Nowadays, it’s not uncommon for us to hear our peers or even our own family members talk about the hottest stock in town, which particular investment is generating the most returns in the shortest time, etc. You get the point.
While not everyone is all that interested in looking at the stock charts or reading financial statements, there is a sure-win way to invest which guarantees a good return, at least over the measly 0.05% (YES, it is 0.05 PERCENT) POSB pays you per annum.
The “sure-win” tool which we are talking about today, is otherwise known as an Index Fund. Basically, it is a pool of money that is used to invest into the components/constituents of an index. A market index, or index for short, is used to track a particular stock market or market segment.
Because I’m writing this for the benefit of local (SG) investors, the index fund that we are looking at today is the STI ETF (Straits Times Index Exchange Traded Fund). Before I continue, ETF can be used interchangeably with Index Fund in our context.
The STI ETF (Ticker: ES3.SI), is a fund that is used to purchase the 30 components of the Straits Times Index, which is representative of our local stock market. To put it simply, when you buy 1 unit of this ETF, your 1 unit would represent the 30 stocks in the STI. Because the ETF is used to track the STI, which is representative of the entire Singapore stock market, the value of your holdings will fluctuate according to the actual value of the Straits Times Index.
You might be thinking, how is this simple and “sure-win”?
Because the STI ETF tracks the entire market in general, you do not have pick any particular stock from the market, and risk everything in that one stock. You don’t even need to understand what does EBITDA mean, where does Company X gets its revenue, why is it being sued by its customers, etc.
The only reason the STI ETF will fluctuate is due to the entire market sentiment, as well as the business environment. These are not major causes of concerns, which I will explain further in detail. The MAIN ADVANTAGE of the STI ETF is that the investor DOES NOT NEED TO PICK ANY PARTICULAR STOCK, which is great for the lazy investor who wishes to just buy, hold, and see his/her holdings appreciate in value.
Now that we are clear about what the STI ETF is all about, let’s proceed to how we can do this to ensure a good return. Based on the data shown below,
If you have invested $1 in the STI, you would have a total of $3.50 by the end of 2015. If that amount seems small, a $100,000 would have grown into $350,000 in 2015. That is an annual return of 4.5776% per annum! What’s more, this is done simply by buying the STI ETF, without picking out any stocks! Impressive, isn’t it?
Some sources that I have found online have mentioned about returns over 8% in the same period, with dividends reinvested. Because I’m writing this for the simplicity of general readers, I have excluded the dividend part in the calculations.
While not many people can dish out $100,000 at one go, my recommendation for the lazy investor would be to take a percentage of their total income every month, and purchase the ETF. As you can see from the data, there are years where we experience extreme growth, as well as extreme losses. The point of us buying into the ETF every month, regardless of what the market conditions are, is to perform dollar-cost averaging in our purchase price. This will smoothen out the extreme highs and lows.
There is a catch in this lazy way of investing though. YOU NEED TO BUY, REGARDLESS OF WHAT YOU HEAR, AND WHAT THE NEWS SAY. Because news tend to overprice the markets in a good business environment, you may be enticed to buy more than the percentage you have allocated every month, thus pushing up your average price. Similarly, news will also underprice the market in a poor business environment, which is what we are experiencing right now. This might lead you to refrain from buying the percentage you have allocated, which will not reduce your average buying price as expected.
In conclusion, you will need to set aside a percentage of your monthly income to purchase the index fund (STI ETF), regardless of market conditions. In the long run, you will earn at least 4.5% per annum! Not only does it beat the interest the bank pays you, it also covers the annual inflation rate of 3%!
This article is contributed by HouTian, founder of The Forex Trader. HouTian is a 21 year old Forex Trader who is residing in Singapore. He has been studying the Financial Markets, in particular Currencies and Equities, for the past 7 years. Grown up in a business-centric environment, he is an entrepreneur-in-the-making, with experience in running his own businesses.
If you are an independent or freelance writer/blogger willing to provide original content that is related to finance and investing in Singapore, feel free to contact me and I’ll contact you for a further discussion.