Personal Finance
The 1,2,3 about your money
THE
LAST
WORD
Dr Larry Haverkamp
Today we will review what to
do with all that money you make. In particular, how to invest it.
First, set aside emergency money. I suggest $10,000. Deposit it in
a fixed deposit, although you will earn a skimpy 1 percent per year
that you'll have to forfeit in part if you must withdraw it quickly
for an emergency.
Second, buy a property. lt has so many
advantages, your best strategy is to invest as much as possible,
but that depends on how much the bank or HDB agrees to lend you.
That, in turn, depends on the mortgage service ratio (MSR) and
more. Don't bother trying to calculate all this yourself. Instead,
simply ask the bank or HDB the maximum home loan you are
allowed.
Third, make "investments in living': This
includes things like a refrigerator, washing machine and - the big
one - a car. Not everyone needs a car and avoid it if you can, but
if you got to have it, go ahead and even buy with borrowed money if
you must.
Fourth, you may be finished but ask yourself:
Is my income so high, that I still have money coming in? If so, you
are part of a privileged group that has to worry about investing.
(Good for you!)
Fifth, Where to invest? A popular choice is
property, but you already did that when you purchased your home.
When you purchased your home. You could add an investment property,
but it's not cheap. You'll have to pay a buyer's stamp duty, the
new "additional buyer's stamp duty", property taxes plus
maintenance costs, and income taxes on your rental income.
Those costs make a great investment just so-so. You
may be better off with safe investments like bank deposits, bonds,
bond funds and a Singapore favourite, whole life and endowment
insurance policies.
While risks are low risk, the returns are too.
Jeremy Siegel tells why in his book: "Stocks for the Long-Run"
where he shows that over any 20-year period since 1900, stocks have
always out-performed bonds. (Opt out of risk and you will pay for
it dearly!)
One guideline is to buy shares but hold a per cent
of safe investments equal to your age. For example, a 40-year old
will hold 40 per cent in fixed deposits and bonds. lt's an easy
rule, but check to see if you've covered your safe investments
already in groups (i), (ii) and (iii). As I say, overdo it on
safety and you will lose big-time on returns.
Sixth, What's left is shares. It's a good
choice, since the long-run returns are high and costs to buy are
low. Most advice you receive, however, is the opposite. lt is to
pay high fees, employ professionals and jump through hoops to prove
you are competent enough to invest your own money!
Seventh, KISS, which stands for "Keep it
simple, stupid!" (No offence.)
It is easiest to KISS with a passively managed fund
that you purchase on your own with no need for professional
advice.
Is it risky? Not really. The risk is low because it
is passively managed. lt's called an index fund because you own all
the shares in an index, like the S&P 500 in the US or The
Straits Times Index here. There is no need to worry about picking
stocks because everyone owns a little bit of all the shares in an
index fund.
The best way to invest in index funds is probably
with exchange traded funds or ETFs. They make investing cheap,
since ETFs don't hire experts who try - with little success - to
pick stocks that out-perform the market. ETFs are the market!
Another big plus: Most ETFs have yearly expense
ratios of 0.5 per cent or less, which compares to two to three per
cent for unit trusts. You need a broker to buy ETFs, and online
trading is always cheapest. One-time costs are about 0.6 per cent
for a "round trip'; which means to buy and sell. (US and European
brokerage costs are even cheaper and almost free.)
Eighth, a problem is most of the world's 1,600
ETFs are traded in US dollars, and new Singapore investing rules
classify these as "specified investment products" or SIPs. SIPs are
supposedly so risky, you must prove you are qualified to own them,
and the standard way to do that is to take a test given by your
stockbroker.
Not all investors are keen to be tested, so ETFs
have yet to gain a foothold here. Another reason is advisors
typically don't promote them, since ETF's can't afford to pay sales
commissions from their already low fees.
One solution is to avoid the US ETFs, which you can
do by trading non-SIP Singapore dollar ETFs like the SPDR STI-ETF
and the NIKKO AM STI ETF. Both contain all 30 shares from The
Straits Times Index, and both are approved for investing from your
CPF ordinary account.
A second solution is to avoid SIP rules and trade
US dollar ETFs through a US stockbroker. You can do that by opening
a US dollar account with a US broker, which is easy, although some
may require a US street address. You can get one with a US mailbox
company that you can find with Google.
Two US discount brokers I recommend are Charles
Schwab and E-Trade, with E-Trade having the fewest restrictions and
lowest capital requirements.
Dr Haverkamp is an economist and adjunct
faculty member at Singapore Management University. In his weekly
column, he shares simple tips on how you can make money work harder
for you.
Personal Finance, The Sunday Times Classified, November 16 2014,
Pg C18
