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Tuesday, September 22, 2015

Should I Invest Or Insure? (Part Two)

In the previous post, I discussed two factors to help you decide whether to invest or insure. We continue with a discussion of the other three factors mentioned. Do remember that there are other considerations, but the ones I discuss are the ones most frequently raised or talked about when I meet my clients.

Time Horizon

Used as a gauge for financial advisers to recommend where clients will invest their money in, time horizon would refer to a time period in which to achieve your financial goals. This is where there is a clear delineation between investment and insurance.

I often use a single question to give my recommendation to clients as to where they will invest in: "What are you investing for?" This seemingly simple question can open the discussion into bank account balances, lifelong dreams and purpose in life, but in a less romantic but more numerical sense, it gives me a specific number to base my recommendation on.

A 30 year old who wishes to begin saving for retirement has a good 30 years ahead of her to attain her goal. But a 22 year old who wants to travel to India in a couple of years will not have a lot of time to allow his funds to grow. Couple that with the fact that a 30 year old will (statistically) have a more regular, higher paying job and some money already in her savings account, compared with the 22 year old (who is just starting out, and may realize he is in the wrong company or even field), and probably is still busy "partying it up" at each payday, and their time horizons will affect where they will invest in - or if they should even be investing at all.

This is why when I meet parents who have very young children, I cannot help but advise them to begin investing for their child's education ASAP. In investing, a longer time horizon tends to be equated with a larger fund value, and given the cost of college education these days - and the fact that schools can legally increase this amount every year - it would be wise to begin investing NOW. (Actually it should have been yesterday, but spilled milk and all.)

In contrast, insurance proceeds are triggered by an event - usually death, but sometimes, the onset of an illness (depending on the type of insurance product). The time horizon is instantaneous (all one needs is for the event to occur), and which is why those with dependents should consider insurance as being more imperative than investments. You need time to maximize the latter, but no such requirement is needed for insurance.

(Courtesy of


In both cases, it is in one's best interest to get in while you are young: Invest early, insure early.

As previously mentioned, in investing, one needs the element of time on one's side, in order to maximize potential gains. When you look at the charts of funds available for the general public to invest in (and I'm excluding those that are considered high-risk, speculative or derivatives), the price per unit goes through a series of ups and downs on a daily basis, but are generally in a line that slopes upward. Over the long term, most funds perform in this fashion.

Even when the Asian financial crisis hit (which saw a noticeable dip in fund performance), if the investor did not pull out his funds (which was still a paper loss at that point), he would have recovered by last year, and even surpassed it, especially if it was in a mutual fund, where the investment is spread throughout several companies and even industries.

I've had clients who withdrew their funds after less than a year of investing, and predictably, most of them "lost," especially since they said they wouldn't need the funds until 20 years later, and which is the information I used to recommend them placing a portion of their money in equities (stocks). Whether out of need, or that they wanted to place it elsewhere, given that funds have an entry fee, management fee and the timing of the withdrawal, chances are an investor would be suffering a loss.

I mention this because it is important for clients to remember that the information they give their financial adviser should be accurate, because it is the basis upon which we give our advice. In the same way that you go to a doctor and he doesn't give you antibiotics without first asking you about your condition, we only give recommendations based on the information we receive.

Insurance premiums are pretty much age and health based - and this is something that makes sense statistically. When one is younger, chances are great that you are healthier and free from most diseases or illnesses, which result in lower premiums. Rates are computed in part based on the mortality and morbidity experience of age groups, and it's no wonder that if you were to get the same product, a 59 year old would be paying much more than someone who was 21.

A word of caution, though. The age when people are getting tumors and life threatening conditions is getting younger, based on my experience. I've had a 31 year old client who was denied insurance coverage because of a tumor (even though it was benign). I also remember another client who worked out everyday (he was in his 40's), and did not want to consider getting an insurance plan for himself (he is single but his parents depended on him financially).

Out of the blue, he calls me one day and asks to meet with me - with the news that he now has cancer, owing to family medical history. (One thing I pointed out a year before when I was encouraging him to get protected with life insurance). It may be our stress levels, our lifestyles, but whatever the case, the age when people contract these diseases has become earlier.

Insurance is a strange product because you have to get it when you don't need it, and you can't avail of it anymore once you do.

Current Financial Condition

If you only had 100 pesos left and it is still three days to payday, would you opt to buy dinner or the pair of shoes on sale?

Many of our buying decisions are based on "how much do I have in my wallet?" This, I feel, is because most of us are content in living from paycheck to paycheck. As a country, we have one of the lowest savings rate in Asia. We have not inculcated in ourselves, and especially our children, the discipline of setting aside a specific amount from our paycheck, to remain untouched and only to be used in emergencies. This is a topic that deserves a separate post, but I mention it because in giving financial advice, it is important for advisers to know where a client is right now in order to make an informed recommendation.

If one has limited funds, or especially a pressing need for immediate funds, it would not be wise to either insure or invest. If we are at a level where there is no safety net, then that should be a financial adviser's first priority: to recommend that a client first make sure s/he has enough funds in a savings account to ensure personal needs and emergency needs can be met if the need arises.

One might argue that an insurance product is a safety net. True, but only if the daily needs are met, and can be reasonably met in the near future. Only then should a client begin to assess the correct insurance product for him or herself. Other than need, cost is also a factor - and if needed, a client could consider getting a term (temporary) insurance first (lower premium), which is most likely convertible to a permanent plan, which costs more.

As stated previously, money for investing is something you should be prepared to lose. This is why you should gauge - honestly - that the amount you are putting up for investment makes up only a part of your overall financial plan, and one that doesn't impinge or take away from funds for other purposes. Only by assessing your current financial condition truthfully can you make a realistic estimate of how much you can or should be investing.

Financial advisers can only do so much - the action portion of this equation belongs to each and everyone of us. I've had my fair share of people whom I've encouraged to either invest or insure, but they've delayed for a myriad of reasons. The only thing constant is that those who acted - they invested or insured themselves - are always in a better position financially than those who did not, who dilly-dallied, and wasted time letting their money grow, or already contracted diseases that they have been rendered no longer insurable.

Financial knowledge is good , but it doesn't benefit you until one acts on it.

1 comment:

  1. I agree with what you wrote here. Credit card will either save you or put you in more peril. Therfore, credit card must be used wisely. I have a credit card too and it gives me headache sometimes. But I'm paying my debts slowly and managed not to use the card when not needed.