Jumping into the rabbit hole of traditional investing 🐰🕳
Disclaimer: This is not financial advice. The goal of this article is to just get you started on this rabbit hole. It is not a comprehensive guide to investing. This started out from notes I have written for myself on Roam Research, before I decided to post it here as a full-blown article!
Traditional investing is one of the most common forms of investing. It focuses on building wealth via multiple passive income streams by putting them in well-known asset classes: bonds, equities, real estate and cash. You earn passive income from capital appreciation (when the price goes up), dividends (distribution of profits by a corporation to its shareholders), rental fees (from real estate) and interest rates (savings accounts).
A key principle behind the book Rich Dad Poor Dad by Robert Kiyosaki is that we should aim to acquire assets, not liabilities. Assets are anything that will appreciate in value and puts money in your pocket, while liabilities take money out of your pocket since they are depreciative in nature (e.g. cars, vacations, clothes). The first step to increasing your wealth is to identify and reduce liabilities.
Another principle behind investing safely would be to ensure diversification in your portfolio. A diversified portfolio contains a bunch of holdings from different asset classes to limit exposure to any single asset or risk.
Holding cash serves two purposes. 1) To provide emergency funding (hold at least 6 months worth of expenses) in the event of a job loss or health incident. 2) To buy the dip when the market is down.
Besides the above two reasons, it is not advised to hold that much cash in your portfolio if your goal is to increase wealth, due to inflation.
Most hold cash in a high-yield savings account (your typical local banks), which typically offer a measly <1% APY.
Equities, or stocks, represent shares of a company. People buy stocks with the expectation that the stock price will appreciate, and they can gain passive income from dividends.
One of the most sound methods for equity investing is buying index funds or ETFs (Exchange Traded Funds), as diversity is key. They basically consist of a basket of different investments (e.g. stocks) that are managed by an external entity.
In the context of Singapore, let's look into the index funds available in both the local and international markets.
Local stock market index funds. The purpose of holding local index funds is to hedge against foreign currency risk.
The best local ETF is the Straits Times Index (STI) ETF by either SPDR or Nikko AM. The STI index represents the top 30 companies listed on the SGX-ST Mainboard ranked by full market capitalisation.
International stock market index funds. Purchasing any stock through the U.S. stock exchanges (U.S. domiciled stocks) is heavily discouraged due to the hefty dividend tax and estate tax. Instead, we would look to Irish domiciled stocks:
- Vanguard FTSE All-World UCITS ETF (VWRA) – 3,130 companies from developed & emerging markets, large and mid cap companies.
- SPDR MSCI World UCITS ETF (SWRD) – 1,634 large and mid cap companies from 23 developed markets.
- iShares Core MSCI EM IMI UCITS ETF (EIMI) – 2,800 all cap companies from emerging markets.
Stock picking is another alternative, but requires more research and entails larger risks.
A popular investment strategy is buying blue chip stocks so as to gain dividends (a form of passive income from the profits earned by the company). Blue chip companies are typically industry leaders that are large, reputable and financially sound.
They tend to have lower risk compared to growth stocks (companies whose revenues and earnings are expected to increase at a faster rate than the average company) and hence a popular option amongst long-term investors.
Investors purchase debt issued by the borrower (typically corporate or governmental), where the debt is securitized as a tradeable asset. In the case of government bonds, you are basically borrowing money from the government with the expectation that they will repay you the principal amount with interest at a later date.
Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa.
Singapore Saving Bonds (SSB)
- ABF Singapore Bond Index Fund (A35) – Tracks a basket of high-quality bonds issued primarily by the Singapore government and quasi-Singapore government entities.
- Nikko AM SGD Investment Grade Corporate Bond ETF (MBH) – Tracks a basket of Singapore Dollar-denominated, investment grade corporate bonds in affordable units.
Reasons why I personally wouldn't touch bonds if I am still in my 20s:
Younger investors usually can afford to have a higher risk appetite (we have less to lose) and a longer investment horizon (more years till we reach the typical retirement age = lower risk from stock market volatility).
Singapore citizens are already required to put a portion of their income into CPF funds. The contribution can be as much as 20% of our paycheck – dropping lower as our income rises above the $6,000 cap – with another up to 17% contributed by our employer.
These amounts are already being placed into the Special Account (≥4% in risk-free returns) and Ordinary Account (≥2.5% in risk-free returns). You may read more about CPF interest rates here.
We all need a house to live in. Buying real estate means you are accruing wealth while using it instead of just losing wealth by just renting one. This is in line with the principle of acquiring assets, not liabilities.
Owning additional real estate can also be a good source of passive income in the form of rental fees.
Real estate investment trusts (REITs) are listed companies that manage a bunch of properties. REITs provide real estate exposure without the need to own the actual property. Investing in REITs is like owning a fraction of a property. Investors also receive dividends from the rental income of REITs.
There are also other ways to invest.
🤖Robo-advisors. If investing is something you’d rather not think about and spend time on at all, then a Robo Advisor would be a good choice. This is a great tool for most people starting out, before slowly transitioning to something like bogle fund investing when they become more familiar with the investing scene.
₿ Crypto. Blockchain technology brings a new paradigm shift in the way we trust. Aside from Bitcoin, emerging disruptive industries such as Decentralized Finance (imagine being able to gain access to financial instruments without the need to create an account!) and Web 3.0 are some interesting ones to look into.