Just like there are many options to get from one destination to another, investors have many avenues to grow or preserve their wealth. There’s the stock market, property market, and fixed income market (for investment vehicles such as bonds).
With so many options to choose from and with an environment of rising interest rates, investors may be confused about what is the best for them. Let’s take a look at some of the typical investment options that are within reach for most investors.
Stocks, or shares, refer to a fractional ownership claim in a company. Before you can buy shares of a company in the stock market, the company has to go through an initial public offering (IPO). To illustrate what “fractional ownership” means, let’s imagine that you had bought 1,000 shares in a company with a total share count of 1 million. A quick calculation will show that you own 0.1% ((1,000/1,000,000)*100%) of the company.
In return for buying shares, shareholders receive dividends from the company and/or an appreciation of the share’s price when the company grows.
There are many categories of stocks such as income stocks, growth stocks, and value stocks. Each type offers different benefits for investors. Income stocks are generally safer than the others as they tend to be mature and stable companies. However, income stocks may not provide much growth as compared to fast-growing young companies, which in themselves have their own set of risks.
The way to invest in stocks is to ensure we know what we are buying into. Billionaire investor Warren Buffett once said:
“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
For some of the advantages and disadvantages when it comes to investing in stocks, you can check out this article by my colleague, Jeremy Chia: Your Investment Options: A Breakdown of Equities.
An exchange-traded fund, or ETF, is a collection of stocks that is traded on a stock exchange, just like shares. ETFs are typically passively-managed funds that mimic the performance of a stock market index. As such, the returns investors get from buying an ETF would be similar to the performance of the underlying index.
The beauty of ETF investing is that investors can easily diversify across a wide number of companies by buying units in just one ETF. For instance, the SPDR STI ETF (SGX: ES3) tracks the performance of the Straits Times Index (SGX: ^STI), which contains the 30 largest and most liquid companies listed in Singapore. By buying the SPDR STI ETF, an investor can purchase fractional ownership of all the 30 companies of the Straits Times Index in one fell swoop, and enjoy a diversified portfolio that comes with the potential for both price appreciation and dividends.
For more examples of ETFs, and the pros and cons of investing in them, you can head to the following article from Jeremy: Your Investment Options: A Breakdown of ETFs.
Real estate investment trusts
Real estate investment trusts, or REITs, trade like stocks in the stock market as well. But unlike most companies, a REIT owns an underlying portfolio of mostly real estate assets. REITs would thus be an excellent choice for investors looking for instant exposure to the property market without having to worry about the intricacies of directly investing in properties. REITs also offer high dividend payouts, making them attractive for retirees who require stable income from their investment portfolios.
There are many different types of REITs, such as retail, commercial, industrial, healthcare, and more, that are available in Singapore’s stock market. Some REITs even combine types. Investors can take their pick of the kind of property exposure they want and the income level they require.
Recently, The Motley Fool Singapore released our exclusive guide on investing in Singapore REITs. We believe it is the one-and-only REITs guide you would need to navigate Singapore’s REIT market. Grab your free REITs guide here.
Singapore Savings Bond
The Singapore Savings Bond (SSB) is a relatively new investment vehicle that was launched by the Singapore government in the second half of 2015. SSBs are safe investments that are fully backed by the local government. Each SSB has a term of 10 years, and pays interest half-yearly (the interest also increases every year). SSBs cannot be traded like conventional bonds or shares, but have to be applied through the major banks.
The interest rate for the SSB is based on the average interest rates of the benchmark Singapore Government Securities (SGS) one month before. If you hold an SSB for the whole 10 years, your return will match the average 10-year SGS yield the month before your investment. Over the past 10 years, the 10-year SGS yield has mostly been between 2% and 3%.
If investors decide to redeem their SSBs early, they will receive a lower return. In general, an investor who holds an SSB for say, five years, would receive an average return similar to that of a 5-year SGS.
Investors will receive their investment capital back in full with no capital losses when they redeem the bonds before the 10-year period is up. There is also no penalty for redeeming the bonds early.
Due to the immense flexibility that SSBs provide, they can be used to park “rainy day” funds, instead of having the money sit in bank accounts, which offer much lower interest and may have lock-in periods for fixed deposits. SSBs can also be used to “hold” funds for near-term use, such as your marriage or your kid’s education.
The Foolish bottom line
So, which is the best investment option for you? The answer will depend on your time horizon, risk appetite and financial goals. Also, investing in knowledge will go a long way when it comes to wealth-building. Read more, talk to experienced investors more, and listen more, to become a better investor.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.