Step 2: Investing
Welcome to the Singaporean’s guide on investing.
Investing is extremely simple to do. Investing is extremely complex to understand.
Investing is about growing your money over time. To do that, we need to take on compensated risks. The riskier the type of investment, the higher the expected return.
Good investing is about finding a (good) strategy that you can stick with, and sticking with it. It’s like the saying – the best diet is the one that you can stick with.
Investing is about putting aside money into a mix of asset classes that grow in value over time. The more risk you take on the more return you expect, but be careful! Not all risks are compensated. Only systematic risks are compensated.
First, we need to understand the different asset classes. For the average person, these are the three main asset classes (in order of increasing volatility):
- Cash and short-term cash equivalents.
- Bonds
- Stocks
Whoa there Mr SG Money Guy! What about REITS, gold, crypto, commodities, options...?
You don’t need any of those to be a successful investor. For investing, simplicity beats complexity.
Asset class 1: Cash
Cash is for short term expenses. Anything within the next 3-5 years should be in cash or cash equivalents. E.g., car loans, downpayment for a house, wedding, renovation, education costs for your child.
Cash-equivalents would be short-term instruments like:
- Fixed Deposits offered by local banks
- T-bills offered by the Singapore Government
- Cash Management funds like Fullerton SGD Cash Fund, which invests in short-term debt instruments.
Asset class 2: Bonds
Bonds are an IOU. They are a loan to the company from you, the bondholder.
They tend to have lower volatility and lower returns than stocks, but higher returns than cash.
You can access this asset class through the following means:
- A global bond etf like iShares Core Global Aggregate Bond UCITS ETF (AGAC on LSE)
- A global bond fund like Amundi Index Global Aggregate Fund.
- A local bond etf like MBH or A35
I recommend bond funds over individual bonds for diversification and ease of management. There are multiple bonds within each fund and the funds will automatically buy new bonds that are issued to replace bonds that “expire”.
Asset class 3: Stocks
Stocks are a little piece of ownership of a company. When the company earns a profit, the company is worth more and the value of its stock goes up.
I’m oversimplifying a little, as the stock price also contains future expectations of how much profit a company will make.
Some companies make more profit and are worth more. The worth of a company is simply the total value of all its shares, and is known as its market capitalisation.
Stocks offer the highest return, but the highest risk as well.
The best way to access stock returns would be through:
- Global stock etfs like VWRA or SPYI.
- A global stock fund like Amundi Index MSCI World Fund plus Amundi MSCI Emerging Markets Fund
Asset allocation
The table below shows the relative risk and returns for various asset mixes over the past 20 years.
| Asset Mix (Stocks/Bonds) | Annual Return | Annual Volatility | Largest loss |
| 100/0 | 8.86% | 13.06% | 48.5% |
| 60/40 | 6.41% | 7.92% | 27.6% |
| 40/60 | 5% | 6.43% | 12.5% |
A 100% stock portfolio is very very volatile indeed. A 48.5% loss is no joke. A portfolio worth $1m would go down to $515,000. That’s $485,000 of your life savings gone.
So think carefully about what asset allocation is appropriate for you, then invest in the ratio of stocks:bonds that lets you sleep at night.
Vanguard has a simple questionnaire that helps you estimate your risk tolerance.
The all-in-one solution
There are asset allocation ETFs. These are all-in-one ETFs that maintain a steady stock to bond ratio. These are fantastic options for a set-it-and-forget-it strategy.
- Vanguard 80/20 (Higher risk)
- Vanguard 60/40 (Moderate-high risk)
- Vanguard 40/60 (Moderate risk)
- Vanguard 20/80 (Lower risk)
Always remember that higher return entails higher risk.
If you can’t stay in your seat, you won’t get to capture the returns.
Expected returns and fees
One last thing. A 100% stock portfolio is estimated to return 7% annually (4-5% after inflation). Anyone who says they can give you returns of over 7% through any combination of assets is very likely to be lying or misinformed. You have to be one of the world’s best traders (extremely unlikely!) or be taking on more invisible risk to generate that higher return.
Active management doesn’t work. Only 1 in 10 funds can beat their index returns over a 15 year period. I wouldn’t take a 1 in 10 chance. If they really knew the secret sauce to beating the market, why would they need to manage your money anyway?
Keep fees low. All investment vehicles above are low-fee options. 0.5% is high. 1% should be the maximum. Fees eat into your returns. A 1% fee is 1/7, or 14% of your yearly return.
Don’t be greedy. $500 a month growing at 7% a year for 30 years will get you $584,726.30.
Get the basics right and you’ll be better off than 90% of Singaporeans.