Just some quick thoughts after reading Nigel's post on 'Buy Term and Invest The Rest', its pretty interesting. Do take note that this is not a 'die-die-must-follow' method as compared to the normal conventional strategy of buying Whole Life to protect oneself till he dies, and whatever remaining money for investments into endowment policies, money market funds, and of course, unit trusts.

Like what Nigel said, a Term insurance usually insures one til 65 years old, then after the person is not insured anymore. A whole life insurance insures one until usually 99 years old. The differences between the 2 is: ( correct me if I'm wrong)

1. Premium paid for term is significantly lower than that of whole life
2. Term is mainly for protection needs, whole life gives protection and a bit of savings ( has cash value)
3. Term if surrender, will get no money back. Whole life have... think after a few years

So why the emergence of such a strategy?? To me, the rationale behind this is:

Let me give you a very simple analogy, usually for a whole life, to be insured for $100k, monthly premium needed will be around $120-$160. For a term insurance to be insured for the SAME $100k, the premium per month will be around $30-40. On a minimal basis, if I were to compare in this way, and I bought a term, I will have a surplus of $90 (120-30) left t0 invest.

So the surplus can be used to invest in other financial instruments such as futures, options, stocks and shares, or relatively lower risk investments such as unit trusts, bonds and treasury bills. And can reap higher returns than that for a whole life insurance.

A few of you may be confused.... A TERM insurance ONLY offers personal protection. Thus I only pay for the mortality charges, which makes the premium so cheap!!

For a WHOLE LIFE, besides paying for mortality charges, there is also a SAVINGS element in it. So, part of the premium I pay goes to something called a LIFE FUND which invests in stocks and bonds, and so on so forth. But we don't know how much goes into equities, how much goes into bonds. So people tend to INFER that most of the money goes into bonds, as it is more safer.... ( I will post this in detail in my next post)

Hence, for a person who is in their early 20s, people like me, we can afford to stay invested for many many years, like 30 years? So our investments can afford to be more aggresive in nature ( I will speak more about this in the coming post on the reasons why), hence can reap higher returns.

Hence, that's why certain financial advisers will advocate "buy term invest the rest".

Clear?

Talked to Victor, my financial planner today about investment stuff, and realized that there is really too much information about investment instruments to finish absorbing and understanding. Probably its because of different schools of investing philosophies, like the value investing-kind from Warren Buffet, different opinions about dollar cost averaging and investing 1 lump sum.

Something that I have learned today and my thoughts about it. Since my little knowledge about unit trust investing, I can say that I have truly felt the impact of using dollar-cost averaging and investing lump sums in different phases. For $$-cost averaging, it is said that it takes away the investor's greatness weakness : emotions. I like to see the market as being controlled by human emotions, and they tend to overreact to good or bad news. So dollar-cost averaging (DCA) eliminates that part. By setting aside a fixed amount of money every month and investing it at regular intervals, the investor don't have to care if the market is in a boom or bust. Hence, this technique will allow one to buy more units when the fund price is down, less when the price is high.

However, I personally feel that this method only works if and only if, the fund is in a long-term upward trend. Think about it, if the fund price is tanking every month for say, 3 years due to recession or mismanagement by the fund manager, will DCA work? You are buying a fund that has its price tanking all the time, it is highly unlikely that you will make a profit when you sell them at the end of 3 years. Another point is, DCA requires little supervision, just pumping money in every month, isn't that what your fund house or financial planner wants!!! So when bad things happen, you don't even know!! How many people actually forget what happened in 2000 when the tech bubble bursted, will DCA help out at that time? NOOO!!

Well, I have done a bit of both to see for myself what really works. Investing in phases will require experience and maybe (in my view) timing the market. Though many investors, including Warren Buffet, said that one who times the market will always lose out in the end. History has supported that this is usually true. I don't really know how to explain it myself. Will get back to it later.