Why you don’t have to break the bank to start investing
Investing is perceived to be an expensive thing to do. In fact, many people we spoke to told us that they aren’t investing because they do not have S$10,000 to spare. We know that can be an awful lot of money for the average person trying to make ends meet.
So, we’ve compiled some ways where you can invest like the average Joe/Jane. Underlying all these options are the real “engines of growth” – in other words, how investments get returns:
- Capital gains/losses: when the price of the investment rises/falls
- Dividends: when a company rewards its shareholders with its excess earnings
- Coupons: when a company (or government) pays you interest for lending them money through your bond purchases
- Compounding: when you earn returns on your previous returns
With that, let’s look at the 7 different ways that have different combinations of these engines.
1. Look for investments with affordable minimum sums
When you buy stocks, you become a shareholder in that company. One way is by buying Singapore stocks in ‘board lots’ of only 100 units, through a trading platform such as DBS Vickers Online.
So, if you fancy Stock X which costs S$3.35, you can start investing in it for around S$335, plus some brokerage fees.
Unit trusts are another consideration, as many of them have a starting investment amount of S$1,000. And if you decide to buy more of that unit trust in future, some of the minimum “trade amounts” can drop to S$100.
2. Think about regular, small investments
Alternatively, if you can commit to regular investments each month, some unit trusts have the option to start investing with an even-lower starting amount of S$100.
If you prefer buying an Exchange Traded Fund (ETF) that mirrors the performance of the Singapore stock market or a bond ETF, you can start investing for as little as S$100 a month through POSB Invest-Saver.
One advantage of regular, small investments is you are not trying to time the market. This is a disciplined plan of investments, known as dollar-cost averaging, that will average out the cost of share purchases.
More importantly, this means that you are relying on “time in market” instead of “timing the market”.
- Time in the market: Historically, good quality stocks have their ups and downs. But over the long term, their prices will tend to trend higher.
- Timing the market: is a very difficult task, because it involves trying to pick the moment when stock prices are at lows. Even highly-trained professionals find it difficult to do this consistently.
Take legendary investor Warren Buffett, who is now said to be worth US$84 billion. In his youth, he learnt (painfully) how to buy good, buy cheap and hang on. In other words, time in the market.
Warren Buffett reportedly started his first investment with only US$228 spare cash. The story goes that within days of making his first investment, he lost a third of it. When it bounced back, he sold the shares at US$2 each, and made a profit. To his dismay, the share went on to rise to US$162 – oh, profits!
3. Tap on your CPF
So long as your CPF balances exceed the threshold, you can use the “excess” to invest. But it’s not always better to use your CPF to invest. That’s because the returns you get may not be better than the interest paid by the CPF board: a risk-free rate of 2-4%, and an additional 1% on the first S$60,000 of your total CPF balance.
You must have at least this amount before you can invest
* There is an additional 1% interest paid on the first S$60,000 of your total CPF balance.
Note: You can invest a maximum of 35% of your “investible savings” in stocks and 10% for gold. “Investible assets” refers to whatever is in your CPF-OA, plus the amount of CPF you have withdrawn for investment and education.
Before you invest, make sure that you’re aiming for a return that’s bigger than the risk-free CPF interest rates.
Similarly, if you’re choosing between using your CPF-OA or CPF-SA, always prefer the OA. That’s because it pays a lower interest rate.
To start investing using your CPF funds, open a CPF investment account with an approved CPF Investment Scheme (CPFIS) agent. You can use this account to invest in stocks, unit trusts, and bonds, among other things.
4. Invest some of your tax savings
If you’ve maxed out your CPF contributions, you might have a Supplementary Retirement Scheme (SRS) account. With this, you can top up your account with a maximum of S$15,3000 each year to get the maximum tax relief.
And because it makes more sense to leave the monies within the scheme (than withdraw it before you turn 62), that S$15,300 can be put to work in investments, rather than sitting idle and earning a paltry 0.05% each year.
5. Build a portfolio without timing the market
When you get your first bonus, it feels good. Subsequently, the bonuses probably go to household items and needs.
Here’s when we will say that saving some of your bonus for your future is the most loving thing you can do for your family. Because saving (and investing) for yourself is investing in your children’s future. And with a diversified, multi-asset class portfolio that is built by human expertise and powered by robo-technology, you can do just that. You’ll need to put in a minimum of S$1,000, but our promise is that you can invest, enjoy your family time, and repeat.
And if you’d like to dive deeper, we’ve compiled a list of useful reads to help you with your investing journey. Because, like you, our families come first:
- A Singaporean’s practical guide to investing in stocks
- 3 factors to consider before buying a REIT
- A beginner’s guide to Unit Trusts
- How to understand your appetite for risk
- Psychological traps to avoid when investing