Monday, July 21, 2008

Lorna Tan, July 20, 2008

Lorna Tan is a financial correspondent with the Straits Times, and the quality of her articles is generally good (a rare compliment from me for anything related to the rag).

She had two articles in the Sunday paper this past weekend.

Taking the right dose of health insurance was a good article on some general pointers when buying health insurance. I’m already aware of all of these pointers, but I think it’s still useful to summarize these for less knowledgeable readers of this blog:

1. Always buy private health insurance even if your employer provides excellent cover. The reason is that you will not work for the same employer your entire life, and the employer-provided cover will not persist when you change jobs or retire (the ‘portability issue’).

2. Always buy health insurance early on in your working life even if you are in perfect health. This is to avoid the problem of exclusionary clauses should you be diagnosed with a serious illness before cover has commenced (the pre-existing condition issue’). This is also linked to reason #1. I know of people who literally cannot quit their current jobs because they were diagnosed with a serious illness while not being covered with private insurance. Now, only their employment cover protects them; no private insurer will cover their pre-existing condition.

3. Always buy the insurance cover at or above the level that you think you will use. The simple reason is that downgrading coverage is a snap, while upgrading coverage later on may require underwriting.

4. Consider the optional add-on riders for your plain vanilla Health and Surgical (H&S) insurance. The most useful are the riders that remove the deductible and/or co-insurance portions of the claim amount (10% or 20% of a very big bill is still a very big bill). Also useful are the riders that remove category sub-limits on claims.

[As someone who trained as a biomedical engineer, I can assure you that many implants, particularly orthopedic implants, cost way more than the few thousand dollars that typically mark the limit on the ‘consumables’ category].

Somewhat less useful are the riders that cover outpatient treatment (such as physiotherapy and the like) and cash benefit riders/policies that pay a cash benefit for each day spent in the hospital.

5. Other health-related policies may also be considered. Critical illness coverage is one example, although some skeptics point out that the list of 30 (or some arbitrary number) of dread diseases is too short to cover the full spectrum of human suffering, far better to get comprehensive and heavy H&S coverage. Another important type of health insurance is long-term/continuing care insurance, best exemplified by Eldershield, although frankly, I think Eldershield the policy sucks. Not many insurers provide this kind of insurance, so far I have only seen Great Eastern provide this product, but then again, I haven’t shopped around all that much.

Lorna Tan’s other article was on inflation-linked investments, As prices rise, so can your returns.

As an explanatory article, the article was passable. As advice, well, you probably want to read up more on your own before committing to any investment.

I too have been hunting for investments that will offer a high likelihood of a positive real rate of return.

I haven’t found any that I’m really comfortable with yet. That should tell you something about the current market environment now.

My main beef with inflation-linked investments is that in general, most governments around the world are pre-disposed towards fudging the CPI numbers to make them look artificially low. “Core inflation” in the USA is a joke, and even the food and energy numbers have been fudged before stripping them out.

Why would governments want to deliberately fudge the CPI numbers to make inflation seem lower than it really it? Because it works directly on managing inflation expectations, and it also makes social security payments (normally indexed to inflation) and other payments (such as on oh, say, inflation indexed bonds) paid out by the government cheaper.

Needless to say, if the CPI systematically underestimates inflation, inflation-linked instruments will also fail to keep pace with the true rate of inflation.

The other reason why I am wary of inflation-linked investments is that countries with high inflation also tend to suffer from currency depreciation. Given the strong SGD now, the real return in SGD from such investments may still turn out to be negative. And even if the funds that manage these investments hedge their currency risks, you can bet that that will result in lower returns as well as higher management fees.

Other investments to consider using to beat inflation:

1. Real estate is normally a good inflation hedge, but is generally a bad idea now, given the deflationary climate in real estate.

2. Commodities. Uh, can you say bubble?

3. Precious metals. I am actually bullish on precious metals right now, but I suspect that precious metals are benefiting less from inflation fears than from the current credit crisis. You could make a case that precious metals are in a bubble right now, but unless and until the credit crisis is really over (it’ll take a year or two, at least), precious metals will probably remain at elevated levels, and will spike each time a major financial institution implodes.

4. Stocks of companies that have pricing power and hence can pass on price increases to their customers.

Investment #4 is probably the best inflation hedge over the longer term. But in the short term, the volatility will be extreme. Unless you can afford to hold onto the stocks for several years, and stomach largish paper losses at least part of the time, you might want to stay out of stocks until things settle down a little.

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