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The Investment Products Cheat Sheet for Beginners

investment products cheat sheet for beginners

Ask anyone whether or not they would like to grow their money, and you’ll most likely be met with a slight mix between a deathly stare and look of curiosity as to whether you’ve lost your mind or not. It’s clearly a rhetorical question.

But… ask anyone if they would like to read up on the basics of investing and you’re probably more likely to find success asking for donations to fund your round-the-world trip than getting someone to read up on what is perceived to be a huge amount of information.

Beginners who want to start their investment journey often feel overwhelmed and intimidated by the amount of options they appear to have. But the truth is, it’s not that hard to make sense of the various investment products available to Singaporeans. All it takes is a simple cheat sheet.

For each investment product, we’ll discuss three different aspects:

  • the “risk”: how likely you are to make a loss on this investment
  • the “fund”: how much you need to start investing
  • the “horizon”: how much time you need to commit to the investment

 

Stocks

stocks investing

 

What is it?

Very simply put, stocks in a company, or otherwise referred to as “shares” or “equities”, are a “piece” or “share” in that particular company. The reason people invest in a share of a particular company is generally due to the expectation of an increase in the value of the company and hence, an increase in the value of the stocks of the company.

You can also make money through dividends that the company might pay out to shareholders, which is essentially a sharing of their profits.

How risky is this product?

Stocks have varying levels of risk. Stocks of an established company may be considered blue chips, which are lower in risk, but higher in cost. Stocks in smaller companies may be considered penny stocks, which are cheaper but higher in risk. Ultimately, because the value of your investment is dependent on the share value of the company, the risk of stocks in general is significantly higher than a few of the other products we will cover below because their value is pegged to the performance of the company, which can fluctuate a lot.

How much do you need to start investing?

With SGX having reduced lot sizes for both stocks and bonds, you don’t need a massive amount to start investing. However, it would be good to have at least $2,000 – $3,000 saved so that you have some buffer. If not, stick to Exchange Traded Funds (ETFs) for greater security.

Is it a long-term or short-term investment?

Long-term share investors look for stocks that give them high-yield dividends. Short-term share investors usually follow a buy low, sell high policy, sometimes buying and selling multiple stocks within a day. How you choose to approach trading of stocks really depends on your investment goals and what your time horizon is for investing.

 

Exchange Traded Funds (ETFs)

ETFs

What is it?

Just like stocks, ETFs are traded on a stock exchange. Your money is collectively pooled together with other investors and invested according to the fund’s investment objective.

That objective is typically to generate a return that tracks or replicates a specific index such as a stock or commodity index. One example would be the Straits Times Index (STI) ETF, which aims to mirror the performance of the STI. Another example would be a commodity index like a gold ETF (more on that later), which aims to mirror the price of gold.

How risky is this product?

While it’s very rare to lose money in the long run, the main risk in exchange traded funds is making enough to beat inflation.

How much do you need to start investing?

Exchange traded funds can be purchased for as little as $100 a month through products called Regular Savings Plans. Because these index tracking ETFs are passively managed and don’t aim to outperform the actual index, they tend to have fees and charges that are usually lower than those of actively managed investment funds. This makes this particular investment product very attractive for people just looking to start growing their money.

Is it a long-term or short-term investment?

Because exchange traded funds tracks a stock or commodity index, it is typically a long-term investment.

 

Unit Trusts

unit trusts

What is it?

Similar to ETFs, a unit trust is a fund that is grown by pooling together money from different investors and invested in a portfolio of assets. The key difference here is that the fund is managed by a fund manager, which could also be an institution or group.

Different funds have different investment objectives, not just in terms of risk and return, but also in their areas of investments. Some funds may be invested in emerging markets, others may choose to invest purely in assets associated with climate change or renewable resources.

How risky is this product?

Because unit trusts are investments into a basket of assets managed by a fund manager, the risks therefore come not just from the assets managed, but from the capability of the manager.

However, a key advantage of investing in unit trusts is diversification as the funds are invested in a wide range of different assets. Because of the fund’s diversified portfolio, a single asset’s underperformance is unlikely to affect your investment very negatively as compared to investing in individual stocks.

How much do you need to start investing?

Due to the extra fees and charges for the fund manager, you should have at least $5,000 on hand to make your investments worth the cost.

Is it a long-term or short-term investment?

Unit trusts are typically long-term investments. Some annual fees may even be reduced over time, the longer you hold on to the investment.

 

Bonds

What is it?

Bonds are actually a form of debt that a company takes on. If a company issues a bond, the money they receive from people purchasing that bond is essentially a loan, and must be repaid over a specified period of time. Investors buy bonds to earn interest over the stipulated period of time for the bond that is typically paid out on the bond’s maturity date.

How risky is this product?

Bonds are typically low risk, but they also provide limited returns. High-yield bonds pay you more, but only because they are at a higher risk of default if one is not able meet the legal obligation of debt repayment.

How much do you need to start investing?

Similar to stocks, bonds are a lot more affordable now and you can start by investing about $2,000 – $3,000.

Is it a long-term or short-term investment?

Normally, you would hold a bond to maturity, which guarantees your principal investment. Bond tenures can go up to 30 years, but most of the time, people buy bonds with shorter tenures

 

Property

property

What is it?

Property investment in Singapore is one of the long held pillars of investment from generations ago. It essentially involves purchasing property and selling it at a profit once the property appreciates in value. Investors also make money by renting out their property and earning from that.

How risky is this product?

Risk in property investment comes from different factors. Most properties appreciate in Singapore, especially if you buy when prices are still relatively low. However, volatility is higher since many factors can influence the value of a property, with things like Government regulations having an impact of people’s ability to purchase property. Other factors like the interest rate for home loans can also have an influence on purchasing power.

At the same time, if you can’t rent out your property, you’ll be losing out on rental yield as well, so the rental market is also another factor that will influence how much you stand to gain.

How much do you need to start investing?

Depending on the property, as little as $250,000 can afford a new Housing and Development Board (HDB) flat, most of which can be borrowed or paid from Central Provident Fund. If you’re buying a second property, don’t forget to factor in the Additional Buyers’ Stamp Duty or ABSD, which is meant to discourage property speculation.

Is it a long-term or short-term investment?

Whether you’re buying a property to live in, or a second property to rent out, expect prices to only appreciate to a point where it’s worth selling after at least 5 to 10 years.

 

Real Estate Investment Trusts (REITs)

REITs

What is it?

REITs are very similar to unit trusts in that investors buy into a managed portfolio of real estate. For people looking to invest in property without sufficient capital needed to buy a physical property, REITs offer an alternative way to invest in property.

The investment objective of a REIT is to provide investors with dividend income, usually from rental income of the REIT’s properties, and capital gains from the profitable sale of real estate assets.

How risky is this product?

REITs are typically low-risk, but it depends on the type of real estate you’re investing in. Some types of property are less resilient in a weakened economy, as landlords struggle to find tenants. If the REIT you’re invested in consists of property that isn’t able to earn from rental yield, you’re not going to earn money either.

How much do you need to start investing?

There’s no extra cost for buying REITs; it’s the same as buying stocks so you have to pay usual exchange and brokerage fees. Also, you don’t need a lot of capital to get started. For example, 1 lot of a Suntec REIT now would cost you approximately $185.

Is it a long-term or short-term investment?

REITs often boast high-yield dividends through the year, so it is better to keep them for the long-term to benefit from those.

 

Gold

Gold

What is it?

Historically, gold was first used as currency by merchants as a simplified and easily transferable form of payment. This eventually led to the creation of gold coins and given it’s value, the US bimetallic standard in 1792 stated that every monetary unit in the US had to be backed by either gold or silver.

A key importance of gold is its ability to hold its value a lot better than paper-denominated currency. $50 thirty years ago is definitely not of the same value as $50 today because of the erosion of value due to inflation, but gold is not subject to that kind of erosion. This is also why it is known as a safe-haven investment, because historically, in times when the market has been bad, gold has been used as a means to preserve wealth.

How risky is this product? Gold tends to appreciate during times of economic uncertainty, but doesn’t do well during economic booms. This was very evident in 2011 after the global financial crisis when it hit a high of close to USD1,900, and then in 2015, the price of gold hit a 5-year low of about USD1,066. It has picked up since then and currently stands at around USD1,280 per ounce.

How much do you need to start investing? Gold is not cheap. Buying relatively small 50-gram gold bars, for example, could set you back by almost $3,000 per bar. Fortunately, unless you have a fondness for the physical item, you can consider buying gold certificates or even gold ETFs, which is a commodity ETF that, as mentioned above, aims to track and reflect the price of gold. When you sell units of your ETF, you don’t actually get physical gold back, but the ETF allows you to get exposure to the performance of gold.

Is it a long-term or short-term investment? Gold tends to be a long-term investment and prices don’t fluctuate much. The good news is that gold will always be very liquid – you can sell your gold for cash easily, whenever you need to cash out.

 

Investment-Linked Insurance Policies

Investment linked insurance policies (ILPs)

What is it?

These policies are a combination of investment and life insurance and try to be the best of both worlds. Your premiums go towards paying for units in investment-linked funds of your choice, and then part of it is sold to cover the insurance portion, while the rest remains invested.

How risky is this product? Sadly, they often fail at achieving either goal. The way these products are designed often means that you’re paying a high premium for little returns. Unlike classic insurance products, they often do not have guaranteed cash values either, which means you might end up with even less than you expected.

How much do you need to start investing? Typical premiums tend to hover in the range of $2,400 a year, or in the form of a single lump sum premium. Of course, the amount can be higher depending on the type of coverage you want.

Is it a long-term or short-term investment? As these involve life insurance policies, early termination often involves a hefty penalty, so you’re stuck with it for a while. If the policy isn’t giving you the returns you expect, you might still need to wait until the penalty is worth the cost.

Does this cheat sheet give you more confidence to start your investing journey? Let us know.

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