Investing 101: What You Should Look Out for As A Beginner Investor

One of the components of managing your personal finances is strategic investing, on top of wise budgeting and saving.

Done properly, personal investments can generate higher returns, compared with letting your money sit in a savings account.

Especially in today’s low interest rate environment, putting your money in the bank will only bring you abysmal returns, much lower than Singapore’s inflation rate (core inflation rate fluctuates around 1.9%).

Here’s how the base interest rates across Singaporean banks look like: (updated as of January 2021)

 

Bank Base Interest
DBS Multiplier 0.0005
OCBC 360 0.0005
Standard Chartered (Bonu$Aver) 0.0003
Standard Chartered (Jumpstart) 0.4% For $20,000
UOB One 0.0005
Maybank Saveup 0.18-0.31%
CIMB Fastsaver 0.3% (From 15/1/2021)
Bank Of China (BOC) Smartsaver 0.1-0.2%

Many young adults tend to put off investing because they don’t know where to start. With unfamiliar terms and different investment products, it can be mind-boggling.Hence, if you’re looking to maximise your finances and plan for a secure future by growing your passive income, smart investing is the way to go.

So for the total beginners, here are some tried-and-tested principles that successful investors live by.

1. What to know before you invest

Get knowledgeable

Get familiar with commonly used investment jargon, know your stocks from your bonds and connect with a mentor to ensure that you invest suitable amounts and in the right arenas.

Investing in ill-suited products or pre-maturely rushing into a certain investment could be detrimental to your hard-earned money.

So, before you pool your cash, do your homework and consider what type of investments best fit within your financial situation and goals.

Saving is essential

Unless you somehow have large sums of cash tucked away in your bank, getting into the habit of saving is important when you begin investing. Be wise with your financial choices and don’t overspend.

After all, investing is the next step towards financial responsibility and in order to do this, you will require some spare cash. As a guide, do remember to have 6-12 months of your expenses as emergency savings, before pooling in extra cash for investments.

Protip: If you are not sure how much your emergency fund should be, use our calculator.

Be prepared to be in for the long haul

Ownership investments, like stocks and property, are more volatile and hence, betting on them requires a resilient, long-term mindset.

It is recommended that you keep such investments for 5 years at the minimum, and if possible, 10 years or more before selling them to reap greater returns. Being in it for the long haul also allows your interest to compound.

Be realistic on expected returns

Investing requires patience, grit and continuous effort in monitoring the market. Even so, seasoned investors may only receive about 9 to 10% in returns from personal investments annually.

While there have been a handful of investing success stories, don’t expect to be an overnight millionaire. Instead, think of investing as the key towards gradual, long-term financial stability and an early retirement.

Riskiness of the investment

Before investing, consider the investment risks due to market volatility that come with each individual asset. What is the probability of making losses rather than returns from this investment?

Research the different types of risks that unique assets come with to make informed decisions.

Diversify your assets

Diversification helps you not to put all your eggs into one basket, ensuring that your investment portfolio contains a variety of assets in different markets.

By doing so, you minimize the risks tied to investing in only a single asset while simultaneously generating higher potential returns.

2. Know your risk appetite and investing horizon

Understanding your current and expected financial situation with regard to investing involves careful calculation of your risk appetite and investing horizon.

These factors exert significant influence over your investing behaviour and outcomes so you should ideally know them like the back of your hand.

Risk appetite

Your risk appetite or capacity refers to how much risk you are willing to stomach and subsequently maintain when investing. Can you brave high-risks for prospective large profits or are you the more conservative type when it comes to money?

Your risk appetite will help guide which securities to keep in your portfolio and the allocation of capital across different asset classes. For example, stocks, while comparatively unstable in the short run, reward the biggest over time. Bonds are a relatively stable income source while mutual funds are suitable for the more prudent souls.

Determined by one’s personality, demographic factors like age and family situation as well as other factors like insurance and current net worth, people have vastly unique risk appetites.

Not sure how to assess your risk appetite? Take this short test to find out.

Investment horizon

As stock markets can get vulnerable, investors worried about losing their money in instances where the market dives should take into account their investment horizon or the length of time that they plan to hold onto their investments for before purchasing stocks.

Newcomers not interested in gathering cash for retirement or making big ticket purchases can take up a medium-term horizon which involves low to high risk investments.

On the other hand, the more daring can choose a long-term horizon which accumulates larger returns from lengthier investment periods and possible recovery from any losses made.

3. Investment instruments for making small, monthly investments

Don’t worry if you cannot afford huge sums of money every month because making small investments regularly can be just as, or even more effective than one-off large investments.

Thanks to dollar-cost averaging and the fact that stock prices generally increase over time, your money will essentially attract more money when left in the market!

(Read more: What Exactly is Dollar-cost Averaging?)

Here’s a helpful summary of the various investment instruments available in Singapore:

Type of product How it works 
Individual Shares/Stocks Shares: the fraction of ownership one has of a company

  • Of equal denomination w.r.t. each other

Stocks: a collection of shares of multiple companies or collection of shares in one company

  • Of varying denominations w.r.t. each other
  • Both issued by companies in exchange for cash

Types of stocks suitable for individual investors:

  • Common stock
    • General ownership
    • Rights to elect and vote
    • Come after bondholders preferred stockholders
  • Preferred Stock
    • No voting rights
    • Get fixed dividends
    • Prioritized over common stockholders
  • Growth Stock:
    • No dividend or only a small dividend

The Singapore Exchange (SGX) offers a slew of stocks for you to choose from. But know your stock well before choosing to invest in it!

Bonds
  • Companies, financial institutions or the government are indebted to the investor, paid back to with interest
  • Good

complements to stocks in an investment portfolio

Unit Trusts
  • Money from investors is pooled, managed and invested by a professional fund manager. Trustees are allotted responsibilities based on certain goals and investment methods.
  • Unstructured portfolio
  • Established under a trust deed
  • Beneficiary: the investor
Mutual Funds
  • Similar to unit trusts, except the portfolio is structured
Exchange Traded Fund (ETF)
  • A type of fund, involving a group of securities (e.g. stocks), that is traded throughout the day on a stock exchange
  • Includes all types of investments like stocks, bonds etc.
Real estate investment trusts (REITs)
  • A type of unit trust that is traded like a stock
  • Has special taxation
  • Invests in properties (like warehouses, hotels, medical facilities, apartment buildings etc.) that are rented out

Of course, for each investment product that you would like to invest in, you have to keep in mind the pros and cons of each product.

To save you the trouble, here’s a quick overview of the pros and cons of each investment product:

Type of product Pros Cons
Individual Shares/Stocks
  • Profits earned when prices rise as a result of economic growth
  • Liquidity: simple method of buying and selling
    • Can be purchased via a broker, financial planner or online
    • Liquidity: Stock markets allow for quick selling of stocks at any time with low transaction fees.
  • Keep ahead of inflation (If you have a longer investment horizon)
  • Most stockholders have voting rights in companies
  • High risk: As it is dependent on how the company performs, poor performance can result in extreme price fluctuations and the loss of your whole investment
Bonds
  • Low risk: fixed returns from bond coupons
  • Regular income every few months, depending on contract
  • Bond shareholders are prioritized at repayment period
  • Subject to price fluctuations and performance of company
  • Other risks such as liquidity risk, prepayment risk etc.
Unit Trusts / Mutual Funds
  • Good for diversification
  • Match trusts to personal risk appetites and investment objectives
  • Access to professionally managed portfolios at a low cost
  • Subject to market fluctuations
  • Management fees paid to fund managers and if your fund is under-performing, could affect profits
  • Expense ratios paid annually, could affect profits
  • No autonomy over investment decisions
  • Some require minimum investments and commissions for service
Exchange Traded Fund (ETF)
  • Low risk
  • Low cost: lower expense ratios and broker commissions than buying stocks individually
  • Good for diversification: Access to stocks across various industries
  • Subject to price fluctuations throughout the day
Real estate investment trusts (REITs)
  • Steady income stream
  • Good for diversification
  • Liquidity
  • Subject to interest rate fluctuations

Now that you know what types of investment products you can invest in, here are some platforms you can use to kickstart your investment journey!

4. Investment Platforms You Can Use to Kickstart Your Investment Journey

Direct means: CDP and brokerage accounts

In Singapore, buying and selling stocks independently requires a Central Depository (CDP) account and a brokerage account.

Central Depository (CDP) accounts, handled by SGX, provide integrated clearing, settlement and depository facilities for investors in the local market.

A brokerage account can be opened by those above 18 years old for the trading of stocks. There are tons of investment brokerage firms in Singapore, so comparison among their commission fees is vital in helping you choose the right one for your investment journey.

Here is an overview of the most popular online brokerage accounts with no extra fees that are compatible for trading with SGX:

Account Minimum commission fee Trading fee (less than $50k) Trading fee ($50k-$100k) Trading fee (more than $100k)
CGS-CIMB Securities $25 0.275% 0.22% 0.18%
DBS Vickers Cash upfront $25 0.28% 0.22% 0.18%
KGI Securities $25 0.275% 0.22% 0.18%
Lim & Tan Securities $25 0.28% 0.22% 0.18%
Maybank Kim Eng  $25 0.275% 0.22% 0.18%
OCBC Securities $25 0.275% 0.22% 0.18%
Phillip Securities (POEMS) $25 0.28% 0.22% 0.18%
RHB Securities $25 0.275% 0.22% 0.18%
UOB KayHian $25 0.275% 0.22% 0.18%

Assisted means: Robo Advisors, RSSs, Endowment Plans 

As a small-time beginner investor, you might prefer a hassle-free, more passive approach towards investing. Hence, here are some investing platforms that offer just that:

1. Robo advisors

Want to invest with a small input and buy-in fees that are as low as possible? Robo Advisors may just be for you.

With humans out of the picture, these digitised investors charge an annual flat fee of 0.2-0.5% of your total account balance. They can even help you to branch out towards the global market, letting you get your hands on those valuable US-listed assets.

How it works:

After collecting personalised data (financial situations, risk appetites, future goals), these automated investment platforms enable small-scale investors to pool together their finances and make large, diversified investments via proficient algorithms.

In Singapore, robo advisors are loosely regulated by the Monetary Authority of Singapore (MAS) under the Securities and Futures Act (SFA) and/or the Financial Advisers Act (FAA).

This means that their operations are permitted as long as they gather minimal data on investors to recommend suitable investment types. They also gain approval as long as they have senior management members with relevant fund management backgrounds on board and offer non-complex collective investment plans.

So, while they offer a convenient means of investing, you should not adopt a total hands-free approach when turning to robo advisors.

Where to find them:

Singapore boasts 10 different robo advisor platforms. From ETF assistants (Syfe, Stashaway, UOB Asset Management Invest etc.) to robo advisors who help out with unit trusts and individual stocks (OCBC RoboInvest, Kristal.AI), the base investment amounts range from $0 to US$100.

Whatever the amount that you are comfortable with investing, you’re bound to discover a robo advisor for your needs!

Pros Cons
  • Low commision fees
  • Low opening balance
  • Easy diversification of portfolio
  • Low effort
  • Lack of human interaction and mentorship
  • Deviates greatly from traditional advisory services (use of algorithms)

(Read more: Interested in investing with Robo-Advisors? You can learn how to get started in this article!)

2. Regular Shares Savings (RSS) Plans

RSS Plans, also known as Regular Savings Plan (RSP) offer a medium-risk challenge to investors determined to invest on a monthly-basis.

How it works:

This long-term method of investment involves committing a small and fixed sum (as low as S$50-100!) into a certain investment product (REITs, ETFs, stocks etc.) every month.

Hence, they are highly viable for students with a regular part-time income stream, working adults who just started making coin or those who already practise saving monthly.

Where to find them:

There are 4 RSS Plans offered in Singapore, namely:

These services offer investments in all kinds of assets, so if you’re dead set on getting an RSS Plan, be sure to look around before locking in your decision!

Pros Cons
  • Profit over time due to dollar-cost averaging
  • Low opening balance
  • Hone habit of investing regularly
  • Not risk-free
  • Some level of self management involved

3. Endowment Plans

Endowment plans are insurance savings plans that offer lifetime coverage over a certain time frame. Much like normal investment schemes, endowment plans also encourage regular investing habits.

As endowment plans supplement clients with insurance services, they are suitable for couples with children to be used for their educational expenses, holidays or during retirement.

But, those who want to practise discipline with their finances while being protected under insurance schemes can also consider getting an endowment plan.

Types of endowment plans:

There are 2 types of endowment plans — participating and non-participating. The former promises a sum and potential additional returns in the form of bonuses while the latter does without any bonuses.

As with other investments, whether you should go with a participating or non-participating plan depends on your risk appetite. Be sure to do a background check on your insurer’s general performance and qualifications too!

Tenure:

The maturity period of endowment plans should also be of your concern. Those with a shorter tenure tend to be most attractive because it allows for swift access to funds.

When picking out an endowment plan, it is good to assess your future financial needs and goals to determine how long you should ideally keep it for.

Types of premium:

There are 3 types of premium: single, regular and hybrid. For single, the investor must pay a one-time lump sum upfront while regular premium stretches the payment over a period of time. Hybrid, as you might have guessed, has ambivalent qualities between single and regular premiums. This means that hybrid premiums are generally more flexible when it comes to first-time purchases.

Where to find them:

Here are some short-term endowment plans available in Singapore:

Here are some long-term endowment plan options for your consideration:

Pros Cons
  • Guaranteed returns (provided you keep plan until maturity and pay premiums promptly)
  • Non-guaranteed additional returns
  • Insurance safety nets
  • Actual returns may differ from projected returns
  • Guaranteed returns are not the same as guaranteed principal

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