Growing your $100,000 to $500,000 in Singapore is easier than you think. Here are practical ways to do it.

Developing an investment strategy that promises to multiply your money by a factor of five could seem to be an impossible task. But adopting a sensible approach to your finances over an extended period of time can give you returns of this magnitude.

Remember that the power of compounding is working in your favour. If you start off with a sum of S$100,000, the returns that you make will get ploughed back to generate returns of their own. It is not necessary to earn an astronomical rate of return to grow S$100,000 into S$500,000. Of course, patience and the ability to follow sound investment principles is all-important.

What is the sort of return that you need to make to quintuple your money? Earning a rate of 7% consistently over a period of 24 years will add S$407,000 to your initial investment. While this rate of return is definitely high, it is not impossible to achieve.

 

Understand the power of compounding

The key to getting the power of compounding to work for you is to resist the temptation to draw money out of your investment portfolio. This can be especially difficult to do if you have already made a respectable return in the first few years. You need to have the discipline to let your money work for you, year after year.

The greatest returns in absolute terms are made in the later years when your money has already grown by a significant amount. Withdrawing funds in the initial years will drastically reduce the benefits that compounding has to offer.

Let us see that rate at which your initial investment of S$100,000 grows over the years.

 

Number of years	Rate of return per year compounded annually	Sum at the end of the year (figures rounded off to the nearest thousand)
0	7%	S$100,000
1	7%	S$107,000
5	7%	S$140,000
10	7%	S$197,000
15	7%	S$276,000
20	7%	S$387,000
24	7%	S$507,000

 

It is apparent that reducing your investment amount midway will lead to a substantial loss in your overall returns. The above calculations show that it took 10 years to double your money. S$100,000 grew to S$197,000 only after a full decade.

But the next 10 years saw the total amount grow by an additional S$190,000. The final four years added a further S$120,000.

It is important to bear in mind that the later years provide the greatest returns in dollar terms.

If you think that a consistent return of 7% is difficult to achieve (or if you are of the view that you can do much better), using this compound interest calculator will allow you to test different scenarios.

Here is what the calculation that we did above looks like:

 

Earn a higher return on your investments

When you deploy your funds in various financial instruments, your primary concern would be to ensure that your money remains safe. If you want to be absolutely sure that your principal amount will not decrease in value at any point in time, your options are severely restricted.

You would have to allocate your investible surplus to bank term deposits, government bonds, or put additional amounts in your Central Provident Fund account. Each of these options provides extremely low rates of return.

Consider bank term deposits. Standard Chartered Bank, Singapore, offers its depositors interest rates ranging from 0.05% to 0.75% per year. The rates available with DBS Bank are similar, although you can get a return of 1.2% per year for a 60-month tenure.

Government bonds offer slightly better returns. The interest rate on Singapore Savings Bonds can be as high as 2.06%.

 

Interest rate on Singapore Savings Bonds

Year from issue date	1	2	3	4	5	6	7	8	9	10
Interest %	1.05	1.40	1.59	1.75	1.95	2.20	2.42	2.64	2.87	3.11
Average return per year % (compounded)	1.05	1.22	1.34	1.44	1.54	1.65	1.75	1.85	1.96	2.06

 

It is quite obvious that the scope for meeting your investment goals using “safe” investments of this type is severely limited. In fact, by putting your money into low-yielding investments you are probably doing yourself a great disservice.

What is the best way to increase the returns that you make? Is it possible to make your money work harder so that you can meet your financial goals?

Many investors have found the answers to these questions in the stock market. Equities can provide high returns and if you are careful, it is possible to increase the value of your portfolio on a consistent basis.

 

Investing in shares

When you put your money into the stock market, you are opening up the possibility of earning spectacular returns.

Take the example of the Thai Beverage Public Company. This company is a part of Singapore’s Straits Times Index (STI) along with 29 other large firms. It currently trades at S$0.92 per share. Five years ago, Thai Beverage was quoting at S$0.34.

 

An investor who bought S$100,000 worth of Thai Beverage shares five years ago would now have shares worth S$270,000. According to a report prepared by DBS Bank, the company’s stock is still a bargain. The bank has set a target price of S$1.07 for Thai Beverage’s shares.

But buying individual shares could be a risky proposition. While it is possible to register an almost three-fold increase in value in five years, you could also see a decline in the worth of your investment. It is worth mentioning that Thai Beverage is one of the best-performing stocks on the STI and made it to the Straits Times Index only as recently as March 2013.

If you are unwilling to take the risk of purchasing individual stocks, there is a safer option to grow your investment portfolio. Of course, the potential return will be lower than what is available with individual stocks.

 

Investing in index funds

One of the best ways to gain the advantages that stock investments offer without taking on the attendant risks is to buy into an index fund. This is essentially a mutual fund that has a portfolio that tracks a particular index as closely as possible.

The SPDR Straits Times Index ETF is a highly popular index fund. It holds the same 30 shares as comprise the STI. It divides its investments between these 30 shares in the same proportion as the STI’s holdings. For example, the DBS Group forms 13.48% of the STI. The SPDR STI ETF has also apportioned 13.48% of its investments into DBS Group.

If Singapore’s economy and the country’s main stock index do well, the SPDR STI ETF will gain.

The following chart provides an idea of the annualised returns that the fund has made since its inception in 2002.

 

Since its inception about 15 years ago, the fund has earned a return of over 7% on an annual compounded basis. Although past performance is not necessarily an indication that you will get similar returns in the future, you can use this data to make an informed investment decision.

 

Should you invest in the stock market?

Higher yielding investments are inherently risky. Buying into the stock market can boost your returns, but you may experience periods when the value of your portfolio declines to an amount that is below the sum that you initially invested. Liquidating your investments at this point in time could lead to large losses.

But there is no getting away from the fact that if you want to earn high returns, you will have to take an exposure in stocks. While the shares of individual companies carry a greater degree of risk, your potential gains are more. Index funds present a safer option.

 

How long will it take to convert S$100,000 to S$500,000?

In the calculation given above, we saw that a 7% return would quintuple your money in 24 years. What if you can earn 12% per year? Your investment would grow by five times in a little over 14 years. Of course, you would have to take on a much higher degree of risk to achieve this return.

Your investment decisions should be based on your time horizon and your risk appetite. Young investors are at an advantage as they have a greater number of years to see their investment grow. They also have the ability to bear more risk.

Instead of simply targeting an absolute amount, it may make more sense to invest in a manner that is in accordance with the amount of risk that you can bear and the number of years for which you are seeking to invest.

(By Ravinder Kapur)

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