What is your first investment to make in Singapore?
Knowing what to invest in for the newbie (and even seasoned investor) can be daunting. Here is a tip on what to invest in first when you are ready to make your first investment.
The following is a list of the most common financial assets available in Singapore for the retail investor. Which do you think is the financial asset that should be your very first investment?
Unit Trust/ Mutual Funds
Exchange Traded Funds (ETFs)
Real Estate Investment Trusts (REITs)
Investment-Linked Insurance Policies
The answer is at the top of the list… CASH.
Cash is an asset that everyone is familiar with. Everyone is comfortable using cash and understands what it can do.
In investing, when we talk about cash, it can mean the cold hard cash that you keep in your wallet or cash equivalents which are different financial instruments that are very liquid.
The purpose of holding cash or cash equivalents is for its liquidity so the investment vehicles need to allow you to access the money when needed quickly.
First, let’s have a quick explanation of liquidity.
Liquidity refers to how easily an asset can be sold and easily converted into cash. Most investors want to have some degree of liquidity in their portfolio in the event they need cash on short notice. Different investments and assets have different levels of liquidity. See an interpretation of Exter’s Pyramid below:
Notice that cash and gold are right at the top of the pyramid as they are the most liquid assets. Achieving liquidity requires sacrificing a certain level of income or potential for capital gains.
The more liquid you want a financial asset, the lower your returns will be. The longer you keep your money invested (or locked up), the more returns you will get.
The reason is the banks or financial institutions who you hand over your money to want to use your money to make money for themselves. So, if they have to return your money in a short time, they will not be able to get good returns themselves. Hence, since they cannot make as much money, they will make sure you do not make as much money.
Your goal is to find the best cash equivalent to hold your cash in order to get a high return or interest, yet still be fairly liquid.
Cash Equivalents (or Instruments)
Savings Account & Fixed Deposits
A savings account is very liquid. But, the interest is almost nothing at 0.05% – 0.25% a year.
You can try to look for a special high interest savings account offered by a select number of banks. Of course the higher the interest, the more conditions there are to be able to enjoy the high interest. One example is DBS’s Multiplier Account that will offer up to 2.08% interest which will require a certain amount of spending each month through the account.
A fixed deposit account that allows you to draw out the money every quarter if needed (offered by Standard Chartered Bank) is fairly liquid. The interest rates are higher (up to 1.55% currently) so it is a better instrument than a standard savings account.
Money Market Funds
You can also invest your cash in a money market. The money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.
Money market securities are short term bonds (loans) issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.
Note: You will need to open a trading account and CDP account with a brokerage firm (also known as stock broker) to put your money into a money market fund.
Bottom Line: Research your options and hold your cash in instruments that yield a higher return than the minimal interest earned in savings accounts.
Managing your cash should also be the first “investment” you make. There are two practical reasons for this:
Firstly, it is going to take you some time to read through this guide, set up all your necessary accounts, understand all the financial assets, do further research and figure out your investment plan. You will also need to construct your investment portfolio which means calculating how much money you have and how much you are going to invest in each financial asset.
Realistically, as a smart investor, all the above could easily take you at least a month to 3 months to complete. So, in the meantime, you might as well make full use of this time and get a higher return on your idle cash, even if it a fraction more.
Secondly and more importantly, finding a good cash equivalent to hold your cash for the short term (3 months) will force you to do research, assess your options and actually hand your money over.
More importantly, this will really help you get over any psychological fear you might have in investing. “Investing” in a cash instrument will be your first baby step towards investing in more sophisticated and complex financial assets. But mentally, it will be a giant step towards transforming yourself from being a saver to being an investor.