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.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

New To Investments? Here’s 5 Things To Look Out For When Creating An Investment Account.

Tips when creating an investment account

Written by Sherwin Chan, edited by Jackie Tan.

As promised from the previous article, where I shared my personal experience in getting started in stocks, this is the follow-up article where I go into a lot more detail on the things to look out for when creating a brokerage account. After all, when you first decide to dabble in investments, you must first create your platform to stand, and there are many options available for you. So, keeping a lookout for the things written below will make sure you create a sturdy platform that can make your investment life simpler!

#1 Commission Fees

This is a no-brainer thing to look out for. Would you have spent money on a trade knowing that there are cheaper commission fees options out there? Of course not! So how do you go about selecting a brokerage firm from this option? Well, one important aspect is knowing your own investment goals and financial capability.

If you know your investment goal or specific products you want to buy, be sure to choose a brokerage firm with the lowest commission fees for that product you want to buy! Most of the time, there won’t be a specific minimum to have when making your trades, but brokerage accounts do have a basic fee when you make a trade. Keep a lookout for this amount especially if you don’t have enough to hit the lowest band of trade amount.

Lastly, don’t just consider the minimum commission and the percentages charged on the lower end of the trading amount, but look at the fees the firm charges at the higher end of the scale as well. After all, as you progress on, you will earn more income from your job etc., and you will be trading more substantial amounts, and commission fees on the higher end of the scale become essential.

#2 Ease of use of the online platform

This is especially important since 99% of the time you’ll place your trades online (commission fees are usually cheaper this way). Some firms provide very old-school user interfaces to make the website faster by reducing the fanciful user interfaces (useful for those intending to do high-speed trades), whereas I prefer a more user-friendly interface (since I invest in the long term) and only log in occasionally. Every individual has their own needs and preference and needs so make sure you choose based on what you require. The last thing you want for a long-term investor is a platform that’s hard to access the information about the fundamentals of the companies! You can find tons of online reviews of the different platforms in Google regarding this.

#3 Scope and Depth of Research Reports

Investment firms pour tons of money into this area of their operation because if you make the right trades, they earn more commission fees. However, not all research reports are created equally; quality of analysis is essential. Additionally, the coverage of the research reports regarding several markets (E.g., Hong Kong, Japan etc.) and the coverage for medium cap firms and penny stocks. These are usually the neglected ones, but they tend to have higher returns than blue chips (big established firms). The frequency of update is also critical. Do they update quarterly? Semi-annually? And lastly, is the accuracy of the reports. When they recommend buy and give you a price target, how are their hit rate and standard deviation? All these are difficult to answer especially when a newcomer does not have access to the resources but have faith in Google and your researching skills.

I implore you to spend more time on doing this especially if you’re a newbie because research reports by brokerage firms are usually exclusive information and can provide you with more in-depth insight on the inner machinery of how the market works. This information is priceless (not really since you pay via commission fees).

#4 Customer Service

Don’t underestimate the importance of customer service. If you ever encounter any problems in your trades, especially if a sizable amount of your money is tied down, the last thing you want to hear over the phone are stupid jingles that last for eternity, while the customer service officer enjoys his cup of coffee on the other end, taking his time to finish his biscuit before attending to you. Customer service is especially crucial for those who intend to do most of their trades over the phone and for beginners who will most likely face problems over the system when doing their trades.

#5 Freebies

One freebie that is prevalent in most brokerage firms are the attractive sign-up bonuses you can receive. These can come in the form of commission-free trades or a one-time sign-up bonus. After reading all the above, if you still need help in deciding what brokerage firm to use, the freebies that come with the brokerage firm might help make or break the decision you make so make sure you choose wisely. Additionally, some brokerage firms have young investors scheme where they provide lessons beginners on certain basics.

After reading all the above, I hope you have a clearer idea of what to look out for when choosing a brokerage account. Remember, the above is just a short list and explanation of what to look out for. Don’t neglect your research into the company and make sure you tailor your investment needs to the best brokerage firm out there. Having an excellent online platform can make your experience investing an enjoyable and more importantly, profitable one 🙂

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.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

My First Time Was Painful (When I Started Investing)

Why and how I started investing

[6 min read]

Written by Sherwin Chan, edited by Jackie Tan.

How I got lucky with boredom

Before you read on, what I have written below is more on how I got started with stock investing and some snippets of suggestions inserted based on my personal experience. It won’t be a long read but neither will it be short. Hopefully, I can provide prospective investors with some peace of mind of what to expect. I’ll follow this article up with another one that will help you understand the different types of financial opportunities and how some will not suit you.

Boredom

I started investing due to boredom.

Now hear me out, it is not that I do not have the awareness that early financial planning would be beneficial in the future, but rather the reason why I first picked up a book related to investments was merely due to boredom. I started investing when I was in the army doing my national service; I was a clerk and was fortunate enough to stay out (go back home daily). Since my daily duties were not physically exhausting, by the end of the day, I had sufficient energy to engage in my hobbies – binge watching my favourite shows.

As time grew on, I got bored of the routine where I just “consume YouTube videos like there is no tomorrow” lifestyle and decided to read more educational non-fiction books instead. This led me to non-fiction books that eventually brought me to topics like economics and investments. I decided to pick up the book on “Stock Investments for Dummies” (I was a dummy then so I might as well start from the book designed for me) and was pretty apprehensive about it at first but still gave it a shot.

Me giving a shot at the book led me to spend the next four months intensely devouring its contents. I studied my book as if I was taking A Levels and learned lots of stuff from it. Now, I’m not promoting the book but merely telling you how I felt when I first dabbled in a topic that I did not know. I was like a caveman seeing the fire for the first time; everything was new and too exciting for me to pass. I’m sure that’ll be the case for you newcomers as well.

Suggestion #1: Your first book should give you the general idea of where to begin

While we are on this note about what books to start with, I suggest newcomers pick up a book that covers the different forms of investments. I started with “Stock Investing for Dummies” (more specialised to stocks) partly because I already knew I wanted to try stocks first before others, but also because I couldn’t find the “Investment for Dummies”, the more general one, and was lazy to go find it on other bookstores. For beginners, always know what choices are available to you first before picking one and going to learn more deeply about it. This means knowing what a bond is, what are ETFs, what are REITs and all the other possible investment products available out there for you. The more you know about each type, the better you can invest based on your needs. Ultimately, if you don’t know anything about investments, it’s best to start with the definition, scope and depth of it first! I will be covering more the different forms of investments in the follow-up article that will be so stay tuned!

Creating my first account

Apologies for the slight digression above but that’s how I am going to place my suggestions. They are all just snippets of useful information, that will be inserted wherever appropriate. Going back to my story…

I eventually got into the process of creating my first brokerage account with DBS Vickers Securities, and it was at this point that I felt that I should have done more. I was naïve then and just assumed that a good brand name for a company was all there is to a brokerage account; I’m not saying that my experience DBS Vickers is terrible, in fact, my experience so far with them has been positive. All I am saying is I did not do the necessary research properly before choosing my brokerage firm. I was lucky that DBS is an excellent firm with a strong reputation, but for other first-timers into the investment scene, I shall create a short to-research list about the brokerage account in the follow-up article (otherwise we would never end this article). For now, let me just share with you my experience when I created mine.

When I first wanted to create an account, I was not eligible for a full trading account (above 21 years old) and signed up under their young investor scheme (18-20 years old) instead. They explained to me what the benefits of having their trading account was and gave me a short risk-profile test and sizing my investment knowledge. Which basically went like this…

Well, the picture might have slightly simplified things but what I can say is that they do all the assess you in a natural flow of conversation that helps keep young, apprehensive investors like me at ease. They also informed me that the brokerage account is different from your usual bank account and how to top up money into it to start trading. They also explained the different avenues which they can help me improve my knowledge of investments. I eventually got my brokerage account and SGX CDP account (requirement if you wish to trade in SGX) created at one go in 15 minutes. With this, I finally had a powerful platform to start my stock picking.

Devouring information

Now doing all the above will only give you the platform to start investing. The other, more difficult portion is knowing what to buy. What I’ve learned over the past couple of years is the importance keeping up to date with industry, economic, political trends and random information off the news. During the whole course of the journey, it is essential that you know everything and anything about the stock you want to buy or already have. Only when you know the latest trends, predictions in the future can you be “in-the-know” about what stock to buy, whether the industry is expanding, threats to your company etc.

Suggestion 2: Start reading early

You don’t have to have an investment account to start knowing what is happening around the world. A lot of news event around the world occurs in a sequence of events; they don’t happen singularly. For instance, predictions you hear about quantum computing doesn’t just come from the wild imagination of a tech geek, these futurists often have seen information and news from around the world that gradually roll out. If you don’t expose yourself to this small but gradual steady stream of information, you will never be able to analyse trends yourself and must always rely on others. What I’m saying is if you’re the kind of person that doesn’t have the habit of reading news regularly, it’s difficult to follow what is happening in the world and that puts you at a considerable disadvantage over other investors in the market. You’ll always be behind the curve. So, start early!

Choosing the first stock

The first stock I picked was a company listed in SGX. It was G92: China Aviation Oil and getting to this stage where I decided my first stock took me two weeks of research. How I went about choosing my first stock was looking at things from a macro to a micro perspective. Firstly, I analysed the country and the sector that I thought had growth potential. In this case, I chose China’s booming aviation sector. After which, I decided on the industry within the sector, and this was the aviation fuel supplier business which China Aviation Oil was engaged in. I mean, planes need fuel to fly so being in the aviation fuel business would suggest that this industry would be part of the booming sector. After choosing the industry, I narrowed down to the different companies and set a price target to buy & sell. Once I felt the price was sufficiently low and had excellent earnings potential, I bought the stock.

How I chose my first stock may seem easy but trust me, it was tough. Firstly, there are many booming industries and stocks with high potential and narrowing it down to one was hard. It is always best to have a few shares in mind eventually and pick one with the most earnings potential based on the current and future market price. There is a reason why I took two weeks to do this because there were many considerations and it is okay to feel lost during all the research. After all, the companies and industries on the list are probably those that you never heard of so take your time to understand as much as you can!

Suggestion 3: Don’t limit yourself

You may have heard from your parents, investment gurus that blue-chip stocks (large established firms) are stable and provide excellent earnings. While it is true they are stable; they may not offer the BEST gains. Don’t just limit yourself to a particular type of stocks, countries, industries etc. Always keep an open mind and do your stock screening well. Always remember to do your research correctly and BELIEVE IN YOURSELF! It’s better to make mistakes when your starting capital is small than make an error in the future when your wealth is more substantial.

Suggestion 4: Test whether your pick survives the different ways of picking a stock

My method of going from macro to micro can be a way which you choose shares. However, there are many other strategies which people employ. Pick an approach first and once you have a few companies narrowed down, test them with different strategies and see whether they survive the litmus test and is still worthy of a purchase. The stock doesn’t have to endure all approaches but the more the better. Also, don’t pick a plan that does not align with your goals and needs.

What’s next after you purchase your first stock?

Be patient. That’s the number one key. I know it is tempting to sell your stock when you see a sizable increase in its value OR a sudden decrease in value but always stick to your price objective. In the meantime, it is essential to check the value of the stock at regular intervals to monitor for sudden price changes. Sudden price changes might mean there is new information that may affect your stocks current and future value. During all these, never stop keeping yourself up to date with the latest trends and keep an eye out for the next opportunity. New information in the market can change your price objective and remember to re-evaluate the present and future value of the stock regularly.

My journey from picking up the first investment book to purchasing my first share took me a total of 4 months. It may seem long but in hindsight, the moments I had when I felt lost was invaluable because it taught me many things about how to do and not-to-do things. Trying to establish a sense of direction was arduous and painful, but I’m glad to have gone through this journey. I am now more financially independent and able to help my fellow peers. I am continually learning and from my experience, the critical thing I can share is TRUST YOURSELF.

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.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

 

Is Time Really Money? The Real Cost of Excessive Spending

fundMyLife explores the opportunity cost of money

Written by Kartik Goyal, edited by Jackie Tan.  

Opportunity cost! Most of us know it, almost everyone has heard about it – that feeling of wasting money never sinks in completely. It all seems like a wild claim that an excessive spending of just $10 a month is really a $74,000 loss for your retirement fund. In this article, we find a new way to put things into perspective.

Let’s do some (simple) math!

An average person’s lifespan is 82 years in Singapore. On top of that, assume that an average person spends 22 years acquiring his/her education. Additionally, another simple assumption is that a person spends 8 hours a day sleeping, another 8 hours to themselves that do not account for working hours – meals, chores, entertainment, and other activities – and retire by the age of 65. 

After taking everything into account, we are left with just roughly 15 years’ worth of working hours in our entire lives. To put that number in perspective, it’s 5,475 days or 131,400 hours.

At this point, you are probably thinking that that’s a lot of time. Well, the answer is both yes and no. Ideally, the financial aim of an adult is to live at a similar lifestyle after retirement, if not more luxurious which unequivocally depends on your current lifestyle and the one you will adopt in the coming years. This also means you’ll require 17 years’ worth of cash and investments by the time you are 65 to live to the ripe old age of 82.

Let’s maths even more

Deriving from Singapore’s GDP per capita, 3% increment of salary per annum, and a significant promotion and salary bump every 5 years, we estimate that a person will make an average of $51 per hour throughout their career. That’s around $8 million in total (absolute value, not adjusted for inflation or interest). Reading the last sentence would have made you proud of yourself already. You are already tempted into a little celebratory splurge on yourself, with perhaps an ice-cream?

Say a tub of ice-cream tub costs $5 – that’s around 10 minutes of your working life. Now, if you estimate that you buy one such ice-cream every month throughout the course of your working life, the total would be $3,060. If you were to put all that money and its subsequent returns in savings each month, you would accumulate around $19,000 by the time you retire. To put that number in perspective, it’s almost 610 hours of your working life or around 25 days in ice-creams.

To put simply, a single $5 deposit will turn into $53 over 40 years; that’s 62 minutes worth of earnings (assuming 6% interest rate and biannual compound interval). It might not seem like a lot but, if you think about it, spending $5 might cost you 10 minutes but saving $5 dollars will salvage more than 60 minutes of your work time, by the time you retire.

mindblown

There’s more! A $30 dinner with friends each month eats roughly 3,600 hours or 153 days of your time. If you drink alcohol, especially in restaurants and spend $50 a month, you’re pouring away almost 6,000 hours (not including the hangovers). Love those $500 pair of Louboutins? Average price, ladies! Don’t shoot the messenger. That’s walking away from 36 weeks in total, assuming you’ll need a new pair of them every year.  

A graph showing the opportunity cost of buying unnecessary things

To appreciate the impact of purchases, we plotted common activities against two things: average cost of activity, and the number of working hours eaten away throughout your life. For example, if you look at the “Restaurant” example from the previous paragraph, it costs $30/meal and 3600 hours of working life.

We understand that scrimmaging expenses is tough, saving as little as a $100 a month can shave off 1.5 years of extra arduous work towards your retirement fund. By all means spend on yourself to stay motivated, happy and content, however a stitch in time saves nine.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

Follow us on our fundMyLife Facebook page to get exciting updates and your dose of finance knowledge! Alternatively, the Insurance Discussion SG Facebook group is a good place to discuss insurance-related topics with fellow Singaporeans.

Why Bonds Are Not Such a Bad Idea

An underrated vehicle? fundMyLife bonds with bonds to find out more

Written by Kartik Goyal, edited by Jackie Tan. This article is a part of a special series by fundMyLife content marketing interns from QLC.io

No love for bonds?

With exceptional volatility in stock markets, slower lending and higher borrowing rates, bonds should not be a taboo for young investors. In a survey conducted to find the best investment instrument for young investors by youngsters, none mentioned bonds as a viable investment opportunity.

A donut chart showing the % difference between those who prefer to invest in property over stocks.
Investment preferences from a survey conducted on adults aged between 18 to 34. Around 2/3 chose property over stocks as a form of investment.

65% of the people aged between 18 and 34 would prefer properties as their first major investment, stating stability and security as the rationale behind their choice. We also conducted another survey that asked adults over 35 on what they would recommend for younger adults.

Donut chart with different percentages on it
Survey results of what older adults would advice younger adults to invest in.

66.7% of the people aged 35+ would recommend youngsters to invest in properties first, whereas 17% would recommend them to create a 6-month fall-back cash fund for emergencies before investing in properties.

Whether it was a lack of confidence or knowledge, we think bonds might be a little misunderstood and frankly underloved. With this in mind, we set out to enlighten you all on the pros of bonds and why they shouldn’t dismiss them so quickly.

Pros of Bonds in General

Diversification

If you don’t trust the stock markets or are just looking for something that’s more stable than the latest and hottest stocks at your watercooler chats, bonds might be the answer. While stocks are ownership stakes in companies, bonds are essentially loans that you extend to companies. By investing a percentage of your portfolio in bonds, you are ensuring that you do not keep all your eggs in the same basket. They tend to be more stable than stocks and provide relative certainty.

Steady Income

Bonds come attached with a fixed interest rate that pays the bond holder on an annual or bi-annual basis. While companies are under no obligation to pay the stockholders with any dividends, bonds provide predictable returns which is perfect for anyone planning for their retirement or just looking for additional income.

Interest Rates

Bonds come with a coupon rate which is the percentage of money that the issuer would pay the holder as interest on the loan, throughout the life of the bond. This interest income can be used to fund your extravagant lifestyle, satiate your appetite for riskier investments, or it could also form a part of the income you retire on.

Liquidity

Highly rated bonds from reputed companies and those issued by stable governments are easy to sell and convert to cash when needed. This provides you with the assurance that you would get your money when you need it. If you plan to hold the bond until maturity (i.e. the time at which the issuer agrees to pay the principal) you would get the totality of your principal back.

From 1980 to 2016, bonds yielded a positive return 34 out of 37 times, whereas stocks went up 31 out of 37 times (based on USA markets). Stocks generally provide higher returns over longer duration and that they are volatile. On the other hand, bonds are relatively more stable and are known to provide positive returns even in bad market conditions. The graph below perfectly visualises this phenomenon.

Relative performance of bonds to S&P 500
A plot of the relative performance of bonds to S&P 500 over a period of over 80 years

Fun fact: Apple holds $148 Billion worth of corporate and treasury bonds, making it the biggest accumulator of bonds in the world. When the biggest company in the world decides to invest 58% of their cash pile in bonds, there must be something attractive.

Legal Protection

You must be asking what happens when the issuer goes bust or refuses to pay? Well, if the company goes bust, it starts selling its assets. The remuneration is paid in such an order that structured bond holders get paid first (the highest class of bonds), then the holders of unsecured and subordinate bonds are paid, and if something remains it is distributed amongst the shareholders (so much for being an owner).

Still not convinced?

Story Time

What would you choose were you given a choice between a diamond and a bottle of water? You would pick the diamond, and this is because you are taking into account the exchange value of the product in account.

Assume a situation where you are in a desert; if you are like most people, you would choose the bottle of water over the diamond, and this represents the use value of the product. This is defined as the ‘Paradox of Value’, first brought forth by Adam Smith in the 1700’s. Consider another scenario where you are in a desert but you get to make the same choice every 15 mins. You would first choose enough bottles of water that can last you the whole trip and then take as many diamonds as you can carry!

In a similar fashion, the following two cases represent examples where the value of low risk investment and ability to liquify investments at will is higher than the opportunity cost of investing in stocks and holding over a long duration of time.

Example Case Studies

Case 1: Say you are saving to buy a new car in the next couple of years. You carry this out by putting aside a share of your monthly income in a bank account. The bank would then pay you a small interest on whatever you accumulate over the course of the years. Since you have a fair idea of time frame and the amount you would require, you could invest in bonds instead. Not only would this provide you with a better interest rate on your savings, bonds are fairly liquid instruments as well and can be readily converted to cash when needed.

Case 2: Assume you are saving for your child’s college fund and thus, you can’t invest the same in risky instruments. However, instead of saving in a bank account you could put the funds in bonds, reap benefits of higher interest rates and calculate with fair certainty how much you would need to save in future to accomplish your goals. Additionally, you can liquify the investments as and when needed.

That’s All Folks

Phew – bonds are quite useful under certain circumstances, and might be more suitable depending on what you’re looking for. Want to know more? Come ask us on our platform and you’ll get quality answers!

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