In this section, we address some questions which our clients ask most frequently: Why invest in Unit Trust? What about bonds? Should I contribute to Supplementary Retirement Scheme? What about risks? What about investing for short term and switching? We welcome you to email us any questions you like us to give our opinion.

FAQ

Why invest in Unit Trust and not leave your money in fixed deposits, CPF Or SRS?

What about bonds?

What about your CPF Ordinary and Special Accounts?

Supplementary Retirement Scheme (SRS)

What if I don’t have money to save and invest?

What about risks?

What about investing for short-term and switching?

Why invest in Unit Trust and not leave your money in fixed deposits, CPF Or SRS?

Firstly, consider the returns you get from fixed deposits or savings account for your cash. What are you getting and is it enough to keep up with inflation? It is “risky” to leave your money in fixed deposit because it might be worth less than the amount you would have to pay for things like food, transportation, etc. over time. As they say, the money you have is only as good as the amount of goods that it can buy you. If prices go up faster than your interest gain, then, in real terms, you would have lost the money.

Secondly, consider the fact that most people just cannot save enough for their big purchases and for retirement, without depending on fair investment gains. Hopefully, you can get a return which is a few per cent higher than the inflation rate so that you are really accumulating wealth.

Thirdly, consider the way stock markets and bond markets work. Investing in equities in the short-term is risky because it is hard to predict how things will be. Also, it can be risky to invest in a single market, or country, or sector. But if you are able to invest long-term, say over five years, and you have a diversified portfolio, you can be pretty sure of gaining.

In addition, if you do dollar-cost averaging and constant rebalancing, your returns will be far more certain and enhanced.

Statistics show that if you take any 10-year periods since 1969 when the MSCI index was created, you will find that they would all be positive. What this means is that anyone who had invested in a portfolio of stocks similar to the MSCI would have made a profit over any ten-year period. In fact, over 25 possible 10-year periods since 1969 (statistics as at 2004), there are 17 periods where you would get triple digit gains, i.e. your money would have more than doubled. What these statistics demonstrate is that it is relatively ‘safe’ if you can invest for the long-term.

The key phrase is “diversified portfolio”, e.g. a globally diversified portfolio of equities or, for the moderate risk-taker, globally diversified balanced funds or bond funds. SM Lee’s statement that small mountain ranges are unlikely to have the highest peaks can also be applied to the investment world – most of the world’s best companies are not found in Singapore’s stock market, e.g. Microsoft and Coca-Cola.

A global fund is a good way to tap into the world’s successful companies.

What about bonds?

Stock markets are by nature volatile and to a good extent cyclical and fluctuate more than bonds. Bonds might give steadier but lower returns. Investors who are not risk aggressive may prefer to achieve a balance between risks and returns and have a balanced fund of both equities and bonds.

Investors should know their risk tolerance and appetite and select a portfolio that has the potential of giving them the most gains with the level of risk that they are able to bear.

So the point is that, while stock markets will rise and fall in the near term, most will generally rise over the long-term. Statistics show that the chances of making gains increase if investors can hold for five years. The chances are even higher (almost 100 per cent) for some of the markets when the holding period is 10 years.

In contrast, a one-year holding period lowers the chances of making any positive returns significantly.

Of course, it is possible for those who are investment savvy (and lucky) to time the markets successfully and gain over a short period. This is especially so when they study and select the right market as well.

To succeed in timing the market and choosing the right market takes a high level of knowledge, discipline, skills, effort and time. Advisers may help you to fulfil this, but the safer way to invest is to buy and hold, while rebalancing along the way.

What about your CPF Ordinary and Special Accounts?

The CPF pays an interest rate of 2.5 per cent per annum and four per cent per annum for your Ordinary Account (OA) and Special Account (SA) respectively. The CPF also has an approved list of investments you can invest with either the OA or SA, with more options for the OA. The unit trusts you can purchase with SA are only bond funds and balanced funds (typically a certain portion in equities and the rest in bonds or cash).

Generally, the factors you must consider are:

  1. What are the expected use of my CPF and when? For example, for home purchase with OA money. When you need to use the money will affect your choice of investment instruments (equities, unit trust, insurance, etc.) and the specific investments (which equities, which unit trusts).

  2. Amount available for investment You can make an initial investment of just $1,000 for a unit trust and $100 each month for a regular savings plan (RSP). For equities, a small amount would not go far and heightens the risk.

  3. The investment horizon or period you can stay invested. For SA, since the amount is meant for retirement, you can have a longer investment period, and this helps to reduce your risks.

  4. The expected return You need to have a high confidence of gaining more than the 2.5 per cent and 4 per cent of the OA and SA. If you are investing SA, bond funds are unlikely to beat the four per cent, so it has to be balanced funds with a sufficient portion for equities to give you the upside gain.

  5. The fees and charges Beware of the high sales charges which some advisers may charge. A wrap account whereby the adviser charges an annual fee for his service and advice is cheaper if you expect to do switching of funds quite often, since switching is free under wrap accounts.

Supplementary Retirement Scheme (SRS)

For SRS account, the interest rate given by the banks is very low and it pays to invest your money.

The things to note are:

  1. The “tax” treatment of SRS. In view of the tax on withdrawals at age 62, it may be good to stagger withdrawals. This will affect the investment horizon. Single premium insurance is one option, timed to mature at different years from age 62 to 72. Unit trust is a good alternative. Which unit trust to invest in will depend on the client’s profile, objective and the number of years to withdrawal.

  2. The “gain” from tax exemption should be recognised. This is an immediate “gain” and makes SRS attractive to those in high tax brackets.

  3. Since SRS is for retirement, it is probably better to be more “conservative” in the choice of instruments.

What if I don’t have money to save and invest?

Start Early

The earlier you start saving and investing, the better. Even if you have to start small.

Do not wait to build up a big sum because you would lose time and miss the “miracle of compound interest”.

If you are unable to set aside some money each month, your first step is to find out why. If the problem is your lifestyle and spending pattern, you must decide whether to follow the same pattern, or to start saving and investing for what you believe in, e.g. children’s education, home purchase, retirement, etc. It is important to strike a balance between “wants” and “needs”, and between the present and the future. For many people, a car is a major expense. It is never an investment (gone are the days!). Owning a car in Singapore is, for many, the biggest reason why they are not able to save and invest. For others, it is expensive holidays, purchases and entertainment, or a huge home loan, which rob them of their needed savings.

The first step is to have a regular savings plan. Even a $100 or $200 a month is a good start.

Miracle of Compound Interest

Your money will work for you if you give it time. The table shows the difference in the return you get when you start early and have a longer time to let your investment grow through the miracle of compound interest. The table shows the time needed to accumulate the following amounts by saving $200 per month at a compound interest of 10 per cent.

Current Value of Investment Time Taken To Accumulate Amount

$2,400              1 year (purely from saving)
$11,933            4 years
$19,983            6 years
$41,509            10 years
$82,968            15 years
$149,738         20 years

Interest Rate’s Influence

Besides time, your investment returns depend greatly on another important factor – the interest rate. A few per cent difference may not look much, but combined with the “miracle of compound interest”, the resultant difference can be tremendous.

Starting Investment

Rate of Annual Compounded Return

Investment Value After 20 Years

Additional Amount That Your Money Has “Earned”

$10,000

0%

$10,000

$0

$10,000

2%

$14,859

$4,859

$10,000

4%

$21,911

$11,911

$10,000

6%

$32,071

$22,071

$10,000

8%

$46,610

$36,610

$10,000

10%

$67,275

$57,275

What about risks?

Understanding what is risk, is an important lesson not only for investment but for life. We face risks everyday and must learn to manage risks. There are certain risks we must take or else life becomes cramped, e.g. recreation, travelling. There are certain risks which we do best to avoid. And there are certain risks which we can hedge against or transfer (e.g. insurance).

Where investments are concerned, there is a clear risk-reward relationship – the higher the expected return, the more you need to take risks.

We must understand the risk element in every type of investment and assess whether the rewards are worth going for, considering the risk. For example, investing in a single equity and for the short-term is quite risky. Is the potential reward worth it?

We must understand our risk tolerance (whether you are comfortable taking risks) and risk appetite (your stomach or capacity to take risks which depends partly on your wealth and age).

There are ways to manage risks such as diversification, dollar-cost averaging, asset allocation and portfolio rebalancing.

A very important factor is how long you can stay invested.

Over 10 years, the risk of losing in investment in equities is negligible if you have a well-structured diversified portfolio.

History has demonstrated that the human race has risen above crises and made progress despite odds which appeared insurmountable each time.

Doomsday predictions like Thomas Malthus’ population explosion leading to widespread starvation, or the feared depletion of natural resources, or pandemics like SARS and avian flu, or the threat of terrorism, have so far proved wrong.

The world’s population has grown 700-fold from the 9 million during Malthus’ time, but starvation has held at bay and only remains because of political factors and problems of distribution. Natural resources needed for modern production are still available and continue to fuel progress. A good case in point is oil. There may be certain countries or regions and sectors of industry and the economy which will not be performing better than others at certain times, but generally, the developed world and developing countries have made good progress.

“You should invest long-term because the human race needs time to overcome whatever challenges it is facing and move on to a new and improved level of existence. This is why long-term investing works. It is the most basic belief in our ability to do well as a race.” FSM

What about investing for short-term and switching?

Although investing for the short-term is considered more risky than long-term, there are circumstances which require you to move in and out of the market, or to switch funds. For example, you have invested in a fund which is clearly not suitable because you were ill-advised, or have been pushed the product and bought without a good understanding. If you now know what is better for you, it may be necessary to switch funds.

Or you may have purchased a fund which was expected to do well, but political or economic circumstances have changed drastically and you now decide it is better to change.

Or you have now changed your investment objective because of new wealth, or have lost a job, and your financial situation has changed. A change of asset allocation or switching of funds may be necessary.

It is possible for those who are more investment savvy to time the market successfully, i.e. to enter and quit the market at opportune times. Selecting the right market and funds is equally important.

“Punting” is not advisable, but this does not mean that reviews cannot be made and profits taken or losses cut where appropriate. Our advisers would be able to advice when these would be in your favour. If you are likely to move in and out of the market, it is advisable to use wrap accounts.

For more information on the above products and any other financial planning services, please feel free to leave us your contact details and we will get back to you.

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