To new investors in Singapore, the stock market presents a bewildering range of options. There are dozens of systems and methods of investing, all with their pros and cons. So how do you start investing in Singapore?
If you tallied every book ever written on investing, you’d account for the deaths of at least two rainforests. While the variety is confusing, it exists for a good reason: almost no one agrees on a single, best way to invest. Instead, investment approaches fall into 5 basic methods.
|Investment strategy||Description||Investment assets|
|Tortoise method||Slow and steady. Pick “safe” investments for long-term growth.||Blue chip stocks, investment grade bonds|
|Growth investing||Buy low, sell high. Invest in young companies with a lot of room for growth.||Small cap stocks|
|Value investing||Buy stocks priced under their “intrinsic value” and sell after the market corrects the error.||Undervalued stocks|
|Speculation||High risk, high reward. Buy cheap assets and hope they will appreciate.||Penny stocks, junk bonds|
|Hands-off investing||Leave the investing to a third party fund manager, usually paying hefty fees.||Investment-linked insurance plans
The best investment method depends on two main factors: your investment horizon, and your financial goals. Some people want to make a million dollars in 10 years. Some want a passive income of $3,000 a month, by the time they hit 50. The methods they use will have to be tweaked to suit their ambitions.
(Note: New investors should seek advice from their stock broker. Even if you pick the right strategy, it is still possible that you’re not executing it correctly).
Investment method #1: The tortoise method
This method is the “slow and steady” approach to wealth. It will never make you a million dollars in a year (Or five years. Or 10 years). But this method seldom loses money, and is as low risk as you can get.
The tortoise method features investments in “safe” assets, and its favourites are blue chip stocks and investment grade bonds.
Blue chip stocks
Blue chip stocks are stocks in large, well-established companies. These companies have long histories, and are the most financially stable in the market.
Only 30 of the 800+ companies listed on SGX are blue chip. As of 2012, all 30 of those companies posted profits. For more details, check out the latest market update from SGX here.
While the initial capital outlay can be steep (you should have at least $5,000 to $10,000 on hand), most blue chip companies provide consistent dividend pay-outs. The money can be used as passive income, or re-invested to earn more.
If you find it difficult to buy your first lot, you can also consider blue chip investment programmes. DBS Group, OCBC and Philip Securities all have schemes as part of SGX’s Regular Shares Savings (RSS) plans that let you set aside a small amount each month (as low as $100) to gradually accumulate these shares.
Investment grade bonds
Bonds come with a bond credit rating, which measures credit worthiness. An investment grade bond (AAA, AA+, or AA) means the bond issuer is unlikely to default.
Investment grade bonds pay out less in coupons (the interest on the bond, which is usually paid out annually or every six months), compared to high yield (or junk) bonds. However, “tortoise” investors prefer them, as junk bonds have higher rates of default (which may cost bond holders money).
Who can use the tortoise method?
The tortoise method is ideal for retirement planning. It is attractive to young investors, who can tolerate long investment horizons of 20 to 30 years. It can also be used for a child’s university fund, or to make the down payment on a house in 10 or 15 years.
Investment method #2: Growth investing
Growth investors pursue wealth through capital appreciation.
Say you buy a stock for $3.22 per share. In a month, the price rises to $3.47 per share. If you sell at that point, your capital appreciation is the difference of 0.25 cents per share.
Growth investors are not too interested in dividend pay outs, or bond coupons. Their main preoccupation is selling a stock for more than they bought it.
Note that growth investing is a form of active trading. Growth investors must keep monitoring the market, and be ready to buy or sell at short notice.
Also, while growth investment can lead to faster wealth, few people are “pure” growth investors. Many will seek to balance their portfolio, by having at least some assets dedicated to passive returns or capital protection.
A common asset choice among growth investors is…
Small cap stocks
A “small-cap” company refers to companies that are in early stages of growth. These companies are believed to have significant growth potential (e.g. maybe it’s the next Google or Apple).
Small cap stocks can be volatile (the share values fluctuate often). But growth investors seek to buy small-cap stocks when they are still cheap, and sell them at sky high prices when the company takes off.
Who can use the growth investing method?
Growth investing is inadvisable for beginners. It takes skilled analysis to make accurate growth predictions.
In many cases, investors who use this method are experts in certain industries (e.g. healthcare or IT), who know the “growth areas” in their different fields.
Nonetheless, investors who want faster returns might dedicate some of their portfolio to growth investing. This should not be done without initial education, so do check out the educational tools on SGX MyGateway or attend courses organised by SGX academy first.
Investment method #3: Value investing
Value investors believe that sometimes…. just sometimes… the market gets its prices wrong.
Value investors trawl for stocks that are presently undervalued. In other words, stocks that are too cheap for the dividend pay outs or growth potential they provide. Value investors want to buy these stocks before market forces “correct” the pricing error.
Simplified example: it’s like noticing something’s too cheap at the supermarket, and quickly buying all of it before the cashier puts on the right price tag.
Value investors spot these stocks through close analyses of companies rather than share prices. Rather than look at trading histories, they consider the motivation of a company’s employees, size of its market segments, its innovation, etc.
In short, they invest in the company, and not the stock.
Some rough techniques that value investors look at:
- The company should preferably be owned by the employees (e.g. they have stock options)
- The company’s current assets should be twice the current liabilities
- Growth in earnings should be at least 7% per annum, over the past 10 years
- The P/E Ratio should be low (around 15)
Value investors also set a margin of safety, to compensate for errors when estimating the intrinsic value of a stock. The further a stock’s price is below its intrinsic value, the greater the margin of safety afforded.
Who can use the value investing method?
Value investing rewards the detail oriented. These investors must know how to read prospectuses and annual reports in-depth. They should also have the basic skills necessary to evaluate a business.
Many stock brokers will advise clients along the principles of value investing. If you listen to your broker, this is probably what you’ll end up doing (whether you realise it or not!)
Investment method #4: Speculation
Speculation is a “method” in the same way pulling a Jackpot lever is a “method”. It exists, but there’s little to recommend it.
Also known as “punting”, this is a high-risk, high reward approach. It mainly involves buying penny stocks (super cheap stocks in start-ups or at-risk companies) and junk bonds. The investor then hopes these assets will appreciate.
Statistically, speculators lose in the long run. However, some are tempted by the prospect of quick cash.
Who can use the speculation method?
Adrenaline junkies, or people who enjoy (rather than get stressed by) high stakes trading. Investors who do this are usually prepared to wipe out a trading account or two.
Investment method #5: Hands-off investing
There are many fund managers, asset management firms, or insurance companies that will manage your portfolio for you.
In exchange, they will usually take a cut from your returns. This amount is reflected as the effect of deduction in an insurance policy, or as the Total Expense Ratio (TER) otherwise.
Many people also refer to the manager(s) cut as the management fee. This may not be technically correct, as the management fee is only a part of the TER (the total expense may be much higher than the management fee alone). Beware the TER as it basically eats into your returns, and these costs still apply even if you lose your capital.
This method provides convenience, as someone else makes your investment decisions for you. The majority of hands-off investors in Singapore do so through their insurance policies.
However, the method may not be as risk free as you’re led to believe. Hands-off investors seldom understand what they’re being charged. Most also have no way of identifying a bad fund manager.
Who can use the hands-off investing method?
People who absolutely have no time, or no inclination, to learn about investing.
How to start investing in Singapore
One thing is for certain: the worst method is to not pick a method (with the exception of #4). As a rule of thumb, your investments should beat inflation by 2%, so you’d want to rake in about 5% to 7% returns in Singapore.
Choose a balance between speed and safety, when it comes to your money. And while you should always consult a professional advisor, be sure to educate yourself!
Remember: you can’t evaluate your progress if you don’t know what’s going on.
A MoneySmart Investment Series in collaboration with SGX
This is the sixth article of a 6-part series, focusing on investment for beginners. For more on starting your investment plans, like SGX on Facebook and subscribe to SGX My Gateway here. In this series, we’ll be introducing you to the most basic elements of the stock market, and how a non-expert can still profit from it. If you are new to this series, here are the rest of the articles in the series: