Risk of long duration bonds

If current interest rate is 0.5% and government bonds for 10 years give a yield of 1.5%, which is better for the investor?

If interest rate remains at the low level for the next 10 years, it is better to invest in the government bonds and earn an additional 1% interest yearly. However, the risk to the investor is an increase in interest rate. If the interet rate increase to 3% per annum, the investor is stuck with 1.5% interest on the government bond for the remaining period. If the investor decides to sell the government bond at that time, there will be a capital loss of about 1.5% times the remaining period. If the remaining period is 8 years, the capital loss can be 12% (or thereabouts). The loss is higher, if the yield goes up to 5% (say).

It is difficult to predict the future interest rate. Even the the fund managers or analysts or the government leaders are not able to predict this trend. So, the investor cannot make this prediction. They should not ask other people, as nobody knows.

If you decide to invest in long term government bonds during a period of low interest rate, you should be prepared to wait out the entire period at the current yield. If you do not want to take this risk, you should invest in a bond for a short duration, say 3 to 5 years, even if you get a lower interest rate compared to long duration bonds.

Tan Kin Lian
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Investing in equities

Many consumers find it difficult in deciding on which stock to invest in. My advice to them is to invest in an indexed fund or an exchange traded fund. They should not worry about stock picking (which is difficult) and market timing (which is also difficulty). If they are not sure about the timing, they can invest in several installments based on the principle of dollar cost averaging. Read this FAQ

Apple iPad

This writer explains why he is NOT buying the Apple iPad
www.easyapps.sg/sgep/latest.aspx
http://online.wsj.com/article/SB10001424052748704259704576033941846942596.html?mod=rss_Technology

I agree with his reasons.

Understand your biggest risk

Your biggest risk is NOT premature death. It is NOT critical illness. It is earning a poor yield due to the bad life insurance products sold to you by an insurance agent (who wants to earn a fat commission from selling the product). By earning a poor yield, you will not have sufficient savings for retirement, even though you have been frugal and have saved as much as you can during your working life.

Your priority is to get a good yield on your investment, at least 2% higher than inflation. You should avoid life insurance products that take away 40% or more of your accumulated savings. You can buy term insurance for 25 years to cover premature death and earn a good yield by investing in a ETF. It is explained in my book, Practical Guide on Financial Planning. You can also read this article.

Tan Kin Lian

Personal Financial Plan [3]

I encourage consumers to carry out a personal financial plan, using the calculator shown in this website, www.easysearch.sg/life21. The key feature of this calculator is:

• It is free (unlike the fee charged by a financial adviser)
• It is easy to understand
• It shows you the projected income, after adjusting for inflation
• It highlights the difference in your income, based on a 2% difference in yield
• It shows the importance of getting a yield that is 2% above inflation
• It show the danger of buying a life insurance policy that gives you a poor yield, due to high deduction.

You can also view the tips on "financial planning" and "buying insurance". Working out a Personal Financial Plan is mandatory for every young person, as your future is at stake!

Tan Kin Lian

Singapore is the happiest place on Earth

Do you agree with this view expressed by an author of a newly published book? Read SGEP for an alternative view. http://www.temasekreview.com/2010/12/24/singapore-is-happiest-place-in-asia/

Art of being minimalist

I received this message from a reader. 

Dear Mr. Tan

In these days of blatant consumerism, especially in Spore, and during this holiday season, please find attached an e-book for your reading pleasure...

The e-book can be viewed here:

www.tankinlian.com/latest.aspx

http://tankinlian.com/admin/file.aspx?id=340