Michael Wong, Seedly Student Ambassador 2020/21 at Seedly
Updated on 05 Nov 2020
Most of the financial buzz circle around investments such as Stocks, ETFs and Crypto… What do these instruments have in common? Your capital is NOT guaranteed. This results in you delaying your investment as you are CONSTANTLY afraid to start. Does this mean that you are a bad investor? NO! It is because you probably are a CONSERVATIVE investor.
Today, this extract will be breaking down the options that are available to you!
Now assuming you have no experience at all, most of your money are kept in a bank’s savings account. The base interest that you are receiving is 0.05%; absolutely nothing. The harsh reality is that although your cash does not lose dollar value, its purchasing power is eroded by inflation (~2%). This will lead you into looking for opportunities to try and keep pace with inflation. So, you will be asking, “Low risk investments… What are my options?”
Firstly, banks offer you additional bonuses through their high interest (~1-3%) savings accounts such as UOB One, OCBC 360 etc. However, in order to clock these attractive rates, you would need to hit their qualifying tiers such as having a tagged insurance policy, minimum credit card spending, credited salary and GIRO bill expenditure. Of course, these vary for different banks but the general consensus is that it is a hassle to keep track of. This results in your interest levels to fluctuate.
Fixed deposits pay a fixed rate of interest (~1.0-1.2%) and have a time period of usually 1 Year. These instruments help you earn more interest than your regular savings account while providing you relatively good liquidity due to its short lock-up period.
The Interesting conversation to be had is that the fixed rates being offered fluctuate due to market forces.
· Before covid market crash: ~1.7-1.9%
· After covid market crash: ~1.0-1.2%
Singapore Savings Bonds (SSB) have a 10-year tenure which pays an incremental rate of interest. Although it is advisable to hold it for a longer period, you have the flexibility to exit and withdraw your investment in full anytime with no penalties. (No lock-up period)
*It starts at 0.23% for the 1st year, and increases up to 1.79% at the 10th year. Giving an average return of 0.91% per year if held to maturity.
*Data used for illustration are extracted at the point of writing
Singapore Government Securities (SGS) bonds pay a fixed rate of interest (1.0-3.5%) and have maturities ranging from 2 to 30 years.
T-bills are basically fixed deposits offered by the Government. Interests are not attractive which leaves little for discussion.
These instruments are fully backed by the Government (AAA credit rating). Meaning to say that unless the government collapses, you would be receiving your money.
Everybody knows that the CPF is the one of the safest instruments that provides you with attractive interests (~4.0%). The only major catch is that you have no liquidity as you will only be receiving $5K at 55 years and a monthly payout from 65 years onwards.
Usually called savings plans by your typical banker/ agent, Endowments are long-term investments offered by large insurers and are aimed at individuals to help create a savings habit. On top of insurance protection coverage, these instruments provide you with projected returns (~2-4%) per year based on the tenure. In addition, a major benefit is that you have the flexibility to customise the policy to suit your needs and wants in terms of duration and withdrawal options.
How it works is that basically, you are entrusting your money to be invested by the insurance entity (par fund) for a period of time. In return, based on their performance, the insurers would offer you a guaranteed and non-guaranteed portion. Even with market fluctuations, these large entities are able to offer you what they have disclosed in their documentations due to their large built up buffer reserves over the course of history. Interestingly, compared to a Stock, ETF, Crypto or UT, some Endowments have a capital guarantee upon maturity portion. However, NOT ALL Endowments are capital guaranteed.
There are two main categories for the premium payment period: Regular Pay or Limited Pay.
You put in money for a period of time. At the end of the period, you will receive a lump sum payout upon maturity.
You put in money for a period of time. Subsequently, there will be a waiting period for your valuation to grow. At the end of the period, you will receive a lump sum payout upon maturity.
These instruments are a mix between an Endowments and CPF. After a similar payment period of an endowment, instead of receiving a lump sum payout upon maturity, you will be receiving monthly/ yearly payouts.
Both Endowments and Annuities are good investment products to consider if you have a long-time horizon as they tend to offer interests that actually beat the inflation rate. However, the main problem arises when some bad advisors push products that offer the highest commissions but do not suit you. This may result in a premature surrender of the policy which will result in a loss.
All in all, there are also many options available to the CONSERVATIVE investor such as yourself. After selecting a category that you would like to pursue, the next step is to do your own comparisons of the exact figures of the financial products being offered by the various companies. Now that you have a better understanding of what instruments are available to you, you can have a better peace of mind and begin your investment journey today.
The best time to start investing was 10 years ago. The next best time to start is today!
*Disclaimer: This extract is not to be used as proper financial advice. Data used for illustration reflect a number of estimates and highly subjective assumptions and judgements. Proper fact-find and financial advice needs to be done by the correct financial entities before embarking on any financial product.