Starting your investment journey can be daunting. People who are unsure of the investing world would tend be tentative of scams and sub-par products. And there are no shortages of these sorts of products being pushed by the most aggressive of salespeople.
When you begin to invest, you should take note of two major financial concepts. Risk and Return. The simple logic is that the more risk you are willing to take, the higher the returns you should expect to get over the long-run.
We will use two scenarios to explain risk. The Singapore Savings Bond is considered a risk-free type of investment, which is as safe as it comes. It provides an approximate of 2.63% per annum if an investor holds it for the full 10-year period.
On the otherhand, the STI Index ETF is considered a riskier form of investment. According to the SPDR STI ETF prospectus, up till 31st May 2015, the fund has returned 7.88% per annum over the past 10 years inclusive of dividends and net of all charges.
What this basically means is that an investor would expect an additional return of about 5% per annum for taking the additional risk in investing in stocks on the Singapore Exchange, rather than to purchase the risk-free bond issued by the Singapore Government.
If someone guarantees you higher returns without taking on additional risk, this would usually be a sure sign that you are not being told the entire story. Period.
Returns refer to the amount of money you make, usually calculated yearly, from your investment. Returns per year may compound into very large amounts if kept over a long-term time horizon. Moreover, the longer you invest, the more you are able to average out the annual returns and hence, your volatility would generally be lower.
And this is the reason why people should start investing their money as early as they can.
Starting to invest
The reason everyone should invest is to make his or her money work for harder for them, earning a return for them instead of sitting in the bank collecting barely any interest. Although some banks, such as the UOB One Account and OCBC’s 360 Account, have now started offering decent interest on their savings accounts, which you should be fully exploiting if you are not already doing so.
As a start, we previously discussed two types investments that investors should look out for, namely; mutual funds; and ETFs.
Let us describe what passive investing means, and why investors starting out should utilize this powerful investment method. Passive investing means an investor does not care about whether prices are cheap or expensive today, they just invest for the long-term and earn the market return.
As mentioned, the STI ETF returned about 7.8% per annum over the last 10 years. This means, without caring what price the STI ETF was 10 years ago, you buy it, and 10 years later, you would have earned 7.8% per annum, which is a pretty good, considering you wouldn’t have spent a minute worrying about the prices and market volatility during crises.
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