“Simi invest?! I’m not financially trained leh…” – Everyday Singaporean
Many Singaporeans often confuse personal finance with professional finance, which deals with stuff like active trading, charts with data that stretch across 100 offices, and ridiculously cheem excel sheets. But to us, personal finance is actually simple stuff that runs in tandem with your daily life. And one of the cornerstones of personal finance is understanding how to do simple investments.
As such, this article will be a dummies’ guide to the different investment products out in the market and how you can get started on your personal journey to getting your finances in order.
Disclaimer: The information provided here is for discussion purposes only, and should NOT be construed as investment advice. As always, do your due diligence!
TL;DR: You Don’t Need To Be Warren Buffett To Get Started
- Doing nothing and leaving your money in the bank is UNWISE as inflation eats away at your savings at almost 2.0% a year.
- Consider passive investment options with long time horizons (like ETFs, bonds, and unit trusts)
- Set up a simple regular investment plan, and set aside a sum of money for investing.
- Understand that it is highly unlikely that you will lose a huge amount of money unless you ‘gamble’ and ‘speculate’ on certain stocks. Or take huge bets based on market talk.
A Basic Principle Of Life: Higher Risk, Higher Return
As with anything in life, there’s no free lunch in this world.
What that means, is that for a proper functional capital market to work (read: everywhere else in the world aside from North Korea), there needs to be a proper trade-off between risk and return.
And it looks something like this:
What Kind Of Investment Products Are Out There?
There are many different kinds of investment products out there. But fret not.
We’ll walk you through a few of the most common ones, and we’ll also explain the pros and cons of each.
From there, you can properly understand what these instruments are and how you can construct a simple ‘portfolio’ (a fancy word that finance people use, which means “strategy for money allocation”).
1) Cryptocurrencies: Highest Risk, Highest Return
There are 3 main types of Cryptocurrencies in the market now which are the most actively traded – Bitcoin, Ethereum, and Litecoin. Think of this as a sexy new version of a stock, where the underlying thesis is the idea of decentralised ownership and value. For any other currencies in the market, for eg. USD or SGD, it is debt-based and backed by the respective monetary authorities. This 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. This is mainly due to the idea of cryptocurrencies and offline/online transaction use-cases have 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 have fraudulent transactions in your wallet, you are unable to report to anyone in the authority. This is enhanced by the fact that there is 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 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. For example, the STI ETF tracks the Straits Times Index which is the collection of the top 30 stocks in Singapore. These stocks include big 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’. This 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. The STI ETF, for example, has grown over 2.9% over 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
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. The entity can either be 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.
An 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 bondholder, 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 optimising 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.
Closing Thoughts: Consider Starting With An ETF Regular Savings Plan
Before writing off investing as something that you’re “not qualified” to do, we recommend the following steps:
- Check out the various low-cost ETF Regular Savings Plans by local banks (the bank which you currently use might already offer this)
- Start contributing a minimum sum of money a month that you are comfortable with for investing
- Watch your money grow over time
Or if you’d like to be a little more active in your investing and are interested in numbers and figures, then maybe you might like to look at stocks instead.
Again, we can’t stress enough that you should always do your due diligence before investing in any product.
If you have any questions (you SHOULD have them if you’re doing your research properly), feel free to ask our friendly Personal Finance Community where various industry experts and knowledgeable members will be happy to help out! And if you’d like to find out more about how to start your personal finance journey, a perfect place to start would be our Seedly Money Framework.