Hi Singaporean millennials!
I have heard you guys! And here it is, the very first edition of easy step-by-step “How to invest with confidence” for the part 2 series of “For Millennials, by Millennial”! Without further ado, let us get cracking to discover the simple strategy of investing!
“To understand investing, we must first talk about finance management.“
Finance management essentially is how you manage the inflow and outflow of your money. Inflow of money can consist of things like your salary, pocket money from parents/Ah Gong or Ah Ma, side business income or even dividends from your stocks investment! Whereas, outflow of money consists of things like your expenditure such as insurance premium, annual income tax, transport, food and much more.
A good finance manager will typically tell you this: “In order to grow your money, you need to have an inflow of money that is bigger than your outflow of money.” Sounds very simple right?
Step 1: Build up your savings using the “Consistently net positive inflow” strategy
“Inflow of money – Outflow of money = Net positive inflow of money (where Inflow of money > Outflow of money)”
So, to have a good finance management is to always have a consistently net positive inflow of money. In that case, your money will only grow, and not shrink. Let me share with you my monthly inflow!
So, I earn approximately $1,000 from the army every month. That will be my only inflow of cash. Next, I spend roughly $50 on transport, $200 on food, $100 on entertainment every month. Hence, my net positive inflow of money will be $1000 – $50 – $200 – $100 = $650
I have been in the army for approximately 19 months, and this will mean that by using the consistently net positive inflow strategy, I will have $650 x 19 = $12,350 in my bank account! Well, do note that unless you are very disciplined in budgeting, your net inflow will definitely fluctuate up and down. However, the key thing is that you must ensure that there is net positive inflow every month.
“Amount you save at the end of a month can drop, but never use savings for monthly expenditure.”
If even better, train yourself to try and increase the net positive inflow every month. This can be done by either (1) increasing your inflow of money or (2) decreasing your outflow of money.
Depending on how much your monthly net positive inflow is, you might take from 6 months to as long as 1 year to reach a sizeable amount of savings!
Step 2: Once you have enough savings, start building up an emergency fund in a separate bank account (and buy an insurance)
After you reach a certain amount of savings, it is important to set up an emergency fund. This is money for ‘rainy days’ which include events like loss of income, unexpected hospitalisation and many more undesirable stuff. I advise the amount in an emergency fund to be worth around 6-12 months of your monthly salary. You should also separate your savings account from your emergency fund. This is to prevent yourself from accidentally spending away your emergency funds!
Personally for me, I am recommending my friends to set a CIMB FastSaver account for their emergency fund to be in. This is because it has one of the highest annual interest rate in town. In fact, it is 20 times higher than a normal POSB savings account (which is only 0.05% per year). I have used it since the start of the year and the user interface is not bad. The application is done purely online with standard bank identity verification process. Due to promotion, I was given a $30 credit for setting up the account and had been receiving passive 1% annual returns on my emergency fund ever since. The money you put in is also not locked away like a fixed deposit account. It is just like a normal savings account and you can always do online bank transfer to your ‘spending’ bank account if you ever need to spend it in an emergency!
Update: Someone recently told me that CIMB also has a 0.8% interest rate savings account called the CIMB StarSaver and I wonder why people would sign up for that when you have CIMB FastSaver which garners 1% rate for a similar account. Turns out the only difference is that StarSaver provides an ATM card while FastSaver does not. Personally, not having an ATM card is not a deal-breaker for me as the CIMB FastSaver is meant to put my emergency funds away, which is not meant for transacting regularly anyway.
“Take note: You should also be covered with insurance such as Life and Health insurance before you start setting up an emergency fund. Be sure to check with your parents whether you are covered!”
Like I said, in the event of health emergency, you should already be covered by your insurance policy. This is because it is very unlikely that your emergency fund can fully cover your hospitalisation fees!
However, there are many ‘scam’ insurances out there. Be sure that you do not buy those insurances that mix with savings. Savings is savings. Insurance is insurance. They should not mix. Good insurances are ‘insurance-only’ insurances!
For myself earning $1,000 a month, I should ideally have around $8000 (8 months worth of my salary) in my emergency fund. Any amount less, it will not be enough to cover emergencies. Any amount more, too much money value will erode due to year-to-year inflation. For me, I am currently covered with the AVIVA $150,000 Group Term Life and $150,000 Group Personal Accident insurance during my terms of national service.
Step 3: Start making your money work for you! (i.e Start investing)
Now that you have an emergency fund set up and have bought an insurance, you are considered safe to let your remaining savings in your bank account make money for you! If I am assuming that I have $12,350 from my consistently net positive inflow strategy, and I set aside $8,000 as my emergency fund, I will be left with $4,350 for my investment portfolio to let them earn more money for me through investing.
“Creating an investment portfolio is like creating a soccer team.“
I always like to tell my friends that investing is like playing soccer. If you looked at the recent World Cup 2018, have you seen the German team, the English team or any other teams having just all defenders or all strikers in their teams? Not really! A proper soccer team will usually have a goalkeeper, defenders and strikers. A goalkeeper is there to prevent a goal to be scored against his team, a defender’s job is to defend and a striker, of course, must find every opportunity to score a goal.
“Every players on the field knows his role and purpose.”
Just like a soccer team, investing also requires you to know the purpose of each and every investment class you buy into. In my experiences of investing, I always picture it like this:
Cash (Goal keeper)
I like to view cash as the goal keeper of my portfolio. It is the last line of defence in investing. Cash allows you the opportunity to purchase good bonds or stocks whenever you need to. Ideally, you should have around 10% of your portfolio being cash.
The cash here is not to be mistaken with the emergency fund you have set up previously. The “goalkeeper” cash here refers to the remaining cash set aside for investment. In my example, cash is not the $8,000 but rather, it is 10% x $4,350 = $435.
“10% of investment portfolio as cash is your goalkeeper for the team”
Next, bonds are akin to defenders. They are basically secured loans that you lend out to the government or private companies in order to earn interest rate. Bonds’ concept is the same as when you deposit money into your savings account and you get back interest from the bank. Bonds are generally low to middle-risk investments. This is the case because when a company goes bankrupt, it has to wind up its business and be liquidated (meaning sell away in exchange for money), and bond holders usually have the priority to receive the sales money first as compared to shareholders/stockholders of the company. This is why bonds are usually called secured loans, thereby making you a secured creditor. Hence, bonds defend your invest portfolio from too much risk.
For my case, as I shared previously, I have holdings in bonds such as the Singapore Savings Bond (SSB) and the Astrea IV private equity bond. An interesting thing to note is that the Singapore Savings Bond is backed by the Monetary Authority of Singapore, just like the first $50,000 you put in a bank account in Singapore. Moreover, the Singapore government has “received the strongest AAA credit rating from international credit rating agencies”as quoted from sgs.gov.sg.
The annual interest rate ranges from 2-3% for SSB 10-year yield and it is just enough to offset the yearly inflation rate of around 2-3%. For the Astrea IV bond, it is slightly higher at 4.325% per annum. This is of course with additional risk compared to SSB. Overall, bonds are generally deemed as a defender of the investment portfolio as it is a low-risk product that protects your cash from inflation. As a beginner investor, I will recommend 50% or more of your portfolio to be in bonds (i.e 50% x $4,350 =$2175).
Personally for me, my own investment portfolio has around 70% worth of bonds. This is because a large part of it will be going towards my tuition fee loan, which will be paid in 5 years’ time. If you do not mind taking a higher risk for a higher return, you can always buy less bonds and buy more stocks instead!
“50% or more of investment portfolio as bonds are your defenders”
Lastly, stocks are like your strikers. They are the ones out there that score the goals and ensure victory for the team. Stocks are usually categorised into either individual stocks or Unit trusts /Exchange Traded Funds (ETFs).
To own a stock of a company is to say that you are a part owner of the said company. For instance, if you own 10,000 shares of Singtel today and assuming that there are a total of 827,000,000 Singtel shares, it means you own (10,000 ÷ 827,000,000) x 100% = 0.00121% of the company. You can now go around telling your friends that you own a part of Singtel!
“You can however only purchase stocks under your name in Singapore if you have a SGX Central Depository Account (CDP) and a brokerage account“
I am currently using DBS Vickers as my brokerage account to purchase Singapore stocks and using Saxo Capital Market to buy US stocks. Some of the stocks I hold currently are like YangZiJiang (BS6) and Tesla (TSLA) for both markets respectively. As for the CDP account, there is only one type which is the one issued by the SGX. You must have a CDP account in order to own stocks under your own name in Singapore. If not, you will need to invest via a custodian account instead.
As a value investor, my investing philosophy is that I believe in not buying merely a stock, but also the business. Hence, I normally do not just look at share prices alone. I will look into the business model of the company and their cash flow, to name a few, in order to determine whether the stocks of a particular company is worth buying or not. It is also equally as important to assess the management team of a company such as the CEO. The CEO’s vision for the company can greatly affect the future outlook of the said company. A good example is the previous CEO of Apple, the late Steve Jobs. His vision for the company and high demand for quality led to Apple being the first trillion dollar company in the world!
Typically, this kind of stocks investment will generate annualised returns of more than 20% if done correctly. However, people fail to achieve such returns as they may become too greedy and bite off more than they can chew or they may also tend to panic sell their stocks when their share prices drop. This happens when they invest with money that is meant for their daily expenses, thinking that they can earn quick bucks. Hence, it is important to follow step by step. Build a consistently net positive inflow of cash every month, save up, build an emergency fund, buy an insurance then use the remaining money to invest.
In this case, you will be able to invest in peace without worrying about days where stocks crash. Normally, these crashes will rebound if the company fundamental is solid with good business prospects. Sometimes, one just has to wait out during the crisis. I personally even recommend buying more stocks during a crisis when their price drop. However, this is only if you are very sure that the business is good in the first place and there are plenty of indicators to assess it.
However, if you are a beginner investor, my advice is for you to start with ETFs first. Buying into ETFs will allow you to buy into an index/basket of companies listed in a stock market. For instance, the Straits Times Index is a list of the top 30 companies in Singapore. The Straits Time Index (STI) ETF will allow you to invest in these top 30 biggest companies. They include our banks such as DBS, OCBC, UOB and companies like Singapore Airlines, Singtel and ComfortDelGro. The US stock market also has their own ETFs that allows you to buy into their own S&P500 index, which is the list of top 500 US companies in terms of size. Investing in stocks through purchasing ETFs is a good start as it automatically diversifies your investment for you.
“In investing, other than not losing money, diversification is the second most important thing“
In investing, there is a saying that goes “never keep all your eggs in a single basket“. If I allocate 40% of my investment portfolio to stocks, I would have 40% x $4350 =$1740 to invest. With the $1740, I can either purchase individual stocks or buy into an ETF. When you just start to invest, you may have limited expertise and experience in assessing which stocks are good for buying.
Imagining now that I use the entire $1740 to buy say Singtel shares, I am essentially placing all my “eggs” in the Singtel business, and what if I wrongly determine that the price is going to rise but it drops instead? Worse still, what if it fails in the telco competition against StarHub or M1 in the long run?
“Then, all my ‘eggs’ will be broken because I left it all in a single basket”
As a beginner, I will choose to buy into an ETF. When I buy $1740 into an STI ETF, a fraction of it will buy Singtel shares, another fraction will buy DBS, so on and so forth… This reduces my investment risk as now my investment is diversified. When one company underperforms in the index, the other 29 companies will be able to mitigate the losses from that one single failing company.
Currently in Singapore, there are only two ETFs that track the STI. They are the SPDR STI ETF and Nikko AM STI ETF. There are very little differences between the two except that Nikko AM was created a few years later compared to SPDR. Because of that, the cost/expense ratio of managing Nikko AM is slightly higher than that of SPDR. For myself, as explained in my previous blog post of “Asset Allocation”, I currently buy into the Nikko AM STI ETF and this is because POSB has a Regular Savings Plan (RSP) that allows Nikko AM STI ETF to be bought every month from as little as $100.
“Do note that there are commission charges whenever a stock/ETF is bought or sold via a brokerage platform“
A google search can easily bring you the brokerages out there in town that offer the most competitive commission charge rate. Brokerages include DBS Vickers, Citibank, Philip Securities and many more. It is important to find the most suitable and cheapest brokerage as a high cost of investing will definitely ‘eat’ into your return over a long period of time!
For myself, I prefer to use DBS Vickers. As for the POSB RSP, it has a relatively cheap transaction fee of 0.84% of the investment amount. Take note that this fee which is paid upfront when investing in the ETF would mean that there would not be any more hidden charges when selling. The 0.84% is also a promotional rate and the standard charge is 1%.
For OCBC, it has the OCBC Blue Chip Investment Plan (BCIP), which also allows one to invest from $100 per month. However, the fee structure is slightly different. It charges 0.30% when buying and another 0.30% when selling. I personally dislike this kind of fee structure as it takes a percentage of my returns on my stock appreciation when I sell them away. POSB RSP in this case is better in this case but do note also that the upfront buying fee of 0.84% is also higher.
As for Unit trusts, they are funds managed by fund managers. These managers will help you invest your money based on their analysis. I recommend staying away from them as they tend to charge hefty service charges and most of the unit trusts do not outperform the market index in the long run.
“Passive investment in an index fund is better than active management in a unit trust most of the time”
There are also differences between holding stocks/ETFs in a CDP account and custodian accounts. For POSB RSP and OCBC BCIP, your shares will be held in custody by POSB and OCBC respectively. This means that you will not have direct ownership of your shares but instead, they will be held legally by those custodians that I just mentioned. Holdings stocks in your own name under the CDP would allow you to literally own your stocks. This gains you access to Annual General Meetings (AGM) of companies.
Personally for me, I don’t really care where my stocks are held in so long as (1) the transaction cost to purchase is cheap and (2) I know that my shares are in good hands. Generally speaking, it will be quite unthinkable for a bank like DBS/POSB to declare bankruptcy. Hence, you just have to look for a reliable custodian account if you find that creating a CDP account is too troublesome for you.
To end off, I leave you with a quote made famous by value investor, Warren Buffet, as you feel overwhelmed by so much you need to know for investing.
“The best time to plant a tree was 10 years ago, the second best time is now“
Congratulations! You have made it to the end of the step-by-step “How to invest with confidence” for millennials by millennials! This is only the start of your investment journey. Allow me to join your investment journey as I share with you more investment tips and strategies that will make you a smarter investor! As always, ask me anything if you are unsure of any parts of the guide.
In investment, the people who don’t question loses out while those that critique often will triumph as they improve their thinking/mindset over time. If not, I hope that you have learnt something valuable and applicable to your life today!