How Can A Profit-Guaranteed Investment Be Risky?

Investment professionals love complicating things.

Trust me on that. I was once like that.

You don’t believe me?

The next time you meet people from the investment industry, try asking them to give you a definition of the word “risk”.

Investopedia defines “risk” as “the chance that an investment’s actual return will be different than expected...risk is usually measured by the standard deviation of the historical/average return of a specific investment.” 

Don’t get me wrong. This is actually a pretty good definition of "risk”... that is if you speak finance. But most people don’t, and if you are like most people, you probably struggled to understand even the first sentence (actual return vs expected return...huh?). Good luck attempting to measure risk!

Then, what does RISK mean?

Complicated definitions aside, many investment professionals define “risks” consistent with the above definition i.e. in terms of “uncertainty” (or “volatility”, a fancy word for uncertainty). Professionals refer to a risky investment as one with a “high standard deviation” or “high volatility” (or in our language, high “uncertainty”).

The problem is, people don’t normally think of risk that way. An investment that is “uncertain” or “volatile” may not necessarily be risky. Let me give you an example;

Suppose there is no chance of losing money on this particular investment, but depending on a certain factor (e.g. how the weather turns out to be in a year’s time), you could either make a small profit or quadruple your money, or anywhere in between. We both know that if such an investment exists, it is a no brainer – this investment has no risk (you either win small or win BIG)!

But by definition, this investment is highly risky!  Why?  The outcome is highly uncertain: you could make a small profit (say +1%) or any amount up to quadrupling your money (+300%)! Isn’t it absurd that professionals define this as a highly risky investment? 

This is how I think “risk” should be defined:  The potential for losses.

That’s it! 

Therefore, a risky investment has a high potential for losses.  An example: a share of a single, unproven company in a politically and economically unstable country. A not risky investment has a low potential for losses – like a bank account.

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This guest post was written by Ching, the founder of iMoney.my, a price comparison website for Malaysians. Ching is a CFA charter holder, and was formerly an investment consultant and wealth advisor.

Europe’s Woes Flood Wall Street—But Not the Economy? (May 2012)

After months of buildup, Europe’s sovereign-debt crisis has finally wreaked havoc on the U.S. stock market, as a wave of anxiety has prompted a major sell-off on Wall Street. We’ve seen a dramatically “risk off” environment with the Dow Jones Industrial Average dropping 3.52% — the biggest one-week decline since November — and the S&P 500 falling 4.3%. Among the hardest hit stocks were small caps and tech, with the Russell 2000 and the Nasdaq Composite falling 5.4% and 5.3%, respectively. To further underscore the risk-off environment, the yield on the 10-year Treasury still appears to be searching for a bottom, finishing at 1.702%, but falling below 1.700% intraday this week — a modern-era low.

Spring Swoon?

History may not be repeating itself, but it certainly is rhyming. Like the spring of 2010 and the spring of 2011, investors’ fears are coming to fruition and we are once again experiencing a “spring swoon.” Stocks are selling off and junk-bond spreads are widening, as concerns about the euro-zone crisis are weighing heavily on investors. While some strategists believe Germany may be softening its stance, yields on some EU periphery nations are skyrocketing and rumors abound that the European Central Bank is preparing for a Greek departure from the European Monetary Union. The problem seems to be fundamental to the structure of the EU and therefore there are no easy solutions: while there is one shared currency, there is no true central government with one shared ability to levy taxes or issue debt that all countries are responsible for.

A federal Europe and closer fiscal integration is the ideal solution but it does not appear to be close at hand. The fiscal compact was agreed to in principal in December 2011, which is an important step toward that goal, but it is still awaiting approval by some euro-zone members.

However, the U.S. economy continues to chug along, albeit slowly. Initial jobless claims remain well below 400,000. The Consumer Price Index was flat for April. In fact, the “oil choke collar” has disengaged, with crude oil falling nearly 5% this week to finish at $91.48 per barrel. New residential construction was higher than expected in April as well. One area of disappointment was leading economic indicators, which were slightly negative for the first time in six months, down 0.1% versus expectations of a 0.1% gain. This is largely attributable to a decrease in the number of building permits and an uptick in the number of unemployment claims.

Looser Credit

Last week’s release of the minutes from the Federal Open Markets Committee’s April meeting offers further insight into the U.S. economic picture. While generally bullish in its observation of measured economic growth, the FOMC highlighted a bright spot for the economy that may have been overlooked: banks are loosening credit standards. As reported in the minutes, “Bank credit slowed in March but expanded at a solid pace in the first quarter as a whole. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on core loans—C&I, real estate and consumer loans—and experienced somewhat stronger demand for such loans in the first quarter of 2012.” The Fed’s poll includes 60 large domestic banks and 24 U.S. branches and agencies of foreign banks.

And lower yields mean lower borrowing costs, which are stimulative. This lower cost of borrowing combined with long-awaited and much-needed easing of credit standards could be the one-two punch that the U.S. economy needs to continue to expand.

It is imperative that the situation be monitored closely but with the recognition that, for longer time horizons, higher-quality risk assets with substantial yields such as dividend-paying stocks continue to be attractive investment options. Dividends, which offer the benefit of getting paid to wait for better market conditions, may help steer portfolios until we see calmer seas.

Source: Allianz Global Investors

Western Debt Crisis: Bursting of Volcano? (Sept 2011)

We cannot deny that we are in for another round of hard times since 2008 global financial crisis. Some experts are saying that we are facing the Great Depression wave coming in the next few months, if no concrete efforts put in by global leaders. Meanwhile, some experts think that opportunities arises again and put off the double-dip recession speculation.

The downgrading of US's AAA rating re-ignite the fears over the sustainability of its sovereign debt. However, please be mindful that US rating remains extremely sound and reflecting a very low risk of default in the long term, still. USD remain the preferred and most widely traded currency in the foreseeable future, and there is no reason to worry about.

Sovereign Risk scaring investors away?

Meanwhile, in Eurozone, the situation remains very complex and greater political will is needed to maintain Euro as regional currency. Between Eurozone breaking up and resolving the situation, which one is easier? Of course, the economic and financial cost of the Eurozone breaking up seems far higher.

Undoubtedly, the "Volcano" is active again now and may burst anytime from now. Unless, we poured ice on it to prevent the crisis. Sorry, we needs ICE-BERG (great efforts) to get through it. Otherwise, we may just let it burst, and start all over again. Not a bad idea though, right?

I can say it that way because I am living in Asia right now. Luckily, Asia is much more resilient comparing to its western friends, partly due to the 1997 Asia financial crisis which make our banking system strong and pro-active now. Our lessons were being taught to western countries this round. Hopefully, they know the root of the problem and tackles it painfully.

Should we invest in Commodities or Resources? (July 2011)‏

Unlike real estate, assets type such as commodities and resources investments tend to be highly volatile. This kind of assets classes is suitable for high risk takers. Knowing the characteristic of the assets classes is important to suit your investment objectives so that a correct investment decision was made. However, I noticed that many investors confused about Commodities and Resources, and they often lumped them as SAME. Is it true? Let's look at it separately (not together).

Commodities vs Resources?
Yes. Both is similar, yet there are some differences between them. First, let's talk about commodities. Commodities for me were comprised of metals such as copper, iron ore, silver, gold, platinum... Although many of us includes energy assets such as oil and gas into it, we can categorize it as an asset class which we can't consume with our mouth. Sometime, it was called hard commodities.

Meanwhile, Resources are soft commodities. They comprises agriculture products and food, etc sugar, corn, wheat, soybean, palm oil... These are closely linked with our food and beverages. After understanding the basic of these two assets, let's us examine the next question.

Should we invest in Commodities or Resources now?

In view of the current scenario, I prefer Resources rather than Commodities. Why? Demand for wheat, rice and other resources tends to be more sustainable. Even if the global economy is going to slow down, we still have to eat or consume as it was a necessity.

Other than that, bad weather (due to global warming?) and natural disaster (due to end-of-the world?) had disrupted the supply of resources. Although commodities such as coal mining in Australia was affected too, food do more harm to human being. Without adequate resources, people may trade commodities for resources!!! Don't you?

What if the current high price of commodities was driven up by speculation? Even though demand and supply play their role here, but speculation and traders tend to make profit from the game. By manipulating the demand-supply story, they're in to drive up the prices, making it more pricier rather than purely based on the fundamental.

After all these points highlighted, would you invest in Commodities or Resources?

How to select a Medical Plan?

While celebrating Father's day, I have a meaningful story to share with you. I visited a hospital in KL recently and to my surprise, I came across a little boy who was diagnosed with leukemia. More surprising, his age was only 8 years old. Oh my god, this little boy doesn't even know what leukemia was, and he had to suffer from such a young age!!! Through these torturing times, I believe his father's love is what he needed the most. God bless him.

Do you know that almost 9/100 Malaysians aged above 35 suffer from diabetes?

Do you know that over 1/5 are expected to get cancer in their lifetime?

The fact is, because of the stressful and unhealthy way of life today, lifestyle diseases are on the rise. Do you have any real example from your own little circle?

We can, however, spare our self and our loved ones a lot of anxiety with comprehensive medical plans, which provide a financial cushion in times of need. Although these plans cannot prevent illnesses, it can help us to go through those rough times - financially.

Most Malaysians are unprepared for the rising cost of medical care

It was a fact. The Government spent a huge proportion of the public's bill with health expenditure which runs into billions of ringgit yearly. Luckily, more and more people are aware of the importance of insurance. I know you do, right? Insurance not only makes healthcare affordable, but also offers access to better and more timely medical attention at private and public institutions.

If you have medical insurance, you have the option to selected the hospital of your choice to enroll in. If not, you can only surrender yourself to government hospital. With a plan in hand, you have the peace of mind to focus on recovery. Do you want yourself worrying on medical bills while laying on the bed?

Things to take note of on Medical plan:

• Is it Guaranteed Renewable?
• How much is the Room & Board rate allowable?
• Any co-insurance / co-payment? How was it calculated? If any, are there any maximum limit for your part?
• What is the annual limit and lifetime limit?
• Renewable until what age? 70 or 80 or 100 years old?
• Lastly, ensuring that the above answers were written clearly on the quotation or policy. Please DO NOT trust the words spoken by insurance agent. See for yourself to prove it.

Basically, all of the medical plans offered in Malaysia have annual limit. However, some insurer may waive the annual limit, subject to certain condition or with a rider. With an additional rider, it commensurate with a higher premium. There is pros and cons to this. And, you should be able to justify the increase charges just to waive the annual limit. If the extra premium is high, you may consider taking up a higher annual limit medical plan, or buying another standalone medical card to supplement it.

Insurance: New Bank Negara ruling to impact claims ratio? (10 May 2011)

Now, every cars can get covered...

RHB Research:

Bank Negara Malaysia (BNM) announced last week that effective immediately, members of the public will be able to obtain motor cover from all general insurers and their branches as well as at Pos Malaysia and its branches nationwide. All general insurers are committed to provide motor cover to all motorists including the "displaced vehicles" which generally comprise private vehicles exceeding 10 years old and motorcycles currently underwritten by the Malaysian Motor Insurance Pool (MMIP).

Obligation to provide cover with NO excessive loading

Based on this new ruling, general insurance players are obligated to provide cover to all insurance seekers, without excessive loading and cross selling of other classes of insurance to mitigate the risk. Although, general insurance players could still load the policies, albeit at a more reasonable amount and not 200-300% as previously charged by the MMIP for the so-called high-risk "displaced vehicles" or vehicles which are aged 10 years and above.

Finance Malaysia: Good to car owners, Sorry to insurers...

According to analysts, as a whole, this new ruling is negative for the industry. Although, this is good to owners of old cars, insurers is at the losing side. Insurers are facing with a probability of higher claims, coupled with a lower premiums charged. Of course, this would be underscoring the bottom line of insurance companies. According to RHB reseach, they are forecasting a higher claim ratios on insurers as follows.

RHB research: Changes in claims ratio and earnings

Short-term pain, Long-term gain

However, Finance Malaysia believes this is just a short-term disadvantages to insurers only. Do you still remember the new motor framework which will allow insurance companies starting 2012? That will allow insurance companies to increase the motor policy premiums in the long term according to the claims experience of the industry. More or less, this will balanced out the current negative implications once the gradual liberalizations begins next year.

Source: OSK and BNM

Source: OSK and BNM

How far could Oil price RISES?

As usual, another episodes of tension in the Middle East pushes global oil prices higher, and surpassing $100 per barrel this time. We did seen this kind of scenario before in the Middle East during 1973-74, 1979, and the Iraq war in 1990. Are there any different this time?

Libyan leader Muammar Qaddafi

By Credit Suisse, 

We believe the rise in oil prices is manageable. Each 10% rise in oil prices only takes about 0.1% off global GDP and 0.2% off US growth. With Western wage growth muted, central banks are unlikely to raise rates on account of oil alone.

Our analysts see oil prices below $100 pb this year, supported by the following reason which differs from previous oil crisis:-

1. There is enough spare capacity in the global oil market to deal with supply-side disruptions as long as they are not too extreme
2. The energy intensity of global GDP has fallen by around 40% over the past 40 years
3. There is unlikely to be the same inflationary follow-through as in the 1970s
4. Oil producers are spending their windfall gains

Yahoo Finance: Oil prices since 28th Feb 2011

Potential Losers

Among the countries that are both significant energy importers and where energy accounts for a large part of the CPI basket, we would highlight India, Czech Republic and Poland. We note that China has the fiscal strength to subsidize higher energy prices, while other countries (namely India and Thailand) may not.

Potential Winners

In our view, the potential winners are countries that are net energy exporters and that have a positive output gap. This highlights Russia, Columbia, Australia, Canada, Malaysia and Norway.

The outlook for oil prices...

We believe that the oil price should fall from here. Saudi Arabia is likely to release some of its oil reserves into the market as it perceives a high oil price to be supportive for the Iranian government. Our house view is that oil price could falls below $100. We would only be concerned if the political unrest in the Middle East were to spread to Saudi Arabia.

* This is just an excerpt from Credit Suisse Research report dated 1 March 2011. This may not informative enough for readers to come to a conclusion.

Related Posts:
When would asset bubbles in Emerging Market "Burst"?

Insurance: Importance of Nomination (Part 2)

In Part 1, we have discussed the importance of nomination in insurance. But, what happens if it is someone else, like an uncle, niece or even a friend was named as nominee(s)?

www.financemalaysia.blogspot.com

 

When a nominee is not automatically a beneficiary

Under a non-Muslim's policy, the nominee in such a case is not entitled to the policy monies as a beneficiary. He or she only receives them as an executor, and must pass it on to the deceased's estate to be distributed according to the will.

1. If there is a will, but the nominee in this case is not named as a beneficiary under the will, he or she will not get a single sen.
2. If there is no will, then the property will be distributed according to the existing laws of distribution.

What if I named my siblings (brother or sister) as a nominee?

Well, it will form as a trust policy, and your siblings will act as an executor instead. So, please take note. Anyway, you can change your nomination, but must sought the consent from your said siblings who is a trustee in this case.

The lesson here is that if your intended beneficiary is not a spouse, child or parent, then you must write a will naming that person as a beneficiary. Once you do, your nominee will receive the policy monies subject to the laws of distribution -- once all your estate's debts have been settled.

When to nominate?

Of course, the sooner the better. I would suggest you did it when you fill-in the proposal forms. Or else, you may nominate after the application or after you get the policy.

Can I name more than one nominee?

Yes, you can. Normally, you can name up to 4 nominees in a policy. But, you should state the proportion to which each person is entitled. Otherwise, each will receives an equal share.

Can I change my nominee(s)?

You can make any changes on your nomination anytime as you like. There is no restriction on the number of changes. The latest nomination will supersede all previous nomination. A nomination will also be considered revoked upon the demise of nominee, or all of the nominees (if more than one nominee), during the lifetime of policy owner. However, in the case of a trust policy, a nomination cannot be revoked without the written consent of the trustee.

What is the nomination procedures?

1. Fill in nomination form:
•  It usually requires details of your nominee's name, date of birth, NRIC, and address
2. Witness
• It must be signed by a witness who is above 18 years old, of sound mind, and who is not named as one of your nominee
• Alternatively, your insurance agent can be the witness
3. Endorsement
• Ensure that your insurance company endorses the nomination
• For new policy, it is written in you policy document
• For existing policy, make sure you receives a letter highlighting any changes to your nomination

Source: Life Insurance Association of Malaysia (LIAM)

Related Posts:

Insurance: Importance of Nomination (Part 1)

Insurance: Importance of Nomination

Well, one of the most important objective of having an insurance policy is to ensure that our loved ones are always financially well-prepared. However, that objective will failed if we did not make the necessary nomination in our policy. By naming our loved ones as nominees, you can ensure that they will receive the monies from your policy fast and easy. This is where an insurance policy will be the most useful to them. Think about our loved ones !!!

What if I did not make a nomination?

Failure to do so means that the insurance company would not be able to make payment until a court has given your loved ones a Grant of Probate (where there is a will) or Letters of Administration (where there is no will). In other words, WAIT for months if not years.

What if I did make a nomination?

Good. If you are a non-Muslim and you have nominated your spouse, child or parent (where there is no surviving spouse or child), they are entitled to the policy monies without having to wait for the time-consuming Grant.

Moreover, a trust policy would be created for them under which these monies do not form part of your estate. As such, they are not subject to your estate's debts. This means your spouse, child or parent will receive the sum due in full.

Meanwhile, a trust policy does not apply in the case of a Muslim policyholder, in which case the nominee acts as an executor and must distribute the policy monies according to Islamic law.

You wait, or Your Loved Ones wait...

In order for a swift payout to your loved ones, please do not wait anymore. Making a nomination today, call up your insurance agent now, fill-in the nomination form. It's that simple. Or else, your loved ones would have to wait for your policy monies. Think about it !!!

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Fraudulent Insurance Claims and YOU

The Importance of Insurance to the Economy

Tax Reliefs from Insurance YOU must know

Fraudulent Insurance Claims and YOU

Recently, theStar highlighting a serious issue pertaining to insurance claims - Fraud Claims. It even started with staggering paragraph "Fingers have been chopped off, medical ailments exaggerated and even death faked - all for the purpose of fraudulent insurance claims".

Among the issues:

• RM500 mil in bogus insurance claims are detected each year
• At least 2 insurance firms have folded as a result of high compensation claims compounded by fraud
• Insurance firms fight back by setting up special fraud detection units

Regarding to this topic, Finance Malaysia would like to shares some views here pertaining to the effects on Malaysians as a whole. And, most importantly, the impact of insurer would definitely pass it to people insured. Why I said so?

First, you must understand how insurance companies compute their premiums charged to each clients. If the insurer is financially stronger, it may charged a lower premium for the same amount of coverage on its policies. In other words, if an insurer is facing financial problems, it may raised its premium charged, even to their existing loyal customers.

If your friend is making a fraud case, let it be?

For example, one of your friend is making fraud claims by collaborating with a particular doctor and agent to issue a false physician statement. Subsequently, your friend could received compensation from insurance company based on that statement. Of course, you can closed one eye and let it be. But, your inaction would lead to higher claim amount being paid by that insurance company for the wrong reasons. If those act was rampant everywhere, insurance companies could raised its premium imposed. So luckily, if you're insured by the same company, you could be a victim of your friend's unlawful act.

Supposedly, we should advise whoever out there to stop making fraud claims as it may abuse the whole insurance systems. Objective of getting an insurance is to transfer our risk to third party, hoping that we could financially went through unfortunate events which may happened,  NOT to gain from an insurance.

Think about this:

What is the purpose of insurance?

Protection or Investment?

Global Food Crisis, a Repeat of 2008?

KLCI is grappling up for a successful 4 days in a row this week, and perhaps today is the 5th day of record breaking level. However, I am concerned about the health and the sustainability of the market, after reading a report by Food and Agriculture Organization of the United Nations (FAO). And, one of the popular Mandarin Dailies highlighted the potential food crisis as its main topic today. Finance Malaysia did some analysis, and would like to comment on the issue which could be a hot topic for many nations very soon, including Malaysia.

In fact, international prices of most agricultural commodities have increased in recent months, some sharply. This has led to a level near to its peak in June 2008.

What causing the prices to increased?

• worsening outlook for crops in key producing countries, which require large draw downs of stocks and result in tighter global supply and demand balances
• of course, weakening USD, which continues to sustain the prices of nearly all commodities
• continuous money pouring in for commodities investing too (spicing up speculations)

Fault of commodities investors?

Globally, investors are trying to hedge against inflation, trying to make profit as much as possible. These return hunger investors prompt investment banks to structure and roll-out commodities or resources fund, which invest in commodities related shares and futures. In fact, the world is trading according to the market price, which is the said futures contract. Consequently, commodities investors indirectly pushing up the prices. Are you one of those investors?

Source: FAO website

Repeat of 2008 global food crisis

Although food reserves are larger now after the 2008 lesson, a series of unexpected downward revisions to crop forecasts in several major producing countries pushes world prices to an alarming stage and at a much faster pace than in 2007/08.

As such, Finance Malaysia expects global food crisis is building its momentum now. A repeat of 2008 global food crisis will led us to experience the same scenario listed below, let's be prepared:

• Surging oil price, etc petrol, soy oil, palm oil
• Surging sugar price (people rushing to hypermarkets everyday)
• Surging wheat price (subsequently bread, mee, kuey teow...)
• Riot and demonstrations held weekly, if not daily
• Governments struggles to contain inflation

Source: Various, FAO website

Malaysia to curb capital inflows?

Due to weakening USD and record low-interest rate in the US, Europe and Japan, emerging markets have been a popular spot for excessive liquidity to park their money. Main reasons being:

1. Emerging markets are the fastest growing economies currently
2. Emerging countries are having higher interest rate
3. Banking system of emerging countries are stronger (safer)

While develop countries are facing a currency downfalls, emerging countries are experiencing continuous inflow of hot money. This in turn causing a chaotic in currency exchange market, where emerging countries' currencies are hitting years high against developed nations. The imbalance forex market prompt central banks around the world to act or to curb any excessive flows of money which could jeopardised a particular countries, like 1997 Asian financial crisis.

In the latest developments on this hot topic, Thailand announced a 15% withholding tax on interests and capital gains on Thai bonds. In the meantime, South Korea, Taiwan, and Indonesia has been using "quasi-capital" control, in which encouraging outflows of hot money.

The billion dollar question... Will Malaysia follow?

Ringgit is the 2nd BEST performing currency in Asia, behind Thai Bath. I think when Bank Negara started its "triple" hike in overnight policy rate (OPR) this year, they already foresee the side effect of capital inflows. Due to large chunk of it went to Malaysia Government Securities (MGS), coupled with strong and effective domestic financial systems, Malaysia can safely mitigate the effect currently. However, we must act soon because I expect more hot money would pour in from countries which had imposed capital controls moving forward. We can expect a much stronger Ringgit soon.

The Importance of Insurance to the Economy

Still remember Obama’s health care bill which was passed recently?

Why Obama want every citizen of US to have a chance to insured themselves?

Because Obama knows the reasons below…

In reality, insurance cannot protect property or lives, but it can protect those insured against the adverse financial consequences of losing property and lives.

Likewise, an insured person cannot be protected against dying or disease, but the dependent is protected financially if such events occur unexpectedly. In any of such similar cases, the insured would be in economic dire straits if not for the financial protection conferred by insurance.

In short, insurance as an economic device provides the insured with financial certainty in an environment that is filled with the possibility of losses. In providing such benefits, insurance brings peace of mind to people – and to society at large.

Another benefit of insurance is its ability to provide for more optimal use of economic resources. Without insurance, individuals and businesses will have to create and maintain a relatively large contingent fund to meet the risks they have to assume.

To ensure the contingent fund is safe, it will be necessary to invest them in low yielding but secured investment like bank deposits. Effectively, this would deny the individual or business the opportunity to invest these funds more productively.

Imagine if everyone keeping their money in bank accounts?

Imagine if everyone spending lesser?

Imagine if everyone investing lesser?

In fact, our economy needs more and more money flowing, so that to create abundance of opportunities for businesses.

With insurance, the risk of loss is minimized or eliminated through transference or risks from the insured to insurance company. The contingent fund against such risks could also be created immediately.