Billionaire “Warren Buffett” gets rich by investing his whole life. To become a super-rich person may not be your dream; the truth is that we can learn from what he has been doing if we want to be financially independent.
Long-term investing is one of the two only sources towards creating wealth besides working. You may hope to generate adequate financial resources to live a decent life in retirement through proper investing. If you think of it as a duty for yourself, the rest are how and what to invest.
In this article, you’ll learn the basic investing styles the Singaporeans are now using and the popular investment tools available to help you reach your financial goals.
An investing style means how you invest your assets. It is about your attitude and views towards growing your money. They comprise 4 investment strategies:
1. Active investing
You are taking an active part in market activities like trading and switching. Your investment aim is to beat the market through your investing skills. The following features are critical features of an investing strategy:
- In-depth market research and analysis: You study the market and investments and analyze the growth potential of assets like stocks, bonds, unit trusts, or other derivatives. You hope to capture the above-average capital gains through active investing in bond or stock markets.
- Risk-taking: Active trading means facing continuous, frequent, and abrupt market volatility. You must be a high-risk-tolerant investor. Psychological training for sudden market changes is as crucial as investment research and analysis.
- Active unit trust investing: Instead of participating in the market, you may invest in actively-managed unit trusts. The trust managers do research and analysis on investments. They keep a close eye on the market and use active trading strategies to profit. Investment managers adopt active buy-and-sell tactics, buying derivatives to lock in profits and even short-sell stocks.
Pros of active investing
- In response to market changes, active investors or fund managers may quickly adopt responsive investment strategies to avoid heavy losses and even make a profit.
- Active fund managers can use multiple investing skills like hedges or forward contracts to stem loss and lock in profits. But the investment strategies involve risks.
Cons of active investing
- While most stock trades are free today, derivative investments like options and forward contracts incur costs. If you trade more on them, you bear more costs. Most active unit trusts have high expense ratios as fund managers make more trades.
- As active investors or fund managers make more trades, the loss probability may increase. A trade is a bet and involves the risk of loss if the market reverses or investors or fund managers miscalculate. The loss may magnify if you borrow money to invest.
- You are distracted and get confused by irrational market changes. Contemporary style investing trends like SPACs or meme stocks may carry high risks and cause huge losses.
2. Passive investing
Unlike active investing, passive investing is a hand-off investment strategy. If you are a passive style fan, you set up an investment portfolio and let go of the assets to grow. The investing guru – Mr. Warren Buffett, is a buy-and-hold investing advocate. He states most active investors and funds cannot beat the market indexes over time.
The number of investment tools for passive investing is increasing with technological advances. Besides stocks, unit trusts, Robo investors, and investment-linked plans make investing more accessible to retail investors.
Here’s the features of passive investing:
- Passive investors believe investment returns will level off and won’t beat the market in the long term.
- Setup-and-let-go portfolio: An investor designs, sets up an investment portfolio, and puts it in place without significant changes for a specified time. The investment assets will grow over time, e.g., 10 years or above.
- Good planning and market research: You should analyze and create a comprehensive plan so the portfolio encompasses your investing preferences and financial goals.
- Multi-products options: Investment vehicles like stocks, bonds, unit trusts, Exchange-Traded Funds(ETF), Robo investors, and investment-linked plans are good options for Singaporeans.
Pros of passive investing
- Reduced costs: Passive investors hold the assets long and cut substantial trading costs rather than active trading. The expense ratios for ETFs and Robo investors are close to zero for stocks and unit trusts. The ETFs charge only around 0.5% a year, while active managers charge 1.5% or above.
- Decreased risks: You will likely increase the probability of mistakes when you increase trading frequency. A catastrophe may occur due to a minor error.
- Diversification: A passive investment portfolio holds many stocks or bonds and reduces a few bets held by active investors. The strategy reduces heavy losses due to one stock’s sudden fall.
- Transparency: Exchange-Traded Funds track market indexes and have their investments transparent to investors. Due to commercial competition, active investment managers do not disclose their investment techniques and provide full details.
- Higher returns: Research shows passive investing has the upper hand on active investment funds regarding returns. Most passive funds based on market indexes always beat active funds over at least 3 years or above.
Cons of passive investing
- Severe paper losses during market turmoils: You may be reluctant to see the heavy loss from your portfolio during a market up-side-downs. You may blame yourself for doing nothing because you cannot change the nature of a passive investment portfolio like an ETF.
- No outperforming star: You may not see a shining stock in the portfolio as an active one. An active manager may seek a few outstanding performing stocks to lead the gains in a portfolio. At the same time, most passive funds have a well-distributed portfolio of assets mimicking an index.
3. Dividend investing
The investing approach focuses on buying stocks paying the most dividends and creating a steady income stream for your portfolio.
- High dividend investments: You invest in high-dividend stocks, REITs, or ETFs and create a portfolio paying steady income streams.
- Potential high dividend stocks: You invest in likely companies currently paying low dividends and expect them to pay more when they grow bigger.
Pros of dividend investing
- Steady income: You may have created an income source besides CPF at retirement if you have a successful income portfolio.
- Dividend Reinvestment Plan(DRIP): Financial institutions may offer dividend reinvestment plans, so an investor increases dividend stock investments automatically hassle-free. It may be one best path towards sufficient retirement income.
- Dividend ETFs or REITs: Another source is buying ETFs and REITs which pay significant dividends. Some ETFs and REITs may pay up to 8% dividends and can be a supplement source to your current income.
- Potential stocks: You can be surprised to find a new source of income after including a prospective stock in your portfolio for some time. If you find an undervalued stock producing sizable income and dividends after years of growth, you can have a good chance of increasing your income and enhancing your investment skill.
Cons of dividend investing
- Growth prospect: A company paying earnings as high dividends may lack funds to develop new business projects in the future. It may have to retain future earnings or issue stock to develop a new project. Both may cause the stock price to slide.
- Dividend sustainability: Companies may not be capable of paying dividends in the longer term. You may have to look for other companies as replacements. But if you are an ETF investor, you do not have the issue; the ETF adjusts its investment components by tracking the index.
Speculation is the act of buying and selling assets, increasing the probability of both huge profits and losses than other investments quickly. The assets are mostly penny stocks or memes, cryptocurrencies, forex, futures, options, and forward contracts. Most speculators are active traders on exchanges.
The speculating activities always involve margin trading. That means an investor may borrow to buy assets and maximize the profit. Yet, the reverse is also true for loss. You should not mingle speculation funds with the retirement ones and keep 20% or less of your total savings on the activities.
What should I consider in choosing an investing style?
If you don’t know your investing style, it may be tough to manage your investments. You may suffer the loss by using the wrong tools. The following factors can assist you in determining your investing style.
1. What are you investing for?
Like life’s purpose, you will mobilize yourself and strive to achieve your goals with one or more financial goals at heart. If you like traveling, you may hope to take a trip to a place you dream about with the money. If you don’t want to work for someone, you may have a lump sum to start your business. And children’s education and retirement are your financial goals in the next 10 to 20 years.
Properly setting up financial goals is the first step toward goals in your life. You should write them down and prioritize your goals in preferential order. Once you have done them, you can go on to the next step.
2. By how long should you strike your goals?
OK! You have listed your targets. Next, determine the time frame to complete them. Investing takes time. A clear time horizon guides you through different stages, from asset allocations to pragmatic adjustments. You may find it hard to reach your goals without a well-defined road map because you have no idea when reviewing and adjusting your portfolio performance. Therefore, you may probably be close to failure.
3. How much risk can you put up with?
“The higher the risk, the higher the return.” You may think it holy to put all your investments in stocks or futures, and you can maximize the returns. It’s half true! The investment market is volatile, and fluctuations are normal. If you do not know your risk tolerance level, you may suffer losses from gyrations caused by unpredictable events.
Financial analysis is necessary to produce your attitude and acceptance level for financial risks before making asset choices and investment strategies. You may need to know the unfinished side: “The higher the risk, the heavier the loss.”
4. What are the best assets to invest in?
You know the goals and the time frames to complete, and you recognize what risk you can take in investing. The final one is the assets.
Confused with so many investment tools in the market, you need a financial advisor to explain the financial instruments you may require to succeed in financial success. In the following, I will explain some essential investment assets, whatever type of investor you belong to.
Since the beginning, the financial world has been evolving with new investing tools like Robo advisors or cryptocurrencies with technological advances. If you don’t know about the latest investment tools, you may make mistakes by investing in them. The fundamental investing knowledge still rules. The following assets are popular among Singaporeans.
A stock is proportional ownership of a business enterprise. As a common shareholder, you share profits and losses generated through business operations. A share is worth more if a company earns profits and less if a company suffers a loss. Your stock portfolio’s value increases because of the earnings a company makes and the market optimism investors are yearning for.
Mr. Warren Buffett says if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. He likes to hold a stock forever. If you invest in quality stocks, you should view them as a long-term investment, and a good stock may reward you considerable rewards as a return. In this, you may need a financial advisor’s help.
A bond is a commitment to a creditor to repay a loan with interest on schedule by a debtor. 3 types of bonds are available in the Singapore market:
- Singapore Government Securities: The government bonds comprise 2, 5, 10, 15, and 30 years. The bonds have 3 kinds of purposes: 1. Market development; 2. Infrastructure development; 3. Green infrastructure development; 4. Singapore savings bonds
- Government institution’s bonds: The government agency, e.g., HDB or wholly-owned funds like the Tamesek, issues bonds at interest rates higher than ones from the Government.
- Corporate bonds: Corporate bonds pay higher coupons than the Government’s and its affiliates. But its risk ratings differ among themselves. If you invest in them, you should consider a company’s credit ratings more than its interest payments. A company with a lower rating has a higher probability of default and bankruptcy than a higher-rating one.
The bond investment provides a regular and stable income stream to investors. You should refrain from investing in risky bonds with lower ratings as a long-term investment.
Exchanged-Traded Funds are popular investment vehicles in Singapore. An ETF invests in security components of a market index, like The Singapore Straits Times Index.
The benefit of investing in an ETF is that you invest in an economy or industry without further research and analysis. Passive investing supporters always advocate: “If you cannot beat the market, join it.”
ETF investing is suitable for hassle-free and long-term investors with a let-it-go style. Like stock or bond investing, investors have a broad choice of ETFs. They range from stocks, bonds, currencies to active ETFs. Investors can invest in overseas ETFs like the S&P or FTSE index.
4. Unit Trusts
If you are confident of a fund’s manager’s performance, you may invest in a unit trust. Like ETFs, unit trusts offer comprehensive asset classes. They include stocks, bonds, derivatives, futures, and cryptocurrencies. The managers will play an essential role in managing the funds, like hedging the profits and actively trading for returns.
If you believe unit trusts meet your investment requirements, you should do 2 things: 1. carry out periodical reviews of the fund’s performance and financial strength to align with your objectives; 2. on the lookout for the inclusion of new star funds to grow your portfolio.
5. Investment-Linked Plans(ILP)
An ILP is an insurance plan offered by an insurance company providing investment options to customers. It is a hybrid product combining protection and investment services.
The insurance portion provides life protection to clients, while the investment portion offers investment choices, e.g., ETFs, unit trusts, stocks, or other investment options. A client can choose international products and markets to suit their investment needs.
An investor should review an investment-linked product about its fees or hidden charges, like early surrender charges. The plan is ideal for long-term savers because of its declining charge scale after a policy is in effect for a certain period.
6. Real Estate Investment Trusts(REITs)
A REIT is a collective trust holding income-producing properties like apartments, industrial properties, hotels, or medical facilities like high-end hospitals with luxurious hotels. It suits passive income producers because it pays up to 6% of dividends per year.
When the outlook for the property market improves, it increases property values in the REITs. But it decreases the yield as a result of an increase in value.
A REIT investment is appropriate to passive income investors who prefer steady and regular income. The popular REITs include Suntec, MapleTree, Frasers Centrepoint.
7. Robo advisors
Artificial intelligence(AI) advances bring investing world new products and services. A Robo advisor uses algorithm computing to invest for clients. The popular Robo investors have StashAway, Syfe, Endowus, and even household banks such as DBS, OCBC, UOB.
A Robo advisor is an investment platform where clients choose an investment package according to a client’s financial needs. The AI machine regularly automates and rebalances a client’s portfolio. The investment packages range from low to high risks and consist of ETFs and stocks like REITs.
Robo investing is a hands-free investing service. As an investor, you choose one or more investment products and let a Robo do the rest. It is suitable for beginner or busy investors with other engagements.
An issue with Robo investing is it can handle simple investing activities according to pre-set formulae. Complicated transactions like hedging and derivatives trading are out of reach. Therefore, Robo can reduce investment costs; but it only performs simple tasks. Find out the best Robo advisors in Singapore.
Investment is a necessary part of accumulating wealth. You need it on the path towards retirement, education, or other goal-setting purposes. Before choosing the most desirable investing style, you should consider your circumstances in detail.
- Active investing suits risk-takers believing above-average returns.
- Hassle-free and long-term investors fit for passive investors.
- Dividend investing is appropriate for passive income investors.
- Speculation is for investors desiring a vast sum of money quickly.
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