On the 28th of April 2016, I started a savings plan to save money for my daughter’s higher education fees.
As an independent financial advisor myself, I was faced with the decision of choosing between all the different providers of savings plans that are available in the market.
I used the following factors to evaluate and choose the best savings plan for me.
- The S&P500 Index savings plan from Investors Trust is one of the two principle protected plans available in the U.A.E., that are ‘principle protected’.
- ‘Principle protected’ simply means that my capital is assured. The S&P500 Index savings plan assures that at the end of the term, the capital plus 40% (140%) is assured as the worst case scenario.
Fine print – This is subject to me contributing all the premiums over the full term.
This means that I have to ensure that I don’t miss any premium at all. While this may seem inflexible, I can pay future premiums in advance to avoid losing the guarantee.
I prefer this plan over other plans in the market, that provide no principle protection whatsoever. Moreover, with other savings plans, I could get back less than what I invested.
This product provides me with 100% market participation. This means that I get the actual performance of the market without any limits on the growth.
- Other savings plans in the market such as Vista from Zurich International Life, or Premier Advance from Friends Provident International, or Vision from Generali International, etc…, offer mutual funds as the underlying investments.
- While there is nothing fundamentally wrong with mutual funds, the fact remains that mutual funds are subject to market risk and have to be chosen correctly. The key here is ‘mistakes happen’ when selecting mutual funds.
- Wrong choice, now or in the future, could lead to losses in the portfolio.
- The S&P500 Index savings plan offers the S&P500 index as the underlying investment choice.
- There is only one variable that could affect the performance of the portfolio, which is the S&P500.
- This plan works without intervention from the plan holder or the financial advisor.
The advisor cannot make mistakes, causing you to lose money.
The S&P500 is simply a numerical index that gives the average performance of the top 500 stocks in the US stock market. I like the simplicity of this investment.
I don’t have to pick and choose anything where ‘mistakes could happen’.
Moreover, Warren Buffett himself advocates the S&P500 as the best investment to everyone including himself.
Not only that Warren Buffett has famously wagered a million dollars on the performance of the S&P500 over the best hedge funds in the world – Protege Partners.
This was a 10-year bet which is into its 8th year and Warren Buffett is right so far. The S&P500 has beaten the hedge fund in overall performance in the past 8 years.
Performance of the S&P500 Index
Historical performance matters even though it may not be an indicator of future results. All I did was look at the 25-year performance of the S&P500, and my mind was made up.
The S&P500 has averaged 12.98% per year over the last 25-year period.
There is a saying in life that you get what you pay for. This product is slightly more expensive as compared to the other savings plans in the market. But there are three factors that made me choose this product over the others.
- Principle protection of 140% which the other products don’t have, and
- Index fund – S&P500 that has actually outperformed any of the funds in the market over 25 years.
- Warren Buffett (one of the richest man in the world recommends it)
Term – (number of years)
The S&P500 Index Savings plan is only available for a term of 15 years. While others might find this unsuitable for their savings and investment goals, I found this perfect for my goal of saving for my daughter’s education.
She is 3 years old and I have exactly 15 years before I have to shell out approximately USD 320,000 for her higher education fees.
Specifics of my investment
My investment details are as below:
- Monthly Contribution – USD 1,000
- Term – 15 years
- Total contribution – USD 180,000
- Minimum Guaranteed amount (after 15 years) – 140% i.e., USD 252,000 or actual market performance.