A Really Simple Guide On Investment Products To New Investors

Guide on investment products

[9 min read]

Written by Sherwin Chan, edited by Jackie Tan

Hello readers of fundMyLife articles! If you have read my two previous articles, which are here and here, you probably figured that I am relatively new to investing that has just a couple of years of experience.

Truthfully, when I first said to myself that I needed to start investing, I had a lot of inertia in the early stages because I didn’t know where to look for information or even what type of information I should be researching. And that’s why I am writing this article for those who are new to investments. Hopefully, I can be of some form of guidance to them.

What this article will cover is:

  1. How each kind of investment is suitable to the needs of different groups of people
  2. Pros and Cons of the major investment types
  3. My humble advice

Here’s the kind of investment that is covered below: 1) Stocks, 2) Bonds, 3) ETFs, REITs, and Index Funds, 4) Insurance products, 5) Alternative Investments

Disclaimer: this article should serve only as a general introduction to investment products. As such, do your own research and due diligence before you purchase any investment products. 

#1 Stocks

Who is it suitable for?

There’s no definite answer to this question. Why? It’s because there are so many stocks out there that every kind of investor can almost certainly find a stock that matches their financial needs. Still, pairing your financial needs doesn’t mean you should plunge straight into the stock market. There are other factors to consider as well.

For instance, one must have good knowledge and have the time to track how the stock market moves to time the entry and exit well. This knowledge is a combination of fundamental analysis and technical analysis because if you enter and exit the stock market at the wrong time or pick the wrong ship to board (analogy), you probably will lose money or won’t earn as much. Also, you should have sufficient financial and mental strength to weather volatility. The stock market is very liquid which results in high transaction volume, and therefore prices change quickly based on new information or market irrationality. As such, having the financial strength to weather volatility is critical, and you shouldn’t enter the stock market if you’re dumping a significant portion of your assets into it. Always be prepared for the worst.

Pros & Cons:

Pros:

  1. Potential for very high returns. (Look at Apple, Google 10 years ago and now)
  2. Some stocks offer stable, consistent dividends that investors can rely on as income.
  3. Almost all industries that you can think of are covered, and this is an excellent avenue for diversification across sectors.
  4. Stocks are easy to liquidate due to the ample liquidity in the market.

Cons:

  1. Higher risk especially if you pick wrong.
  2. Higher volatility in the short run than the long-term
  3. Time and effort are required for analysis.

My humble advice

Don’t be afraid of entering stocks! I know most of my peers are quite apprehensive about entering the stock market because to them, as newbies, it is venturing into the unknown. I genuinely understand that anxiousness, but it’s important to take your baby steps at the start. As I always mention to my friends, always start small and make as many mistakes as you can when your base capital invested is small. It’s better to lose $3,000 now than to lose $30,000 in the future. The earlier you make mistakes, the more you’ll learn because you know what doesn’t work. I’ve mentioned other advice regarding stocks on my first article here that I can only reiterate. Read voraciously, don’t limit yourself and test your pick across different strategies!

#2 Bonds

Who is it suitable for?

Bonds are suitable for those looking a regular source of income. Most bonds provide regular coupon payments that are stated in the terms, and this payment is pretty much guaranteed so long as the company doesn’t default on it. Bonds are also suitable for those looking for diversification sources from stocks and other forms of investments because bonds are stable long-term investments that can provide a decent income. Also, because it is usually recommended to hold the bond till maturity, investors should have sufficient financial strength to hold them until maturity.

Pros & Cons:

Pros:

  1. Returns are fixed and pretty much guaranteed so long as the company doesn’t go kaput
  2. Less risky in general compared to stocks in general
  3. You get the benefit of knowing what a good bond versus a junk bond thanks to credit rating companies

Cons:

  1. Sizeable principal sum needed to purchase the bond in the beginning
  2. May lose value in the future if interest rates rise especially for longer-term bonds
  3. May lose value if you don’t hold them until maturity
  4. Not as liquid as stocks.

My humble advice

Don’t shy away from junk bonds. It’s not that I’m saying you should buy junk bonds, instead, do give some considerations to junk bonds as well because junk bonds often have higher returns that AAA-rated bonds. Remember, go for the bond that you feel comfortable with and can maximize your wealth. Also, don’t underestimate the interest rate risks on bonds especially for those investing in long-term bonds. For all investors, it is essential to have a basic understanding of how the interest rates move and how it affects your investments.

#3 ETFs, REITs, Index Funds

Who is it suitable for?

For this class of assets, while ETFs, REITs and Index Funds are entirely different things, one thing they have in common is that they are all baskets of investments. These usually hold more than one financial product in it and as such, are decently diversified within itself. This means that there are less diversifiable risks and hence provide a safe investment with not so bad returns. Additionally, since it is usually passively managed by a finance professional, it is suitable for those who have no time to micro-manage their portfolio and for newbies who are risk-averse and not sure of what other investment products to venture into.

Pros & Cons:

Pros:

  1. Can provide stable returns
  2. Have lower volatility than individual stocks
  3. An easy way to track the health of an industry/sector/economy
  4. Some are passively managed while finance professionals actively manage some
  5. Good for newbies who are not sure of what stock to buy but know what sector is good. (Reduces the chances you make a costly mistake)

Cons:

  1. Returns are lower than individual stocks
  2. For those managed by finance professionals, you still must pay management fees even if you don’t make a profit
  3. If you do make money, they also take a cut of your profit
  4. Your exposure may be too focused on the industry/sector causing you to have systemic risk

My humble advice

Always check what is contained in the basket you are buying. If you don’t check what’s inside the basket you are purchasing; you’ll never know whether there are golden eggs inside or rotten eggs inside. As such, it is essential to understand what you’re buying. I mean, it’s basic common sense to know what you’re buying right? Additionally, always be sure to check the management fees and the commission fees the finance professionals are getting from you. In times of recession and periods of low return, these small amounts make a huge difference in whether you make a net profit or a loss.

#4 Insurance products

Who is it suitable for?

Almost everyone. Now, talking about insurance warrants its series of articles but thankfully fundMyLife has covered this topic here and touched on the basics of it. But as a summary, there are many different forms of insurance available out there in the market, and you really should talk to a financial consultant to understand more and tailor your needs to the correct financial products. However, in general, it is suitable for people seeking ultra-long-term financial security and for those who are risk averse but do not want to earn the measly interest rates a savings account in the bank provides. Also, it is advised that you hold these products for the long term to enjoy the full benefits of it and hence, it is more suitable for those who have the financial capability to sustain this commitment.

Pros & Cons:

Pros:

  1. Returns are stable especially if you hold for ultra-long-term
  2. With proper research and planning, some have high bonuses over the long run
  3. Variety of insurance products are massive, and some will suit your needs

Cons:

  1. Returns may be lower than the market average
  2. Some products are not suitable if you need high liquidity in the short term
  3. You need to read all the fine print and understand everything inside it
  4. Most products require regular premium top up
  5. Be careful not to be scammed by those products that promise high returns but may not suit your long-term needs

My humble advice

I am no expert in insurance products and as such, implore you to read other fundMyLife articles on the basics of insurance as a start. One thing to know about insurance is that while there are many financial consultants out there who are out to eat your commission, there are many others who have a genuine passion in helping you meet your financial needs. One way to protect yourself is to do your research before engaging one to prevent yourself from falling into investment traps.

#4 Alternative Investments

Who is it suitable for?

Alternative investments here are those types of investments that don’t fall under the above four categories. For example, the most prominent alternative investment product is currently cryptocurrency. Other forms of alternative investments include art, vintage cars, timepieces, wine, etc. While there are many alternative types of investments out there, these usually don’t have the size and liquidity of the above four, and as such, I only recommend it to those who are willing to take risks and for those seeking to diversify away from regular investment products.

Pros & Cons:

Pros:

  1. Returns can be eye-popping (Bitcoin if you time it well)
  2. A wide range of choices available for you and as such, provide useful avenues for diversification

Cons:

  1. Returns can be wild, and losses can be massive (Again, look at bitcoin)
  2. Information about it is a lot lesser and are less accurate than those provided by reputable firms.
  3. Usually not very liquid investments

My humble advice

Truthfully, I am not well versed enough in this area of investments that I can provide you guidance per se. However, what I can tell you is that this area of finance is niche, and most investors are not suited for it. If you ever dabble in this area, make sure you do your proper research on the technical details, legal details etc.

Conclusion

What I have written above is just a simple guide for newbies to understand more about the different product types and by no means a comprehensive list. Newcomers should still do their research on every kind of investments and more importantly, understand their individual financial needs and goals so purchase the correct investment products. It is imperative also to have some basic finance knowledge before you genuinely commit your money into the investment. All the best and may you be profitable in your endeavours!

Been doing lots of research, but not sure who to engage to take the final step? Look no further! fundMyLife connects you to credible and incredible financial advisers privately and anonymously, based on the financial planning questions that you ask. We aim to empower Singaporeans to make financial decisions confidently.

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