Asked on 28 May 2019
For someone who is risk averse like you mention, I would then put it into:
While not technically an investment, a high interest rate yielding savings account can give you a 2-3% p.a. interest rate. Additionally, if it's not conditional on minimum spending, it's very easy to manage since there isn’t much to do after opening your account.
Fully Secured Bonds are another excellent low-risk investment option.
A Certificate of Deposit is also considered to be a pretty safe investment. When you invest in term CDs, the bank assures a guaranteed interest rate over a specific time period, or variable-rate CDs where the interest rate is tied to some type of index – like a stock market index.
This is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It
Slightly higher risk then the previous options mentioned, ETFs look to give you exposure to a basket of underlying assets, to create an index that mimics the market index or a market theme. The benefit is that they provide instant diversification. You could look at the various robo advisors to help automate the investing process for you.
Before you start investing, it is important to set up an emergency fund if you don’t already have one. Like the name suggests, this fund kicks in during an emergency, when you are no longer able to generate active income, and it should be able to sustain you for 3 - 6 months. The rest of the money, never put them all into the same basket. It’s important to diversify to different financial products, even if they are low-risk investments.
You may consider investing a portion into Fixed Deposits, where a specific interest rate is guaranteed for the amount of funds deposited with the bank over a fixed period of time. Typically, you will need to deposit at least $20,000 to enjoy beneficial interest rates.
Otherwise, low-risk investments such as the Singapore Savings Bonds is a relatively safe option given that it is backed by the government. Of course, the interest rates are not as attractive, but all you have to do is decide how much to invest (in multiples of $500) and receive dividends for 10 years. If you want to be more active in the process, they are issued every month and you can always invest in smaller amounts based on how good the interest rates are compared to the market rate.
Another option worth trying is Exchange-Traded Fund (ETF), which are investment funds that traded similarly to stocks. ETFs are typically designed to replicate a specific index and follow its performance on the stock market. However, as it functions similarly to stocks, it is essential to determine how much you are willing to lose if the ETF does not perform well.
Most importantly, research and understand what you are investing in, you should not be investing in a specific product just because everyone else says so.
Your risk appetite is just 1/3 of the whole story. It tells you your Willingness to take risks. When we do investments, we need to know our Need and Ability to take risks as well. The Need comes from any potential shortfalls we might have from our financial goals, such as achieving FI. The Ability comes from proper financial planning, which includes but is not limited to, whether you have set aside sufficient emergency fund, whether you have protected a potential income loss with suitable insurance, whether you have any financial dependants, and your time horizon.
If you have a low willingness (risk averse) to take risk but there is a need and you have the ability, then you really should take some risks in your portfolio. The converse is also true. If you have a high willingness (aggressive), but have no need and no ability, then you really shouldn't take any risk at all.
There are many instruments to help even the most risk averse investor get started.
CPF offers a risk free return of up to 5% p.a. Why not consider doing a Retirement Sum topping up to your Special Account to enjoy tax relief of up to $7,000 next year?
In my humble opinion, risk averse just means lack of knowledge/willingness to learn. If you want to watch your money grow, invest in yourself first. Read kiyosaki financial quadrant for a start. Hope you can achieve 1000% profits soon. Fyi, risk is subjective and speaks about your level of knowledge. Example: would a seasoned property agent think investing in a 1 million condo for himself low risk or high risk?
I think for risk adverse, afraid to lose money, then you can put into endowments, fixed deposits, Singapore savings bonds, high interest savings accounts...
I think it is important to start with the end goal in mind and ask why you need to invest, more so than what to invest. They are two different questions.
If your goal is to beat the dismal interest from banks, then savings bonds, endowment with any insurer or fixed deposit will allow you to do that.
If your goal is to beat inflation, then you might want to consider putting into ETF pegged to SGX or US exchanges (NASDAQ etc) because historical trends have shown positive interest over the course of 5, 10, 20 years.
If your goal is to grow that amount into retirement, you need to start working backwards to see how much is required when you turn 45/55/65 and what is the required compounded interest rate required to grow that $50k.
My other advice is rather than going all in with $50k, break it down and do monthly investment so you average out the cost of the investment vehicle you decide to go with, and even out the risk even if market falls tomorrow, next year, or the year after.