If you have been following DollarsAndSense.sg recently, you would have noticed that we are fans of investing via Exchange Traded Funds (ETFs). ETFs are securities specially created by fund managers to track the performance of a specfic market index.
There are different types of markets you can choose to track. In Singapore, the most common market would be the Straits Times Index (STI). The STI is made up of 30 of Singapore’s best and biggest companies. These companies are representative of the broad Singapore market, accounting for about 77.29% of the total value of SGX listed companies (as at 30 Jun 2015).
People’s Favorite Question: What Stocks Should I Invest In?
One of the most frequently asked questions we receive is people asking which stocks they should be buying right now. The truth here is that if you have to ask such a question, then you really shouldn’t be buying any particular stock.
The fact of the matter is that majority of Singaporeans do not know enough about the stock market to be able to make an informed decision about what they should be investing in. And when we say majority, this is likely to include both you and I.
However, this doesn’t mean that we need to throw out stock investing completely and just leave our money in a bank account or go buy some insurance saving policies.
For starters, investing in strong local companies with good cashflow businesses such as SingTel would be a reasonable decision that an investor with limited knowledge could still make. Most of us are familiar with SingTel. At the point of writing, 100 shares (1 lot) of SingTel would cost about $407. The company pays out a dividend of about $17.50 per year, which equates to a return of about 4.2% per annum.
One of the first lessons a beginner investor would learn is the importance of diversification.
Take for example; when we talk about investing in SingTel, there may be people who agree and feel an inclination to do so. And why not, SingTel looks like a good strong business for the long-term to be vested in.
At the same time, instinctively, you may have wondered if putting all our money into SingTel could be risky. Perhaps, SingTel’s rivals may suddenly become competitive and win more market share, or a new telecommunication player comes into the market to vie for business. Wouldn’t that put us in an unfortunate situation?
A smart decision at this point would be to then invest in multiple companies that are strong. We could look at investing in companies in the same industry and even across different industries such as the airline industry (via SIA), transport companies (via Comfort Delgro), the commodity sector (via Wilmar), oil and gas sector (via SembCorp Marine) the media industry (via SPH), real estate players (via SPH, Capitaland, City Development) and of course, the banking sector (via DBS, OCBC, UOB).
What these big companies have in common are that they are part of the STI. And that buying the STI ETF means you have invested in all of them.
Buying The STI ETF
The whole idea about ETF investing is that rather than try to select a few winning companies that we think and hope would do well; we would rather just invest in all of them and to earn an average return provided by them.
However, when you invest in the STI ETF, you are not simply investing blindly into every single company on the stock exchange. Rather, because the STI would only include the 30 biggest companies in the market, companies would need to be big enough before they even qualify to have a small weightage in your STI ETF’s portfolio.
The weightage of your ownership in each of these 30 stocks would be automatically rebalanced. For example, if DBS Group is currently holding 12.5% of the total weightage of the STI, and if the company does badly in the next year, the weightage of your ownership in DBS Group would drop accordingly. Companies on the fringe of the top 30 will automatically be kicked out if the valuation of their company or liquidity offered by the company drops out of what is expected of the top 30 companies. They will be replaced by other companies, which have grown bigger or considered better.
Think of it as having a meal at a local restaurant in Zimbabwe. Most of us will not know what we want to order from the unfamiliar menu even if we are hungry. We would understand that the restaurant is in business because it generally serves good food. And the best-case scenario would be if we were allowed to order just a small sampler of each item rather than a full plate of something, we would generally be satisfied.
Some of the food will turn out to be delicious courses that you enjoy, others may relatively good and with a kick of spice, and yet some may be just average. And of course, there might be one or two courses that we would find just nasty. This is similar to how STI ETF investing works.
To summarise, for those of you who are keen to start investing in stocks but are not sure what you should be buying into, investing in the STI ETFs is an option that would definitely be worth considering.