.samfp.com/Benefitting_from_Price_and_Value_Dislocation.pdf

The Need to Secure your Eldershield Supplement

We all have the option to use our medisave money optimally - that is to secure ourselves with the best medisave-approved hospital and surgical plan (shield) plan and eldeshield supplement. When we are covered with higher benefits, the impact on our cash flow is largely reduced than when we are not.

Eldershield is a severe disability scheme that provides a monthly payout. It is for people age 40 and above and is an opt-out program. It is also referred to as long term care as the benefit payout can span throughout one's lifetime.

The benefit is nothing to shout about - it is either $300/month for 5 years or $400/month for 6 years (applicable for those who turned 40 after September 2007).

The criteria to qualify for the benefit is when one is not able to perform any 3 out of the 6 activities of daily living (ADLs). These are:

• Washing
• Feeding
• Dressing
• Toileting
• Transferring
• Mobility

The question is: Is $300/mth or $400/mth enough when you are disabled for an indefinite period?


Risk factors that you need to be aware of:

• Singaporeans are living longer but will spend 8 years in ill health or disabled (3 Dec 2007, The Straits Times)
• Younger people are getting old people's diseases (16 Mar 2010, The Sunday Times)
• The number of cases for dementia will more than double to 45,000 by 2020 (4 Mar 2010, The Straits Times)
• Incident rate for common illnesses leading to long term care:
  - heart disease - 23.6% (MOH 2009 statistics, principal causes of death)
  - hypertension - 24.9% (MOH 2004 statistics, disease burden among 18-69 years)
  - cardio vascular diseases - 8.0% (MOH 2009 statistics,principal causes of death)
• Based on the experience of other advanced countries, such as the UK, men and women have a 35% and 45% chance of them being disabled in their lifetime respectively (source: MOH website)

Rising costs of medical care is a MAJOR concern:

• Cost of hiring a maid - close to $1000/mth!
• Cost of private nursing home ranges between 3-figure to 4-figure sum per month (go to MOH website for more detailed information)
• Miscellaneous costs of medical aids, treatments, alternative therapies, supplements

I have come across people who give various excuses for not doing so:
1. They feel that they don't need it now as they are healthy (can you tell for how long?)
2. They want to wait till they are older (who can guarantee that you can still qualify for cover?)
3. They want to conserve their medisave (to serve what purpose?)

By the way, do you know you can only do 3 things with your medisave?
1. Withdraw it based on the daily specified limit for hospitalization and certain conditions if you do not have a hospital & surgical plan
2. Use it to enhance your hospital & surgical plan and eldershield benefits
3. When you die, your beneficiaries will 'inherit' this money

Let's not be penny wise pound foolish.  It is the right thing to do to upgrade your eldershield plan.  Do it for yourself. Do it for your loved ones.

Read more about Aviva's MyCare Plus, the new enhanced Eldershield plan that was recently launched in my next blog post.

One more reason why you need Disability Income cover

As I have shared with you in my earlier posts, claiming from a disability income plan is less stringent than from a plan with a total and permanent disability (TPD) definition.

What you may not know is this - there are conditions that can incapacitate you from working and they need NOT be a critical or major illness or a TPD. 

Let me put it this way - whatever conditions that fall through the 'crack' (i.e. do not satisfy the definitions of critical illness or TPD) in a life insurance policy, a disability income plan can help to mitigate cashflow problems.

I cannot emphaszie enough - disability income is an essential component in your insurance program if you value your greatest asset, that is, your ability to work.

Real life story - how Disability Income could help

I was recently reminded again how important it is to protect our ability to earn an income. Here is the situation of a friend which I'd like to share with you.

A real life case :

“A recent catch up with a friend, age 39, a CPA formerly with KPMG, reminded me how vital it is to have a plan that pays you a monthly income.

JJ is suffering from Chronic Inflammatory Demyelinating Polyneuropathy (CIDP). It is an acquired immune-mediated inflammatory disorder of the peripheral nervous system and it is a chronic disease (not a critical illness). CIDP is believed to be due to immune cells, cells which normally protect the body from foreign infection, but here they begin to incorrectly attack the nerves in the body instead. As a result, the affected nerves fail to respond, or respond only weakly, to stimuli causing numbing, tingling, pain, progressive muscle weakness, loss of deep tendon reflexes, fatigue, and abnormal sensations. The likelihood of progression of the disease is high. There is no known cure.

A guy known for his good physique is now a scrawny chap who is incapable of working a job. My heart goes out to him ... he is uninsurable (insurers rejected him totally). At 39, he has no livelihood, depending only on his wife's income. His AIA agent unfortunately didn’t know about disability income plans. His existing insurance coverage did not pay a single cent for CIDP. What's even worse was that when he was about to upgrade to an 'as charged' shield plan, the disease strike and AIA rejected it. He will be facing some huge hospital bills in the years to come."

If you've not engaged a certified financial planner representing an independent financial advisory platform to review your entire financial holdings in the past one year, this, perhaps, is the appropriate time to do so. 

Is TPD the same as Disability Income?

9 out of 10 people I speak to have not heard about disability income.

What they assumed was that total and permanent disability (TPD) is the same as disability income. But they are dead wrong.

Many folks have mistaken the different enhancements (i.e.riders) to TPD like Enhanced TPD, Deferred TPD for disability income. The riders typically refer to how the benefit will be paid out, for e.g., the number of installments and the number of years payment will spread out. In some cases, it's a lump sum. Insurers have also capped the total aggregate payout for TPD to $X million (so buying in excess is not necessarily a good thing).

Yes, you have TPD coverage and you will be compensated but what are the chances of claiming from TPD?

First, you'll need to understand the difference between TPD and disablity income.

The definition of Total & Permanent Disability means that one has to lose a pair of limbs (i.e. both arms, both legs or one arm, one leg, or both eyes) to be compensated by the insurer. This, to me, is a stringent definition to fulfill.

On the other hand, the definition of Disability in a disability income plan is tied closely to one's occupation. You need not lose an arm or leg or eyes to be compensated. As long as the disability resulting from an illness or accident renders you incapable of working to earn an income, you'll be paid the disability income.

Isn't it obvious that the latter definition is more claim friendly?

Insurers generally do not reveal their claim statistics but NTUC Income is transparent. In the month of Dec 2009, the total claim amounted to $9,294,074.00 for life insurance of which $265,138 was paid out due to TPD. This translates to only 2.9%!  Shocking but that's the truth.

Well, my readers, do not be deceived by 'fancy' TPD rider names. Get your financial planner to explain to you the definitions in your policies.

Bargain deals in the Singapore stock market for value investors

A cursory glance at the Business Times, dated March 26, 2011, reveals some very interesting companies that are potentially going cheap.

The criteria for 'cheap' would be a low price earnings ratio (P/E) of say below 7 times coupled with a high dividend yield of say 7% or more.

A P/E of 7x would indicate an earnings power of 14% on invested capital.  We love to look at earnings power (EP) because as investors, in line with Warren Buffett's philosophy, we regard all of the companies' earnings as our earnings regardless of whether they retain it or distribute it in the form of dividends or share buy backs.

Sure beats the fixed deposit rate we get from a bamk, as well as the inflation rate of 3%.

And why we like dividend paying companies is because that is income for us without needing to create it artificially by selling a part of our stock holding while the market still pays us pennies on the dollar for it.

So, here we go:

• Chip Eng Seng - yield 8%, EP 35%
• BRC Asia - yield 8%, EP 22%
• Casa Holdings - yield 9%, EP 25%
• Elec & Eltek - yield 11.9%, EP 13%
• Cogent - yield 23%, EP 11%
• Food Junction - yield 24%, EP 10%
• Global Yellow Pages - yield 12%, EP 26%
• Dapai - yield 7%, EP 29%
• FSL Trust - yield 14%, EP 14%
• Macq Int Infra - yield 13%, EP 26%

This list can go on. It is easy for most investors to flip to the stock listings of Business Times to discover these gems. Of course, this is just the very first step in studying and filtering the companies we want to invest in based on other factors such as cash flow track record, debt levels and competitive advantages. Last but not the least, it is how well we simply know or like the company - its management, its culture, its products, and its customers. And even after this exhaustive sieving process, we thoroughly consider the entire portfolio as well as the needs and objectives of the investor i.e. a financial planning review before we decide how much to allocate in what securities and for how long.

The premise of this piece is simply 80/20. As with life itself, more than 80% of research, analysis and selection can be achieved by looking at less than 20% of the information. In my experience, it is often skewed as far as 95/5. This author can almost wager that a basket of stocks each bought into using equal dollar amount would yield handsome returns for the investor over a 5 plus year time horizon. Diversification is key as is holding power. Of course, there would be some lame ducks but even a few multi-baggers would make the portfolio highly profitable.

Dear investors, you don't need to put a person on the weighing scale to tell if she is fat. Let us go for the obviously attractive 'no brainers' that give us ample margin of safety without needing to split hairs in our analysis.