When it comes to securing your financial future, just saving alone may not be enough. In this article, we share why investing is important and how you can get started with as little as S$100 a month.

• Part 1: Why you should invest
• Part 2: How you can invest

Part 1: Stretching your dollar – why you should invest

“To thine own self be true” – Hamlet, by William Shakespeare

Many of us look forward to when we have enough money to quit our day jobs and still be able to afford a comfortable life after that.

But before we start dreaming, let’s consider some cold, hard facts.

We may each have our own view of what a “comfortable life” means and what it costs. But whether it’s an occasional restaurant meal, commuting via taxis now and then or an annual holiday overseas – they all cost money. When added up, the final cost of such indulgences can be daunting.

Use our online OCBC Life Goals Retirement Calculator to determine your number for your desired lifestyle.

Someone who is 25 years old today and wishes to retire at age 60 with the above lifestyle will probably need to accumulate about $2.1 million by the time they retire¹. This is no small sum, considering the amount is on top of our regular bills, mortgage payments and living expenses.

Faced with the unpleasant prospect of having to pay off huge bills at the end of each month, most of us would rather pack up our dreams and return our noses to the grindstone for a monthly pay cheque that we hope to stretch as much as possible.

However, being intimidated may not be the best approach to growing your wealth over the longer term.

The best way to grow your wealth is by investing.

Putting aside some of your money into assets like unit trusts, stocks and bonds will have you realise your financial goals sooner as the expectation is that the value of these assets will increase at a faster rate over time than your savings account (Figure 1).

Figure 1: Investing in a diversified portfolio grows your money faster than keeping your money in a savings account and tends to be less volatile than just investing in equities or bonds alone.
Source: Bloomberg, as at 30 September 2023. Global Equities are represented by the MSCI World Index. Global Bonds are represented by the Bloomberg Barclays Global Aggregate Total Return Index. 50-50 Portfolio assumes a constant 50-50 allocation between Global Equities and Global Bonds. All dividends and coupons are assumed to be reinvested. "Compounded at 0.05% / 1.50% interest p.a." assumes monthly compounding.

Investing helps to mitigate the impact of inflation on your money. The cost of goods and services has been increasing – and will continue to do so – over the years, making things more expensive. This means that the dollar you hold today will be worth less in the future and the amount of goods you can buy with that dollar will be fewer due to the impact of inflation.

At OCBC Digital, we make your wealth journey so simple that you will wonder why you didn’t start sooner.

The only thing to fear is fear itself

For many of us, what is holding us back from investing is the perception that you need a large amount of money to get started.

On top of that, there is the perception that the journey to financial freedom would entail pain and sacrifice, which makes the process less enticing.

But the truth is, you only need a small amount of money to get started on investing. You can employ strategies like dollar cost averaging, whereby you invest a small amount of your salary (starting from as little as $100 per month) at monthly intervals into an investment of your choice.

Investing in this manner minimises risk. Plus, you remain invested regardless of which direction the market is going.

You can set up a monthly investment plan easily with our wide range of investment assets on OCBC Digital.

The journey begins one step at a time

Sometimes, we may get ahead of ourselves.

Before embarking on your first steps, you must first prepare yourself mentally for the journey ahead, particularly when it comes to understanding the concept of risk.

We can visualise risk as taking a long, winding but flat road to our destination or opting to cut through a jungle path to get there faster. But the terrain may be rough and there’s a greater chance of hidden surprises. There’s no right or wrong answer – it all depends on your personal preferences and situation.

Deciding how much and what kind of risk to take boils down to three factors: your Need, Ability and Willingness to take risks.

1. Need to take risks

   Stretching limited resources

   We have many financial goals – retirement, children’s education, legacy planning, to name a few – but our resources (i.e. income) are limited. At the same time, inflation continues to erode the value of our savings over time. This means we need to target a certain rate of return to achieve our goals.

   Deploying funds appropriately

   Savings accounts, fixed deposits and endowments are a good start, but relying on them alone may not generate sufficient returns to meet your financial goals. The hard truth is that to achieve your goals, you may need to be prepared to take on some risks or set aside more money to invest over time through forced savings or even both.

   Diversifying your investment portfolio using a combination of equities, bonds and other asset classes can improve your investment returns while lowering the risks than if you had put everything in one basket.

2. Ability to take risks

   Know your constraints

   Your commitments, liabilities and disposable income determine the amount of loss you can afford to bear, and therefore your ability to take risks. The higher your commitments and liabilities, and/or the lower your disposable income, the lower your ability to take risks. This can be determined by analysing your yearly cash flow.

3. Willingness to take risks
    
   • Your willingness to take risk is determined by your personal preferences and is the most subjective of the three factors. This is usually determined via a risk profiling questionnaire which you should answer truthfully.
   • Taking on too much risk is usually driven by setting high aspirations for your financial goals, but this can also mean a higher likelihood of negative returns – even enough to cause you to fall short of your financial goals. You can reduce this possibility by engaging an independent party, like a financial adviser, to assess and recommend investing decisions objectively.
   • Taking on too little risk is typically due to a fear of losses and/or a lack of familiarity with the investments themselves. One way to overcome this is to learn more about the various ways and assets to invest in. Familiarity with how various investments generate returns and/or losses can help you by reducing the unknowns (which we will cover in part 2 below).

Assign a Low/Medium/High rating for each of the factors above (i.e. Need, Ability and Willingness). Understand your overall approach towards taking risks. For example, if your Need and Willingness are High but your Ability is Low, then your approach should be towards Lower Risk.

Why is this important? Staying the course is crucial in your investment journey and this can only be done when your Need, Ability and Willingness are aligned. You do not want to place yourself in a situation where you become disproportionately affected by sudden drops in market prices and thus bail out of your investments at an inopportune time. Only then will you be ready to begin your investing journey.

“Knowing yourself is the beginning of all wisdom” – Aristotle

Part 2: Hitting the road – how can you invest?

We’ve discussed the various asset classes that you can invest in our other article. The next step in your investing journey is to understand the various ways you can invest in these asset classes.

1. Investing directly in equities and fixed income
    

   Benefits

   • Huge investment universe: Investing directly gives you access to a wide universe of securities. Investors can easily open accounts to invest directly in equity and fixed-income instruments, both locally and abroad.
   • Higher return potential: Picking the right stocks and/or bonds can result in substantial gains relative to the broader market.

   Potential snags

   • Selection: Success in investing directly depends on your ability to pick the right instruments at the right time. This often requires time spent doing research to identify the best instruments.
   • Larger minimum outlay, higher concentration risk: Certain equity markets and many bonds require larger initial investment amounts. This means you are more likely to place more of your eggs in the same basket, thus exposing your portfolio to concentration risk.
   • More risk factors to manage: Investing in a smaller number of securities also means you have to bear more company-specific risks in addition to broader market risks.
2. Investing in a bundle – Unit Trusts, Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs)

   Benefits

   • Convenience: You only need to perform one transaction to buy into or sell out of one fund. The fund manager will execute the buying and selling of all the securities within the basket. Most funds are easily accessible to individual investors.
   • Diversification: You will be invested in a selected basket of securities which reduces company-specific, sector-specific and even country/region risks. This offers built-in protection if some of the fund investments decline in value.
   • Economies of scale: Because a fund’s assets are pooled together from many investors, it can invest in certain assets or take larger positions than a small investor can.

   Figure 2: Exchange Traded Funds (ETFs)

   • An exchange traded fund (ETF) is a collection of tens, hundreds, or sometimes thousands of stocks or bonds in a single fund. These underlying securities are traded on stock exchanges. ETFs seek to replicate the returns of a market.
   • ETFs are generally accepted to be an inexpensive, transparent and convenient way to get access to many different asset classes.
   • Investors immediately access a very diversified portfolio of pre-selected securities on the cheap. If a single stock or bond in the collection is performing poorly, there's a good chance that another is performing well, which helps minimise losses.
   • This makes it easy to diversify a portfolio and it also makes ETFs simple to buy and sell.

   Source: OCBC Wealth Management

   Potential snags

   • Fees can reduce portfolio returns: If the fund does generate enough additional returns to offset its fees, your portfolio can underperform the benchmark index.
   • Choosing managers, not securities: Choosing the right manager plays an important part in the success of your portfolio. The manager decides what and how to buy or sell within the fund. Therefore, you need to be comfortable with the manager’s decision-making.
   • Potentially lower returns than investing directly: A diversified basket of securities spreads out the risks, but also spreads out the returns. The reduction in risk from diversification can result in potentially lower, but less volatile returns.
3. Structured products – structured investments and dual currency investments

   Benefits

   • Benefiting from the underlying asset without having to own it: Structured investments offer potential returns that are higher than interest rates on traditional deposits and may even offer the potential for capital appreciation without having to own the underlying asset.
   • Versatile: Structured investments allow you to tap into many different asset classes, such as equities, interest rates, fixed-income products, foreign exchange rates and even commodity prices.
   • Customisable: You can mix the basket of underlying assets and even opt to include defensive features into your structured investments at the expense of some returns.

   Potential snags

   • High complexity: Structured products are complex financial instruments and require a thorough understanding for investors to appreciate the risks involved.
   • Lack of liquidity: Structured products are not publicly traded and thus illiquid. Unwinding a structured product midway usually involves an unwinding cost.
   • Counterparty risk: The failure of the issuer to meet its obligations may be passed on directly to the investor, exposing to the risks posed by the issuer as well.
4. Insurance plans – Investment-Linked Life Insurance Plans (ILPs)

   Benefits

   • Dual purpose: You can accumulate and be covered at the same time.
   • Adaptable: You can change your investments by switching sub-funds when your financial needs change. In addition, you may also top up your investments and make partial withdrawals.
   • Temporary pause of premium payments: If there is sufficient investment value in your policy, you can choose to pause premium payments to free up your cash flow without affecting your coverage.

   Potential snags

   • Penalties for early redemption: You may be penalised if you choose to terminate your insurance plan before a certain milestone is reached. Please refer to your insurance policy documents for more details.
   • Rising insurance costs: Insurance charges rise with age. More fund units will be deducted to finance the insurance charges, resulting in a drag on investment returns.
   • Investments and insurance are interlinked: Cashing investment returns out of your policy may reduce or even terminate your insurance coverage.

While there are many routes and modes of transport to get to your destination, the first step is having a plan. Knowing their respective benefits and potential snags, you can and should use a combination of the above investment instruments in your plan.

The following are some suggestions for your journey.

For new investors starting small

1. Consider a portfolio of unit trusts and/or ETFs for lump-sum investments – this allows you to invest in a diversified portfolio with a low initial outlay. OCBC RoboInvest provides the additional convenience of smart portfolio rebalancing so you can stay on top of market opportunities.

   Robo-advisors can be a part of your portfolio

   • Robo-advisors are digital platforms that utilise automated solutions and algorithms to help you invest and manage your money. They offer a disciplined approach to investing that runs on autopilot.
   • Timing of investments and portfolio rebalancing are done in specific intervals and runs on autopilot, removing human biases in the process.
   • Of course, the algorithms and the investment methodology are produced by humans and may be tweaked from time to time. The ingredients for portfolio construction are typically ETFs, ensuring that investors are not taking concentrated exposure in any specific security.
   • Robo-advisors tend to be low cost, passively managed, diversified and convenient. They offer rules-based type investment process that is relevant to individuals who would benefit from a strictly hands-off approach due to salience of behavioural biases in their investment decisions.
2. Use regular savings plans (RSPs) to inculcate dollar cost averaging (Figure 3) into your investing discipline by investing monthly into unit trusts, ETFs and even blue-chip stocks via the OCBC Blue Chip Investment Plan.

   You don’t really need much to start investing

   Smaller board lots

   Since beginning 2015, the Singapore Exchange (SGX) has decreased the standard board lot size for equities investment from 1,000 units to 100 units. This meaningfully decreases the amount of capital investors would need to buy stocks, making investments more accessible from a practical standpoint. It's easier to gain access to blue chips and index component stocks that tend to be higher-priced.

   Growing retail bond market

   The MAS has also introduced frameworks to make it easier for corporations to offer bonds to retail investors. Typically, purchase of a single corporate bond would set you back a heavy $200,000 to $250,000. Retail bonds are far more accessible with a $1,000 minimum investment.

   Regular investment programmes

   Regular investment programmes offered by banks help investors buy stocks and/or unit trust in a piecemeal fashion, exposing investors gradually to the stock market. It is another cost-effective investment solution that is akin to a strict monthly saving plan – the difference is that you save in stocks.

   Figure 3: Difference between lump-sum investing and dollar cost averaging

   Lump-sum investing in a bear market scenario with a cost of $100/share

   

   Example: $12K investment
   You invested $12,000 all at once in a single stock priced at $100/share in January. By the end of the year in December, a dip in the market hits and the stock fell to $70/share. You lose an immediate 30% of your investment (down: $3,600).

   Example: $12K investment
   You adopted a DCA strategy and invested $1,000 a month over a period of 12 months. Your average cost per stock is $82.75/share. You lose only ~15% of your investment (down: $1,848) despite the same drop in stock price from $100/share to $70/share.

   Source: OCBC Wealth Management

3. Alternatively, if you prefer the convenience of a hybrid product that allows you to invest and insure yourself at the same time, consider an investment-linked life insurance plan (ILP).

For seasoned investors:

1. Consider maintaining a diversified portfolio of unit trusts and/or ETFs as your core investment plan while carving out a smaller portion to invest tactically in direct equities and/or fixed income, or through structured investments.
2. The core portfolio provides a greater level of stability and long-term returns while the tactical portfolio allows you to capture market opportunities.
3. As your portfolio grows, consider adding more asset classes, such as gold and silver, dual currency investments and property (direct or REITs) for added diversification. This can help to further reduce overall portfolio volatility to the various market events.

Investing principles to live by

1. Know your risk appetite and tolerance. Do not take on more risk than you are comfortable with, even if you are tempted by the potential of higher returns.
2. Understand what you are investing in. This includes where returns may come from and the risks you need to be aware of.
3. Diversify your portfolio across asset classes, regions, countries and sectors. This helps to reduce overall portfolio risks and make your journey less bumpy.
4. Review your investment portfolio holistically together with your financial goals at least once a year. Changes to your family, job or health may require adjustments to your financial goals and thus affect your investment portfolio. OCBC Life Goals can help you to keep track of your progress.
5. Keep yourself informed of market developments and seek professional advice where required.