“I Am Not Financially Trained” – Everyday Singaporean
Many Singaporeans often confuse personal finance with professional finance like trading, complicated charts, and rough excel sheets. But to us, Personal finance running parallel to your daily life and it would be wise to understand basic investments.This article will serve as a simple guide for you to understand the basics to the different investment products in the market and you can follow a simple guide to easily get started.
TL;DR: You Don’t Need To Be A Genius To Get Started
- Doing nothing and living in denial is not wise (Inflation eats away at your savings at around 2.0% a year)
- You don’t need to be an active trader or spend a lot of time on investing (Set up a simple regular investment plan which will set aside a sum of money to certain avenues for you to grow)
- It is highly unlikely you will lose a big amount of money unless you ‘gamble’ and ‘speculate’ on certain stocks or take huge bets based on market talk
- Jump straight to the passive investment options in options (ETFs, Unit Trusts & Bonds) which require less time to manage your portfolio actively
The Basic Principle – Higher Risk, Higher Return
As with anything in this world, there is no free lunch in this world. What that means, is that for a proper functional capital market to work (every where else in the world aside from North Korea and other socialist states), there needs to be a proper trade off between risk and return. It looks really simple, something like this:
Further Reading: What Investment Products Are Out There?
Let us now take a look at the various products out there and the pros and cons of each so you can properly understand what these instruments are and how we can construct a simple portfolio in a follow-up article. (a fancy word finance people use as a “strategy for money allocation”, haha)
1) Cryptocurrencies – Highest Risk, Highest Return
There are 3 main types of Cryptocurrencies in the market now which are the most active being traded – Bitcoin, Ethereum, and Litecoin. Think of this as a sexy new version of a stock, where the underlying thesis is the idea of decentralized ownership and value. For any other currencies in the market, eg USD or SGD, it is debt-based and backed by the respective monetary authorities and which also means that they are free to increase or decrease the supply to implement their policies on the market. For cryptocurrencies, they are limited in supply, hence the free market is completely at play here (demand and supply).
- Pros: Significant gains in the last few years as the idea of cryptocurrencies and offline/online transaction use-cases has become more common. The general trend has also been trending upwards over the years.
- Cons: It is completely unregulated, hence if you ever lose or got fraudulent transactions in your wallet, you are unable to report to anyone in the authority. This is enhanced by the fact that there are a large majority of hacks and heists in the past few years thus resulting in large price fluctuations. A ton of observers are standing at the sidelines to observe regulation, Use-cases and security risks before cryptos actually make it to mainstream wallets.
2) Stocks – High Risk, Highest Return
A stock (also called a share) is a part of ownership in a company. It basically represents a claim on the company’s assets and earnings and what that entitles you to do is to attend the Annual General Meetings (AGMs) and dividends payout if declared by the company. So essentially by buying into this company, you are betting that the management team and company fundamentals are able to get you more returns.
Total Returns = Capital Appreciation (price increases) + Dividend Payout (cash payouts)
- Pros: Potentially huge gains if you go by the same old adage (buy low, sell high) in a short amount of time. Familiarity, as they would most likely also be companies which you see or interact with on a day to day basis. Strong regulation as they exist on an exchange, such as SGX or NASDAQ.
- Cons: It is incredibly difficult to outperform the market and beat the ‘whales’ who are moving the prices behind the scenes. As a retail trader, you are often a tiny fish in a big blue sea and the market movers are the one who buys and sell huge amounts in the market. Therefore, purely relying on speculation and market talk is highly dangerous and not advisable.
3) Exchange Traded Funds (ETF) – High Risk, High Return
Think of ETFs as an investment fund which is traded on a stock market. Essentially when you buy a stock of an ETF, you are buying into a basket of weighted shares. So for example, the STI ETF tracks the Straits Times Index which is the collection of the top 30 stocks in Singapore with biggest names like OCBC, Singtel, and DBS. So what you get is a ‘basket of eggs’ – diversification. Being actively traded also brings many benefits, namely, efficiency as well as liquidity compared to funds where often you would need to go through a long process to buy and sell the holdings. You can get a rather efficient price for your holdings at almost any time.
- Pros: You are trading the ‘benchmark’ which also means that your returns are rather pegged to market conditions and if you believe in the market’s long run future, it should be trending upwards (for example STI ETF which has grown over 2.9% in the last 7 years). That also means when the general market conditions are bad, you bear the brunt. It is low cost as well, which means fees are low and you get more bang for your buck.
- Cons: May have lower returns for a long time thus you are unable to cash it out when you need the funds urgently (especially in a bear market).
4) Unit Trust (Mutual Funds) – High Risk, High Return
This is an instrument whereby you pay fund managers a fee of between 0.5% to 2% yearly to manage a pool of money (fund). Essentially their main goal is to outperform the benchmark return (usually the index eg STI – Straits Times Index). Where it is justified if they can outperform the market, they should indeed earn that fee because they know how to navigate and invest in the market better than you.
- Pros: Potential to outperform the market, Easy to switch, buy and sell on online platforms. (most common ones being FundSuperMart (FSM) and Philips Securities POEMS).
- Cons: Management Fee paid to the fund managers, Performance strongly depends on advisors and fund manager, Can be complicated to understand fund fact info sheets.
5) Bonds – Moderate Risk, Moderate Return
A bond is a type of debt instrument where an investor loans money to an entity (either a corporate or more commonly government body). The purposes vary but it is mainly to raise funds for a defined period of time at a defined variable or fixed interest rate. A common example is the Singapore Savings Bond (SSB) which is issued by the Singapore government and matures in 10 years, where if you loan the amount for a longer period of time, the % interest increases towards the maturity date. As a bond holder, you reserve the right to the future payout at the maturity date. Something interesting about bonds is that they come in various types such as a Bond ETF (where it is a diversified basket of various bonds traded on the market) or a Bond Fund (where it is an actively managed basket of bonds with a purpose to beat the bond index)
- Pros: Usually as a safe instrument and risk of default is lowest. It is also very accessible and largely anybody above 18 years old would be able to subscribe for SSBs.
- Cons: Not a good selection of corporate bonds in the Singapore market. You would have to hold the bond for a longer period of time before you are able to cash out (like a fixed deposit).
6) Endowment – Low Risk, Low Return
An endowment policy is actually dressed up as a life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death. Usually, the structure is one which involves regular payments into this endowment fund held by your insurance company which then decides to invest and bring in some returns. Therefore it is a mix of some protection and forced savings plan (with a little better interest than a regular savings account normally)
- Pros: This is the type of plan which forces you to save and draw out a certain amount into that portion which there usually is a guaranteed return sometime down the years. Usually, this can be very good for parents who want to buy an endowment for their children before they reach University as colleges are usually expensive.
- Cons: Often the returns they bring in are less than appealing and barely beat inflation or your savings account interest rates. In addition, there are also fees associated with the management of those funds which they blend into the total fees of the endowment package.
7) Savings – No Risk, Negative Return
This is the most straightforward of all the different options. Actually, this is not an investment option but it is planted in the illustration above to show you how much you could be losing if you put your money in a normal savings account and not touch it. I think it is clear that the main goal is to have enough rainy day/opportunity funds of about 6 months of monthly expenses in this account. Next, by optimizing for an account which gives you the highest interest rates (although usually ranging from 1.5-2.0%). We actually did a useful comparison of which accounts make the most sense for you.
- Pros: Safety, it’s definitely way better than keeping your hard earned cash under the bed or in your Home Safe (as it is prone to spoilage due to poor storage) Also this offers you liquidity in times of need and urgent payments you may need to make on hand.
- Cons: You lose out to inflation (which is ultimately a big deal if you let it compound over time.
Examples: OCBC360, UOB ONE, DBS Savings. etc.
Conclusion – Get Started With an ETF RSP
Before giving it much thought it can be very easy to just write off investments and not give it a second thought and say you are ‘not qualified to look into them’. What we can recommend would be the following steps
- Check out the various low-cost ETF Regular Savings Plans by local banks
- Decide on which banking provider you currently use
- Start contributing the minimum $100 a month and watch your money grow over time!
We’ll be writing a follow-up article on understanding how to allocate your funds based on your goals and a rough guide on how you can get started. In the meantime, you can either join our personal finance Facebook group where we discuss beginner’s questions and basic financial literacy or you can read more about our Seedly Money Framework here.