With $100k savings being a common ‘magic number’ goal among millennials, what’s next for those who have reached this goal?
If you have S$100,000 to invest then you have the luxury of building your wealth. Whether you have a sudden cash windfall (e.g. profit from selling a property) or if you’ve built up your savings over the years, don’t spend it all on the lottery.
Instead, invest that money to build a strong investment portfolio, so that you can continue to grow your wealth towards financial freedom.
There are many ways to grow your money and build a strong investment portfolio. So without further ado, below are some of the ways to get started.
What to do before you start investing:
Before you start investing your money, make sure that you do two things first: 1) pay off any high-interest debt and 2) have an emergency fund.
Pay off any outstanding high-interest debt
If you have outstanding high-interest debt, such as a credit card, it’s best to clear it off beforehand. The average credit card interest is 25% and unpaid credit card debt can spiral out of control.
In addition, this will also negatively affect your credit score. A bad credit score impacts your chance of getting a good loan in the future.
If you have multiple credit card debts and are struggling to pay them off, you can consider taking a balance transfer plan to pay them off in one go.
A balance transfer consolidates all your credit card debts to a 0% account, allowing you to pay the outstanding amount in interest-free instalments.
Have enough emergency funds
Another thing to do is to establish an emergency fund. As a rough guide, you should have at least three to six months’ worth of your expenses saved up. An emergency fund acts as a safety net in case something unexpected happens, such as a job loss or sudden medical expense.
Store your emergency funds somewhere where there’s no chance of you losing the principal amount and you can withdraw quickly, such as a savings account.
Decide what kind of investor you are
Aside from clearing any outstanding high-interest debt and establishing an emergency fund, you need to determine what kind of investor you are. Here are some points to consider:
Do you want to manage your investments on your own?
If you want to be involved in your own investments, then you need to manage and make all the investment decisions on your own. This includes researching, trading, rebalancing, and building your own portfolio.
On the other hand, if you prefer a more hands-off approach, work with a financial advisor or invest using a robo-advisor.
A financial advisor helps to manage, diversify, and build your portfolio, but charges a management fee. Financial advisors provide a more personalised service, and can also help you with complex situations such as retirement planning and estate planning.
Meanwhile, a robo-advisor also helps to build and diversify your investment portfolio for you. But instead of getting to know you and understanding your goals like a financial advisor, a robo-advisor tries to understand you based on a survey about your risk tolerance and goals.
It will then automatically decide which assets to invest in and manage your investments for you. Because of this, robo-advisors charge a much lower fee compared to a financial advisor.
If you prefer a more holistic service to manage your wealth, consider priority banking. As a priority banking customer, you’ll have a dedicated relationship manager who can help to guide your investment strategies. You’ll also gain access to data on private equity markets while enjoying preferential banking rates.
What’s your risk appetite?
Next is to determine your risk appetite. If you’re an aggressive investor, your investment portfolio will probably consist of a larger portion of high-risk asset classes such as stocks. You might also look for growth stock companies that have a high potential to grow quickly.
However, remember that while high-risk assets have the possibility of higher returns, you must have the stomach to tolerate the potential for higher losses as well.
On the other hand, if you find yourself losing sleep over the volatility of the market, you may want to invest in less volatile investments such as bonds and real estate investment trusts (REITs).
What’s your investment horizon?
Your risk appetite is also affected by your investment horizon. Are you investing for the short-term, medium-term, or long-term?
For example, if you’re investing for a 30-year period, then you can afford to take more risks. Even if the stock market crashes, you have plenty of time to recover.
However, if you’re planning to retire in a few years, experiencing the same volatility would greatly jeopardise your retirement plan.
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How to invest S$100,000
While there are many ways to invest your money and build your stock portfolio, below is a rundown of a few popular investments to consider.
Invest in individual stocks
Stocks are the riskiest but also have the potential to be the most rewarding. However, investing in stocks requires a lot of hard work, research, analysis, and some investing experience.
If you want your portfolio to outperform the market, you can invest in growth stocks.
As mentioned earlier, these companies have the potential to grow faster than most companies. Think of your Teslas, Apples, and Alphabets of the world. While they don’t come cheap, these companies are steadily growing in revenue and profitability, and play a huge role in the modern economy.
Invest in mutual funds, ETFs, or index funds
However, investing in individual stocks is risky as you’re putting all your eggs in one or a few baskets.
While you can buy several individual stocks to diversify your portfolio and spread your risk, you need to do a lot of homework since you need to know what you’re buying. It’s also an extremely tedious and expensive process to accumulate different stocks.
One easy way to buy multiple stocks while diversifying your portfolio is to invest in mutual funds, exchange-traded funds (ETFs), and index funds. These are essentially a basket of different stocks, bonds, or commodities, so they allow you instant diversification without the need to buy several different stocks.
The main differences between mutual funds, ETFs, and index funds are how they’re managed, traded, and the costs involved.
|Mutual funds||ETFs||Index funds|
|How they’re traded||Not traded on an exchange||Traded throughout the day, price may fluctuate||Traded once a day|
|How they’re managed||Actively managed by a fund manager||Passively managed||Passively managed|
|Fees involved||Fees include management and operating fees, sales charges, commissions, redemption fees, etc.||Brokerage fees||Brokerage fees|
|Investment objective||Fund manager attempts to beat the market for profits||Matches a specific index, such as the S&P 500, for the same investment returns||Matches a specific index, such as the S&P 500, for the same investment returns|
Mutual funds are actively managed by a fund manager, who’s responsible for managing the funds and making investment decisions. These include deciding which stocks to buy and sell, researching the companies, analysing the stock’s performance, and beating the market so that investors can profit.
However, in exchange for managing your fund, mutual funds have higher fees compared to ETFs and index funds. These include management fees, as well as sales charges, commissions, and redemption fees, all of which will add up and eat into your returns.
Meanwhile, ETFs are similar to mutual funds, except they’re not actively managed by a fund manager. This means that rather than paying a fund manager to make the investing decisions, ETFs use a fixed formula to track a specific index, such as the S&P 500, to match its performance and investment returns. Because of that, they cost much less than mutual funds.
ETFs are also traded like stocks, where shares can be bought and sold throughout the day. There are various types of ETFs; some contain various stocks across different industries or countries, while some only contain stock of a specific industry or sector, such as technology or healthcare.
Last but not least, index funds are similar to ETFs: they’re traded on the stock exchange, are passively managed, and track the performance of a specific index. The only difference is that index funds are traded once a day, while ETFs are traded throughout the day.
If you don’t want to spend time researching and analysing the market, then mutual funds may be more suitable. However, keep in mind that a vast majority of fund managers have underperformed against their passive counterparts in both the short-term and long-term.
As for deciding between ETFs and index funds, it boils down to whether you want to trade in the stock market as often as you like.
But remember that the stock market fluctuates often and it can be tempting to panic-sell or time the market, which may not necessarily lead to desired outcomes.
The quickest and most affordable way to invest in stocks is to open an online brokerage account. There are many online brokerages available and you can evaluate them based on factors such as commission fees, min deposit, and management fees.
Invest in REITs
While most Singaporeans view property investment as the best way of wealth accumulation, the truth is Singapore properties are becoming increasingly expensive. For this reason, most investors prefer to invest in REITs.
With REITs, you’re investing in a professionally-managed property portfolio, such as shopping malls, data centres, and hospitals. REITs generate income by leasing space to their tenants, and are required to distribute at least 90% of their taxable income each year. This is why REITs often pay higher dividends compared to most stocks.
REITs are traded on the stock exchange similar to stocks. The average yield is 5 to 6% per year, which is higher compared to the net yield of private properties of around 2%. What’s more, dividend income isn’t taxable in Singapore.
Invest in bonds
While bonds may not provide the same returns as stocks, they’re less volatile, making them ideal asset classes for those who want more certainty on their investment returns. Bonds provide fixed income in the form of coupon payments, which are distributed quarterly, bi-annually, or annually.
That said, be wary of bonds with high yields, as they tend to be junk bonds. Junk bonds are issued by companies that don’t have good credit ratings. This means they also have a higher risk of missing interest payments or going bust.
There are various types of bonds available, such as corporate bonds, government bonds, and bond ETFs. The most popular bond in Singapore is the Singapore Savings Bonds (SSBs). They have the highest credit ratings and are one of the safest bonds out there.
When it comes to investing in bonds, the general rule is that the further you are from retirement, the fewer bonds you should have in your portfolio.
Should you invest S$100k all at once?
There are two ways to invest your money: lump-sum investing or dollar-cost-averaging (DCA).
Lump-investing basically means that you invest all (or a large sum of money) in one go. Studies have shown that lump-sum investing outperforms DCA in the long run about 75% of the time. However, investing large sums of money is riskier in the short-term especially if the market crashes.
Conversely, the DCA strategy is the slow and steady approach; you spread your investments by making regular and recurring over a fixed schedule regardless of the market condition. This helps to spread your risk and avoid timing the market. However, the returns are lower compared to lump-sum investing and this strategy also requires discipline.
Deciding which approach to take depends on your risk tolerance and investment performance. If you favour performance, go with lump-sum investing. But if you’re more risk-averse, investing using the DCA strategy can help to reduce stress and nervousness, while gradually exposing you to risk.
Looking for a more sustainable way to grow your wealth? Learn more about priority banking and how it can help to diversify your investment options.
Remember to diversify your portfolio
No matter what you choose to invest in, the key to a good investment strategy is to diversify your portfolio with a variety of asset classes. This helps to reduce your risks in case one of the asset classes underperforms.
Read these next:
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Alphabet Stock Split: Is It Good News For Investors?
By Kang Yen Joon
In my past life, I was always broke (I still am) because of a lack of financial literacy. These days, I publish a few posts every week* on personal finance to help you manage your money better.
*I mean, I’ll try