
Investing is the only way to ensure that we will live with dignity when we retire. There are multiple investment vehicles in Singapore, even the CPF is not bad a choice if we are simply lazy and do not want to think.
Investing is not an art that requires extreme talent to excel in. The key to investing is to be disciplined and as emotionless as possible. Hence, if anyone comes to you and tries to sell you the idea that they are smarter than you in investing, refer them to this Financial Times article. An unsurprising 86% of active funds underperform their benchmark.
Read Also: 3 “Not-So-Common” Investment Tips To Remember Before Buying A Stock
The “100 – Age” Strategy Is Dead
Many would have heard of the “100 – Age” investment strategy. Assuming the individual is 25 years old, this person would have to invest 75% (100 subtract 25) in equities with the rest in fixed income (bonds and related) instruments.
This strategy worked out well in the 1970s to 1990s when equities had lesser volatility and when the world was functioning properly (e.g. rock-bottom interest rates). However, the timeframe in between crises has shortened, and too much exposure to equities might bring you unintended misery.
“33-33-33” Might Be The Best Fit
The “33-33-33” is about allocating 1/3 of your investment portfolio into (1) equities, (2) bonds and (3) counter-inflation instruments.
For equities, always choose low-cost funds (e.g. Exchange Traded Funds or ETF) that track a benchmark of your choice. There are more than 50 equity ETFs that are listed on the Singapore Exchange (SGX) for us to choose from. As shown in the article by Financial Times, a high percentage of actively managed funds underperform in the market (after various charges), so why not just simply invest in the market?
Bonds-wise, we have a very simple solution, which is to invest in our CPF. The Special Account (SA) provides 5% interest for the first $40,000 and 4% for the rest of the amounts. Most importantly, it is risk-free, by which we mean that our Singapore Government, an AAA/Aaa-rated sovereign, has said that they will back every single dollar in the CPF.
Of course, if we do not like CPF’s rigidity and illiquidity, we can still choose low-cost bond funds. SGX again has about 10 fixed income funds, which we can use to manipulate our portfolio.
Unlike more advanced markets, like the US or the UK, Singapore still lacks inflation-linked instruments for us to invest in. Nonetheless, we can still look for other instruments that have a higher correlation to inflation. Such an instrument is a Real Estate Investment Trust (REIT).
A REIT is managed by professionals, where we invest in a pool of real estate that earns money through rent (in most cases). Real estates are generally a great inflation hedge. Of course, it has other risks involved, such as low tenancy rate, etc.
How Do We Allocate Our Equities Portfolio?
This is where we can merge the “100 – Age” strategy, but we would only recommend doing this in the equities portfolio.
Using the same individual of age 25, this person can allocate 75% of her equities portfolio into riskier ETFs. These ETFs are generally those that track emerging markets’ indices. Examples of such indices are MSCI Malaysia Index, FTSE Vietnam Index or the MSCI Emerging Market TRN Index.
For the remaining 25%, we can allocate them to mature markets that face lower volatility. The ETFs track the likes of the STI Straits Times Index (Singapore), S&P 500 (USA) and Nikkei 225 (Japan).
In actuality, the amount allocated to the riskiest portfolio (emerging market ETFs) only makes up about 24.75% (33% into equities x 75% emerging market ETFs).
What We Should Take Note Of
Most of us commit the same mistake of thinking that cash is not really part of our investment portfolio. Hence, we hoard large sums of cash lying in the banks, earning close to nothing.
We should think of cash (excluding the 3-6 months rainy day savings) as part of our bonds portfolio. We highly recommend the Singapore Savings Bond that is backed by the Singapore Government and provides a much higher return than bank deposits.
Read Also: Basic Guide To Great Investment Courses Available In Singapore
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