Beware of savings through Insurance, Annuities or Bond Funds

Many stock market shy and inexperienced savers choose instead to believe in annuities, insurance or bond funds. Are you aware of the often hidden front fees, or the interest rate risk incurred?

 

There are a few slick salesmen in Bangkok (as well as Phuket) talking-up their self- promoted savings products. While their English writing is often near perfect, their savings programs are not. They are often hard to understand even to the seasoned expert. And if you ask them the tough questions they decide your are not a good prospect for their service -and slip away.

 

These new experts claim they offer a much superior and safer way to invest, as compared to the local stock market. In past moths many called SET stocks "highly volatile and very speculative". Surely now they must change their tune as it has become more and more obvious that many SET stocks were in fact investment bargains. Why did they not tell you about those responsible price soaring alternatives?

 

These are the new faux investment specialists nurturing angst in people by proclaiming: stock market investing is only for gamblers. Today you see that they were wrong. Responsible stock market investing is for astute investors as stocks over the long run beat most other alternatives. That is, if you diversify your portfolio and buy stocks on investment and dividend income merit, not speculation. Speculation is very different than long term investing. But these experts would have you believe stocks like currency speculation is for big risk takers.

 

Stock market investing in Thailand is under the jurisdiction of the Securities and Exchange Commission, whose mission is to protect investors (no, not brokers!) from unfair practices. But these self praised saving products (mostly sold to Expats), have no regulatory agency watchdog looking out for fairness and most importantly: proper disclosure. Beware, as some so called saving plans can be a real consumer rip-off, or worse an insurance policy in disguise.

 

Many such schemes, often backed through a large well known Western international insurance or financial company; have policies or contracts that may not even be legal for sale in their own home country! So the famous company name can fool unseasoned savers in believing they are getting a competitive investment vehicle from a major international company. The policy/contract may well be an old uncompetitive insurance policy, long outlawed for sale in their home country.

 

In my experience, rarely do these "saving experts" explain correctly the true and real up-front fees/sales commission, or what exactly happens if you need your money back, for whatever reason, in the first 1-4 years. Too many plain insurance contracts are incorrectly called savings plans (a practice prohibited in the US) or dressed up annuities which promise high competitive returns, but often these have severe restrictions if you need your money in the first five years. Calling insurance products savings-vehicles or attaching savings to insurance policies are all nonsense practices designed to confuse the unsophisticated. In many developed countries these practices list among the highest consumer complaint topics.

 

Expats in Thailand must be aware of these so-called saving contracts, which are often not under any jurisdiction and the "saving experts" are nothing more than salespeople who in slick ways may hide the truth and also hidden up-front charges as well. Their pens and mouths are slick -but I would be counting my beans.

 

Various long term bonds or bond funds are similar potential saving traps in giving some people a false sense of security. Individual investors should realize that bond market prices fluctuate daily with the general level of interest rates. On July 3 Thaistocks.com wrote an article called "After a long bear market in US stocks, US bonds may well be next". There I cautioned bond holders not to be too complacent viewing bonds as having "no risk". Little did I know then that the month of July would see on of the biggest sell-off in Bond prices in many years. Bond prices fall when interest rates rise and global and Thai interest rates are now so very low that they will invariably rise at some point.

 

Most bond funds do have a small default risk but they often carry a high interest rate risk, rarely so explained. If your Bangkok savings experts promises a 7% Bond fund, then ask: what are the real up-front and close-out charges and besides what level of interest rate risk

 

A long term bond fund could drop close to half in market value if the level of interest rates where to double in say, the next 3-4 years. Not such a distant potential scenario, now that the US is refueling the financial world with mega Gulf War Petro-Dollars, to the tune of well over 100 Billion US$.

 

History has shown that this can be highly inflationary down the road. Yet stock markets can remain bullish for long under such a new scenario as an economic boom often precedes, a new re-flationary cycle. Bonds may well already be in their next bear cycle as they are the worst asset to hold during a period of new inflation.

 

Paul Renaud,

Thaistocks.com

Noon, August 27, 2003

Article exclusive for Thaivisa.com

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