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Benefit Illustrations

>> Thursday, June 9, 2011

I was Google-ing something when a sponsored link from Company P appeared at the top. Well, curious, I followed the link to the Company website advertising a Super Growth plan. Wondering what was so Super about it, I scrolled down and checked out the illustration. I couldn't believe what I saw, a single premium of about $100k would become close to $700k by age 62. It attracted me enough to do a little math.

Indeed a Super return. So I decided to punch some numbers and $100k compounded at 9% for 27 years (62 - 35) is actually $1mil! Where did $300k (30%) "disappear" to? And for $100k to become $700k it is only a 7.47% pa return.

Anyway, I also wondered if 9% compounded returns for 27 years is really achievable by unit trusts. So I did a quick search on FSM for funds that have achieved above 9% average returns for more than 10 years. Of the about 400 UT available, 114 have data for more than 10 years, out of which, 26 have achieved above 9% pa returns. Using 5 years data didn't yield any better results. And do note that for 10 year results there is a survivor ship bias, funds that did not do well enough to survive the 10 years have been closed off, and there is still no guaranteed these 26 will carry on to achieved 9% returns going forward for the next 17 years.

Naturally it brings me to the point, why is MAS allowing projections that are not reflective of the general market. What was the original rationale of selecting 5% and 9% as the projection values? In addition, are funds in profit all the time?

Actually, I suggest to not even bother to project anything at all and state in bold, ALL RETURNS ARE NON GUARANTEED, plain and simple without jargon, tables and impossible to understand effects of deduction, all assisting the salesman to confuse and complicate matters. Even if any projections are required, it should be at -3% and 3% which is more balanced and reflective. It at least gives an idea of Value At Risk (VaR) to have a negative projection as well.

2 comments:

Anonymous June 9, 2011 at 8:58 PM  

I think you have a great suggestion. Would help stop bankers, finaciers, brokers, agents, and the like, from ripping people off. They should get a real job.

Great blog by the way.

Lau June 9, 2011 at 9:37 PM  

unfortunately, our system may be suffering from capture effect where the ones regulating are existing players in the industry. And they take advice from the salesmen.

Thanks for the support. =)

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