For the past decade, property’s been the best investment. It’s been so good, in fact, there’s been pretty much no reason to invest in anything else (unless you’re poor, which in Singapore means your best investment is a plane ticket and a visa). But after seven rounds of cooling measures, even the most hard headed investors have gotten the message. It’s time to move on, and here are some viable alternatives:
Alternative 1: Real Estate Investment Trusts (REITs)
REITs are almost like mutual funds, except they can be traded on the market like stocks. These investments let you play landlord, without the huge capital required.
Think of it this way: Rather than buy the building yourself, you and a few thousand investors pool your money, and everyone buys a small share in it. Then everyone splits the rent money that’s collected. And you’re not obliged to hold on to those shares. Anytime you feel the rental income’s getting crap, you can sell your stake to another buyer.
So REITs manage buildings, and are divided into different types (retail, hospitality, offices, etc.). Rental from the buildings is paid out to the REIT’s shareholders, with dividends often reaching 5% – 9%.
Singapore REITs (S-REITs) are tightly regulated by MAS. With maximum gearing of 40% (the amount borrowed to put up the building), over-leveraged REITs are not an issue. Most distribute 90% of their taxable annual income to shareholders, hence the high dividends.
Also, only 10% of a S-REIT’s assets can go into greenbelt development (putting up a new building). This restricts most REITs to buying properties and renting them out. That translates to lower risks for shareholders, since REITs aren’t dabbling too much in property development.
Alternative 2: Exchange Traded Funds
Exchange Traded Funds (ETFs) are a basket of different stocks. Think of it as a big shopping cart, containing some shares in electronic companies, some in commodities, some in shipping, etc. This combination of stocks is chosen to mirror the performance of a particular market.
The advantage of ETFs is diversity. Because the stocks come from so many different places, you would need multiple companies to crash before an ETF’s value plummets.
Also, ETFs are not actively managed. Most don’t have a fund manager who’s constantly shuffling the stocks around, trying to beat the system with tactical asset allocation (read: random guessing. Finance geeks like to invent big words for that. If you were a piss drunk poker player, for example, they’d say you were using non-strategized probability distribution).
Anyhow, it means ETFs have low management fees, sometimes below 0.5%. That’s more money in your pocket.
You can also invest a portion of your CPF in ETFs, by opening a CPF investment account (see the CPF Board’s FAQ). For more on ETFs, you can also follow us on Facebook. We’ll cover them in greater detail soon.
Alternative 3: Gold
Buying gold is a way to hedge against inflation. As things get more expensive (and our inflation has been known to top 5%), gold rises in value as well. As such, gold appreciates at the same pace as inflation, whereas your bank account won’t.
Therefore, gold pundits claim, the only way to truly preserve or grow wealth is to buy gold. And that’s where the sanity ends.
Beyond that, it degenerates into a squabble about physical gold (actually buying gold bars and holding on to them) versus paper gold (buying the gold “on paper”, such as through gold ETFs). Just for reference, here’s the most normal of the conspiracy theories:
Gold ETFs don’t really have all the gold they claim to have. It’s just coated tungsten. Once the truth is out, everyone will realize there’s less gold than initially believed, and the price of physical gold will skyrocket. Suck it, paper-gold lovers. Or…
Companies that sell physical gold rely on overblown fees, purportedly to move the stuff around. They want to scare you into buying more physical gold, so they can bilk you with fees. Plus, when you insure physical gold, you declare its presence to the government, which might one day swoop in and take it.
And also…okay, look, I’m stopping, before we end up talking about Bigfoot smuggling gold through Area 51 or something. The point is, gold is a good hedge against inflation. Whether you want to buy it physically, or buy it on paper, is up to you.
If you’re going buy gold, it’s advisable to put a percentage of your assets (say 10%) in gold. Don’t put everything in gold, obviously, since you’ll lose liquidity and diversity.
Alternative 4: Perpetual Bonds
MAS was priggish about these, back in May 2012. But a lot of time’s passed, with no problems surfacing. And frankly, perpetual bonds are lower in risk than a lot of stuff on the market (e.g. structured deposits).
A bond is a promise, issued by a company (or sometimes a government), to pay back the holder of the bond. So when you buy the bond, you’re lending money. The difference between bonds and perpetual bonds is that the latter’s never fully repaid.
Yep. The issuer of a perpetual bond is never finished paying it back. They just keep giving regular payouts (via coupons) till the company folds. That could mean a lifetime of regular payouts for the holder.
There are drawbacks of course. For starters, perpetual bonds go on with the same payout, regardless of how high inflation climbs. As such, the value of the coupons can decrease with time. There’s also a risk that the bond issuer might fold. If you buy perpetual bonds, and the company closes three years later, then you just got burned.
Alternative 5: Sigh. Fine. Insurance.
I’m not the biggest fan of investment-cum-insurance. Growth tends to be an anemic 3% – 4% (agents might claim otherwise), and distribution costs are high.
But for young Singaporeans, who haven’t got much capital, insurance as an investment is…actually not bad. For starters, premiums tend to be low for the young. And a couple of hundred dollars a month may be more affordable than, say, buying blue chip stocks.
It also helps that everything’s managed for you. If you don’t want to read prospectuses and stare at charts, this is the height of convenience. Young twenty-somethings can consider maintaining a policy for a while (five years or so), then cash out and buy into something better.
What alternatives do you prefer to property? Comment and tell us why!
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