Are you more likely to fall critically ill or to strike a lottery?

It has been a short hiatus since my last posting and blessed to have my schedule packed with appointments to the brim over the past 3 weeks as I started on my financial consulting journey.

Throughout my appointments, I have picked up a very interesting psychological factor. I'm not too sure if I can identify it correctly but it's along the lines of over-optimism or simply, ignorance is bliss, negativity avoidance.

The topic is on critical illnesses. 1 out of 3 individuals will eventually get some form of critical illness in their lifetime.

If you were to put 3 people in a room together, they will be thinking that they are the ones who will be free from the clutches of illnesses. Yet, it is quite extraordinary how if we were to put 2300 people in a room, everyone will think they are the ones who will strike the lottery in their lifetimes.

For the statisticians out there, Toto, which is Singapore's lottery system, has 49 numbers and each ticket may contain 6 numbers and onwards. To strike the jackpot, it is a specific combination of 6 randomly chosen numbers of out 49. This means 49C6 = 14m possible combinations and thus 1 out of 14m chance to win per ticket. And, we have 2 draws a week, rounding off to 100 a year. Over one's expected lifetime of 60 years from the age of 25, that is a measly 6000 draws in one's lifetime.

Doing some math, we expect about 1 in 2300 individuals to win the lottery in their lifetime. And that's not calculating all the "premiums" paid to Singapore Pools which may be a net loss.

Both insurance companies and Singapore Pools print paper to generate revenue. Now, insurance companies move on to electronic means but let's just take it as an intangible purchase. Why do people place hope in just 6 numbers but not in the many realisable projections of an insurance benefit illustration?

I used to think that way too - that I will not be contracting anything. It then brings me to think how individuals are so optimistic that they will not be the ones who suffer a loss or impairment.

Looking at the pool of friends who have indicated they want to get life insurance or hospital insurance, a good 25% of them at my age are already diagnosed with a pre-existing condition. Although not severe or life threatening yet, it goes to show that no matter how young and strong we are, we are still susceptible to the vicissitudes of life. These are people who wants to buy insurance yet are unable to or have to be excluded from certain developments later on from either the organ or the illness.

If knowing that the next day will be your last day, or knowing that the next day you will be lying on the hospital bed for the next 10 years, what will be your likely action today? That's the main question.

Similarly, linking back this example to investments, we have always harboured the thought that black swan events are really once in a blue moon. Yet, we can see from the recent years how market fluctuations can be pretty common and even resulting in a huge drawdown.

We thought COVID wouldn't drag the market through the mud but we have faced lockdowns and tumultous markets - leading to logistics crunch and eventually stagflation. We always expected world peace since the last world war but now a new threat emerges and sanctions have impacted the market drastically.

These are actually common events and perhaps even as common as 1 out of 3-5 years. We may not think that our investments will lose money and we are the best investors in the world. But, the hard facts are there. Unless you are investing piously over a consistent period of time, there is not a single guarantee that you will come out unscathed.

Being well protected with disciplined injections into the equity market will then smooth out your returns over the years. The S&P has always been a safe haven but in recent years, that belief has been wavered with the fundamentals of the US being held in question.

We invest and diversify into various other markets to prevent a black swan event from wiping out our life savings. It may cost more, it may not return as much in the short run, but with all risk management, we should protect ourselves and not be overly complacent or optimistic. In fact, we can diversify our health risks as well through premium waivers in the event of disability or critical illnesses - safeguarding our retirement when income is lost and when we can't click the trade button.

If you're interested to chat on this topic or to exchange ideas, please feel free to drop me a message on Telegram @elijah2212, LinkedIn, or through email elijah.thj@gmail.com!

http://www.prudential.com.sg/fc-disclaimer