Past performance is not indicative of future returns.
E-mails from financial services companies often end with the tagline, “past performance is not indicative of future returns.” Nonetheless, there are many people whom have held up the 5-10% average annual return of American stock market indices to argue that this is not the case. This contradiction is often escaped by suggesting that averaging performance creates more stability. While the American stock indices have been a good investment, this is not an international truth.
Here is the performance of the Dow Jones Industrial Average
The NASDAQ
The S&P 500 Index
Things, however, looked quite a bit different in Japan. The overall economic climate in Japan has not enabled the country to recover since its crash in the 1980s. Needless to say, the Japanese stock market has not been a great investment over the past 20 years.
Here is the performance of Japan’s Nikkei 225
The case of the Nikkei may be an extreme, but it exists as a distinct possibility. Throwing a few more countries into the mix of observations may enhance our perspective:
Austria – ATX
Brazil – Ibovespa
Europe – FTSE 100
Germany – DAX
Hong Kong – Hang Seng
India – Bombay Sensex
Korea – KOSPI
In: ETFs · Tagged with: global, past performance, returns
Health Insurance: Who Takes the Risk?
Health insurance is fundamentally a product designed to help share the risk of medical expenditures. (While it also serves the purpose of negotiating discounts, that is outside the scope of this article.) All of the elements of a health insurance policy are put in place to influence how risk is distributed.
Part of what makes health insurance confusing is that it often tries to distribute risk both at the time a transaction occurs and across all the transactions.
Sharing Risk at the Transaction
Unless the “Maximum Out Of Pocket” (MOOP) has been reached, when people receive care covered by insurance, they typically have to pay either a copay or coinsurance, if not the entire cost of the care. A copay is a way to make the insured person liable for a fixed amount of the cost of care, while coinsurance is a way to make the insured person liable for a fraction of the cost of care at the time of use. While copays and coinsurances are typically only a small amount of the cost of the expenses they are associated with, they are put in place to discourage unnecessary use.
Sharing Risk Across Transactions
Deductibles, the amount that must be paid before coinsurances and copays apply, are put into place to share risk between the insured and the insurer. As the average person uses a few hundred dollars of care a year, the average premium cannot be less than that to accomodate the costs of average users. Since there is no point in charging people what they expect to spend (as that is not really a risk), insurers institute deductibles through which they protect people from very large expenses. That way, the cost of everyday use is not built into the cost of the insurance policy. Instead, only extraordinary use is covered. (One caveat is that some policies do cover routine check-ups to prevent people from becoming very ill and needing catastrophic care; the cost of this is built into premiums.)
Employers sometimes offer to step in and take some or all of the risk, particularly if they are large or believe that they have a healthier than average set of employees. They may do this in one of two ways. The most typical method, which is used by very large companies, is to simply ask insurers to bill them directly for the claims “billed to the insurer”. The employer then pays those claims directly, and is charged by the insurer only for facilitating the process. (This is called “Administrative Services Only”.) Alternatively, somewhat smaller employers may choose to create health insurance plans with two deductibles: a low one for the employee, and a moderate one for the employer. In these situations, the employee is responsible for payments until their deductible is reached, perhaps at $1,000. After that, the employer pays the claims for the person until a second, higher deductible is reached, perhaps at $10,000. If the particular employee spends over $10,000, the risk of additional spending is then handled by the insurer. (This is called a “Group Health Reimbursement Arrangement”.) This method of reimbursement allows an employer to save money on health insurance by getting high deductible plans, while offering employees the benefit of a low deductible. In situations in which the workforce is healthier than average, the employer may save money over the cost of simply buying a lower deductible insurance policy.
To conclude, health insurance policies share risk both associated with the transaction using coinsurance and copayments, and across transactions through the use of deductibles. All the risk has to go somewhere. People pay higher premiums when the insurance company takes more of the risk, and lower premiums when they take on more of the risk themselves. This is a mathematical necessity, as the money to cover the additiona risk has to come from somewhere.
In: General · Tagged with: health insurance, risk
How to Buy Renminbi
Numerous articles have been written about how the Chinese Renminbi (also known as the Chinese Yuan) is undervalued, relative to the U.S. Dollar. The exchange rate is somewhat controlled by the Chinese government, and is believed to be undervalued.
As this graph shows, between late 2006 and late 2011, a dollar went from buying over 7.8 renminbi to buying less than 6.4. Simply buying and holding renminbi would have caused a person to have a nearly 22% gain. While there are some risks in investing in the renminbi, for people determined to do it, holding actual renminibi is probably the safest approach. ETFs that supposedly mirror the renminbi are often somewhat synthetically constructed, and do not match the exchange rate perfectly.
- Renminbi / U.S. Dollar Exchange Rate
While obviously, a person could go to China, buy some renminbi, and then carry it back to the United States, there is a heavy transaction cost associated with that. Also, conventional banks charge currency conversion fees of around 2-3% for each conversion. So, converting money in China and carrying it back is not a great way to convert. Making matters worse, the largest renminbi bill is worth only about $15.50!
To efficiently save money in renminbi, the best thing to do is to open a renminbi-denominated bank account with the Bank of China’s New York Branch. To do this, all you need to do is to fill out the materials attached to this blog post, and to mail them to:
Bank of China NY Banking Dept. 410 Madison Ave, New York, NY 10017Every document must be notarized before you send it. You will also need to send a notarized copy of your credit card (the card – not your statement) and driver’s license. The bank will require you to keep a minimum of $500 in U.S. dollars, in addition to the money that you convert to renminbi. At the time of writing, it appears that the bank will charge a fee of .05 renminbi per dollar converted. So, if the exchange rate is 6.35 renminbi to the dollar, they will give you 6.30 renminbi for your dollar, and they require you to pay 6.40 renminbi to get your dollar back. Compared to the 2-3% that banks will charge you in China to use your ATM card and get renminbi, this .7% conversion fee is quite cheap. While using a bank account makes converting money easier, it is important to remember that the Chinese government only allows the conversion of up to 20,000 renminbi per person per day (slightly over $3,000). So, it is difficult to rapidly convert large sums of money to and from the renminbi. Nonetheless, converting some money can serve as a nice hedge against the dollar.
If you don’t want to visit the Bank of China’s New York Branch, you can just mail in the materials. Getting things notarized is easy – just take the documents to a bank near you and ask them if they have a notary. Many banks will notarize documents for free.
Over time, if the renminbi continues to strengthen against the dollar, the value of renminbi-denominated bank accounts will grow when considered in dollar-denominated terms. Given that the Bank of China’s New York Branch is FDIC insured, this investment strategy allows you to place a bet on the renminbi/dollar exchange rate without taking any other additional risks.
In: Savings Accounts · Tagged with: bank account, Bank of China, conversion, renminbi, yuan