Asked on 07 Jul 2019
What are the pros and cons for each asset class? For e.g I heard that one should not invest via endowment policies/ILP. Why ah?
After 10 years, do you definitely need the money back, or are you ok to hold a little longer? We do not know if the markets will be up or down 10 years from now and you could potentially be looking at profits 9 years from now, but a loss in 10 years time.
If you definitely need the money back, you may consider either SSB or a short term endowment plan.
If you are okay to hold, then any other variable asset class should work for you, i.e. equities, REITs, UT, ETF.
Insurance is not an asset class viz bonds and REITs. Life insurance is fundamentally a bundled product that contains an actuarial element and a savings component. You have no control over the investments made by the insurance company. In any case, the investments made by the insurance company does not consider your individual risk profile as it is pooled into a fund.
Endowments are also insurance products and similar to what is described above except that the savings component is proportionately much larger than the actuarial premium. It has the same drawbacks where it concerns your individual needs and personalisation.
ILPs or Investment-Linked Policies are also insurance products. Sadly, many are sold the ILP insurance product as if it is an investment. Yet, the underlying investment or savings component is typically outsourced to a third-party investment fund(s).
There are high distribution expenses (commissions paid to agents) and product fees in insurance/endowments/ILPs which you should ask about. It's better, frankly, to "buy term and invest the rest". That is, separate your protection and savings needs. Don't bundle them up in an insurance purchase which contains high charges, fees and commissions. You have greater flexibility in adjusting your savings strategy as your life needs change without risking your protection cover.
Bonds are not as liquid unless you move large sums. There are spreads that will eat into your returns. However, bonds offer lower risk in general than equities - but you should review carefully the risk ratings, if any before considering it for your portfolio.
REITs are like equities and fixed income at the same time. The underlying REIT price can fluctuate - affecting the effective yield return based on the dividends paid. However, depending on the REIT selected, the yields can look very attractive to bonds and equities. Yet, REITs carry price fluctuations like equities.
Your time horizon of 10 years is more effective for higher risk-taking, all other things constant.
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ILP and endowments charge high upfront fees. For example, ILPs have a sales charge, trailer fee, insurance charges, management fees, investment house fees, etc. You'd be losing money first before earning. Pros and cons for each asset class is very long to explain. Buy kiyosaki financial quadrant book to see how and where to focus your attention.
My choice would be (when emergency funds already established) an not risk-averse:
no mutual funds or unit trusts
no single REITs
but, yes: global passive stock indexing ETFs (only successful past examples: VT, VOO, IVV) and
S-REIT ETFs (most Singapore focused = Lion-Phillip S-REIT ETF)
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Insurance is really an asset design to beat inflation, give you protection only (cost of insurance) and very defensive in its returns. It's also illiquid due to the commitment required until maturity.
Bonds have various different grades, and hence the risk level differs. But generally, investment-grade bonds are safe enough to consider very little defaults (since in the order of liquidation, bond repayment ranks higher than equities). Different thing is hyflux though.
REITs are income producing equities (their structure requires a near to 90% profit payout), which acts like equities due to the way it is valued and traded on the stock market. Hence you may gain dividends, but lose capital which can be painful if it's not managed well.
Learn what is your risk profile first before investing...
Depends on when you want to take the money out. If it's for retirement, annuities although I think you need about 15k.
If you're planning to kinda keep it hanging around, then REITs/ETFs.
If you need to take it out at the end, then endowment or SSB =)
Don't know you age, therefore don't your need or commitment
Don't know whether is $10k is all you have, or $10k is a drop in the ocean to you.
Yes, different asset classes have different pros and cons. What and how much you use for each class depends on your goals, risk appetites and the amount of time you have on hand to manage your investments.
Insurance savings have capital guarantee (partial or full depending on the plan) with returns ranging from 2% to 4% p.a. It also comes with some coverage that protects your savings, you can also add riders to waive off payment of premiums in the event of critical illnesses. However, the money is locked up (either fully or partially) without flexibility of withdrawal.
Then next is investment type of ILP. The fees are high (e.g. 5% sales charge, fund management and policy charges apply). Capital isn't guaranteed but returns can be between 4% to 8% p.a. depending on funds selected. Capital is assured upon death with extra premiums (e.g. 10%).
Both insurance savings and ILPs are hands off approach to investing money.
You can also consider unit trust investments, which is similar to ILPs except there's no capital assurance upon death.
Then for higher risk appetite, shares and index funds (e.g. reits) are possible. No guarantees on your capital and you'll need to spend time to research and make your judgement on which ones to buy. For some shares and reits, they also give out dividends which you can use to re-invest or spend on other places.
These are hands on approach to investing money - lower costs but need time and skills to make the call.
I would suggest if you have not done up your insurance segment of your portfolio, you should look into that first. Once you have your defence in place, look for assets to help you earn a higher income.
I would suggest that you can look into placing your funds into multiple assets for diversification purposes. You do not need to restrict yourself to just one asset.
Let's say that you are able to take abit of a higher risk, put your money into assets like ILP, Funds, Bonds, Reits. If you are really conservative, an endowment would work fine.
08 Jul 2019
Are you only looking at those three instruments that you mentioned ? I'm afraid it's too generic an ask which doesn't indicate your preference for profit or risk tolerance. $10k is not going to turn the world upside down, but for what it's worth, compound interest can still do wonders. Gauging by the audience demographics here, you are probably still young in the 25-35 age bracket? If risk is not a concern, I would put that amount in an index fund pegged against either SGX or S&P. Also consider what this amount will do in the grand scheme of things with your other money allocation.