Investing without goals is like trying to play football without goalposts, it’s utterly meaningless.
Your investment goal must also be quantifiable. “Make more money” is not a quantifiable goal. “Make SGD 250,000 by the time I’m 65” is.
Now the best way to work out these goals is to talk to a financial advisor. You can do this for free and with no strings attached at the NAV Hub or use an investment calculator.
But we’ll show you a simple way to get started here:
First, work out your desired Income Replacement Rate (IRR). This is the percentage of your current income that you want to have, upon retirement. A comfortable retirement usually requires an IRR of 60 to 70 per cent (although those who live simply may aim for just 50 per cent, and some ambitious people may even aim for 110 per cent).
For example, say you earn SGD 3,500 per month. To get an IRR of 70 per cent, you need to make SGD 2,450 per month after retirement.
Assuming you retire at age 65, and plan to live till 90, you will need roughly SGD 2,450 per month for 25 years. Now you know you’re looking at a minimum of SGD 735,000, to retire comfortably.
Once you’ve worked out this approximate amount, you’ll have a sense of which investment products or assets are right for you.
Determine your risk profile and matching assets
Speak to a financial advisor to get a risk profile assessment. This determines the overall level of risk you can afford to take.
Some banks filter products based on risk levels, so you can easily filter out the investments that are suited to you.
Once that’s done, you can move on to…
Understand the common types of investments
There is no end to the number of things you can invest in. However, here are the basics that you need to understand:
These represent shares (ownership) in a company. Some stocks pay regular dividends, usually every six months or every year, but many stocks do not.
Stocks have a higher risk than bond, but tend to deliver better returns over long periods (e.g. 15 years).
Also referred to as fixed income securities. These are debt instruments, and when you buy a bond you are lending money to the company or government that issues it.
Unless you’re an accredited investor, you usually have access to just vanilla bonds. Here’s how it works:
Bonds have a par value (the borrowed amount), a coupon rate (interest rate), and a maturity date.
Say you buy a bond with a par value of SGD 10,000, for which you pay SGD 10,000. The coupon rate (interest rate) is four per cent, and the bond matures in 10 years.
This means that the bond will pay out SGD 400 every year (four per cent of SGD 10,000), until the maturity date on the 10th year. At that point, you will get back the par value (SGD 10,000), and the bond is ended.
Bonds are considered safer than stocks. This is because stocks may not always pay dividends, but bond coupons must be paid (it’s a form of debt).
That said, bonds are not risk free. There is always the risk that the company or government issuing the bond will be unable to pay it back. Also, note that bonds tend to underperform stocks in the long run. That’s because the returns from bonds are much lower, and very safe bonds – such as Singapore government bonds – may deliver returns lower than inflation.
(The bonds are so safe, the borrower doesn’t need to pay a high interest rate to attract lenders).
Unit Trust Funds:
Also called UTs or mutual funds. This is how most Singaporeans invest. Rather than buy specific stocks or bonds yourself, you can buy “units” in a unit trust fund.
The fund pools the money of many investors, and places it under the care of a full-time financial professional, called a fund manager. The fund manager makes all the important buying and selling decisions, to earn a return for the investors.
A fund’s performance is usually measured by a benchmark index. For example, say the benchmark index is the Straits Times Index (STI). If the STI delivers returns of 3.76 per cent, a unit trust that delivers a return of 3.86 per cent has outperformed the market (good performance). If the returns are below the benchmark index, then it has under-performed (write an angry email to the fund manager).
Fund performance should be read over a 10 to 15-year period, not just a single year.
Real Estate Investment Trusts (REITs):
These funds pool investors money to buy property, such as hotels, malls, offices, and others. The rental income collected from these properties are distributed between investors, in the form of dividends.
Singapore based REITs are called S-REITs. By Singapore law, S-REITs must pay out 90 per cent of their profits as dividends. This makes them very attractive to investors.
Exchange Traded Funds (ETFs):
There are partial replication ETFs, synthetic ETFs, full rep…you know what, forget it. To stop your head from spinning, here’s all you need to know:
An ETF copies a particular index and delivers returns that mimic it. Say an ETF copies the STI, and the STI delivers returns of 3.76 per cent. The ETF will deliver returns really close to that, such as maybe 3.75 per cent.
One advantage of ETFs is their low management fee – there’s no fund manager to pay. The ETF is run by a computer that just mimics the index. A low management fee ultimately means higher returns for you.
These are just a few of the assets available. Speak to a financial adviser to work out the correct mix of assets for you.