3 Common Investment Methods: DIY vs Active (Unit Trusts) vs Passive Funds (ETF)
Investing in the economic market is basically the act of putting money into a vehicle and hoping that it drives returns over a period of time.
There are largely 3 ways for you to invest in the economic market and we are here to discuss which is the best solution for you to adopt. Each of the approaches has their pros and cons and we are here to discuss more on each of them especially now that online platforms are a big part of these services.
Beat or Match the Index?
You may be thinking… what is an Index Benchmark? 🙂 In simple words, an index is like the performance of the market. Here’s a simple idea in the image below, where the chart tracks the index. For the STI (Straits Times Index) it tracks the top 30 companies in Singapore which includes a variety of industries eg. DBS, OCBC (banks), SingTel (Telco), Hong Kong Land (Properties) etc.
Summary: Choose the approach that matches your knowledge level
- DIY: For the most investment savvy, and have time to learn and construct/maintain your own portfolio
- Active Funds: For the intermediate investment savvy, and keen to potentially beat the market benchmark index with time to pick funds
- Passive Funds: Highly recommended for beginners and keen to start investing and understand more about index investing with little time to spare
‘Do It Yourself’ Approach
If you are the kind who is keen to buy a certain stock or ETF, you may be keen to open up your own brokerage account and start trading. Do note that you need to know more about what you are buying and at least have a basic level of investment knowledge before taking this approach.
- If you know what you are buying and selling, you can potentially get significant returns
- Full autonomy to control your own portfolio structure
- Rebalance and configure based on economic conditions
- Online Trading and Brokerage Platforms can get confusing to master
- May fall into the trap of speculation (i.e market sentiment) and thus not diversified enough
- Fees can get hefty (from $10 to $25 a trade) hence more suitable for buy & hold approach
- Set up a brokerage account with any of the banks or brokerage firms (where they buy/sell stocks on your behalf)
- Set up an SGX CDP, Central Depository account (where they deposit your stocks)
- You can compare this list where we discuss the full list of brokerage fees in Singapore
‘Active Funds’ Approach – Unit Trusts
These are an actively managed investment funds which are not traded on a stock market. It’s usually higher cost due to the nature of the way that a fund is managed… In this case, as seen above, like a team of analysts running behind the scenes looking to try and beat the market.
One Unit Trust stock = A fund of different holdings, managed by humans and algorithms behind.
- Potential to outperform the market
- Easy to switch, buy and sell on online platforms
- FundSuperMart (FSM), DollarDex, Philips Securities POEMS
- 1.5% – 4% Management Fee paid to the fund managers regardless of performance
- Performance strongly depends on advisors and fund manager
- Can be complicated to understand fund fact info sheets
- First State Dividend Advantage Fund, East Spring Fund
- Franklin Templeton Bond Fund
- Set up a FundSuperMart (FSM), POEMS or DollarDex account
- Note: POEMS has $0 platform fees compared to FSM’s (0.05%) but the platform interface is slightly older looking
‘Passive Funds’ Approach – ETFs
A passively managed investment fund which is traded on a stock market.
One ETF stock = A basket of index weighted shares
- You are trading the ‘benchmark index’. This means that your returns are rather pegged to market conditions
- The STI ETF, for example, has grown over 4.75% past 5 years (2.41% over the last 10 years)
- High liquidity and high efficiency. (Actively traded)
- It is low cost as well, which means fees are low and you get more bang for your buck.
- May have lower returns for a long time thus you are unwilling to cash out at a loss when you need the funds urgently.
- When the general market conditions are bad, you bear the brunt.
- Nikko AM STI ETF (Top 30 companies in Singapore)
- SPDR S&P 500 ETF (Top 506 companies in the USA)
- A common method would be via a local bank’s Regular Shares Savings Plan, they generally charge a low fee for this (within 10 mins)
- Another way would be buying the ETF via a brokerage (similar to what has been described above in the DIY section)
So… What About Globally Diversified ETFs?
For more savvy readers, you might have realized that the above description of passive fund investing I shared was either the STI ETF or the US S&P 500 ETF. However, what if you wanted to be diversified over the world and track many indexes?
The promise? Low-cost, diversified, passive investing.
- Usually, 0.5% to 1% fees are charged for total amount managed (because they are run by models and algorithms behind instead of fund managers, hence the word ‘Robo’)
- Usually put into a basket of Global Exchange Traded Funds (ETFs) which exposes the fund to the global economy in different sectors in some form of a mix of equities and bonds. Some of these ETFs are not available to retail investors.
- A longer-term approach to growing wealth rather than high-frequency trading and taking short-term positions.