Call me crazy, but I’m a skeptic when it comes to one-size-fits-all solutions to ‘financial literacy’.
My main objection is that personal finance is too abstract and complicated a subject. Its lessons also don’t apply universally, since everyone comes from different family backgrounds with different upbringings – hence the “personal” in personal finance.
Money, and its associated problems, are also deeply emotional, tied to feelings of self-worth and identity. And there’s nothing you can put in a textbook that will help you deal with these issues.
In my opinion, the only way to become more financially literate is through practice and first-hand experience.
Trawling through the internet for investment advice can be really daunting even for someone like myself who has worked in finance-related industries for the past decade. I’ve come across articles which overwhelm readers with financial jargon, candlestick charts and statistics.
At best, financial jargon gives readers the illusion of understanding. At worst, it puts them off investing all together by overwhelming them with charts and statistics. Whenever I speak to younger Millennials and Gen Zs, I can literally see their eyes glaze over when we start talking about saving rates, returns, and asset allocation. And I get it: why should the average person working 50-60-hour weeks care about how derivatives work? Or how to read a financial statement?
When faced with a seemingly endless array of options and lack of understanding how financial products work, we become paralysed, for fear of making the wrong decision.
A possible solution to this paralysis is simple:
1. Limit the overconsumption of financial blogs and news
2. Create a passive investing plan that reduces the number of decisions you need to make. Commit to this plan for a few years, reassess, then iterate.
When It Comes to Investing: Keep it Simple and Smart!
A passive investment plan means setting aside a fixed amount of each paycheck and investing in a diversified portfolio containing a mixture of stocks and bonds, then holding this portfolio for the long term (10+ years).
An efficient way to do this is to invest in a low-cost ETF, which is basically the equivalent of buying a basket of stocks or bonds instead of picking individual companies or industries to invest in.
Because why go through the headache of predicting which Singaporean companies will succeed and fail in the next ten years, when you can just own all the major Singaporean companies through a stock ETF like Nikko AM Singapore STI ETF? (which tracks Singapore’s stock index, the Straits Times Index – or STI for short).
Similarly, why take the risk of buying possible junk bonds or bonds tied to just one company (which may run the risk of going bankrupt or defaulting on payments given today’s climate). Instead you can invest in an ETF which holds bonds issued by the Singapore government or more reputable companies and statutory boards in Singapore, through bond ETFs like ABF Singapore Bond Index Fund or the Nikko AM SGD Investment Grade Corporate Bond ETF. Both bond ETFs hold bonds issued by household names like HDB and LTA. (these names are among the bond issuers that the ETF invests into as of 31 July 2020 which are provided for illustration purposes and are not securities recommendations).
You may be asking: what happens if Singapore’s economy takes a turn for the worse? Wouldn’t I lose money on my investment?
The answer is yes – all investments carry some form of risk and in this case, possibly in the short term. But this just means that you can buy a piece of the Singaporean economy at a bargain. Over the long term, economic growth may turn for the better and be positive, and the performance of an ETF like Nikko AM Singapore STI, which tracks the performance of the top 30 companies on the Singapore Exchange, and the Nikko AM SGD Investment Grade Corporate Bond ETF, which promotes stability during market stress, may be able to give you the balance over both the short- and long-term investment period.
In practice, this means that people should look into automating their investments by signing up for a Regular Savings Plan (RSP), which offers affordable investments for as little as S$50 or S$100 per month. Essentially, it takes S$50/S$100 out of every paycheck and invests it in a diversified basket of stocks and bonds.
Note on Diversification and Fees
Within this simple framework, there are two things you need to keep in mind:
A diversified portfolio consists of a mix of stocks, bonds and commodities. For example, investing in a Singapore stock ETF like Nikko AM Singapore STI ETF, not only gives you exposure to Singapore’s economy, but also exposure to all the countries that these companies operate in (eg. China, ASEAN etc). In the future, Singaporeans might also want to consider other ETFs that are exposed to other developed economies like the U.S. and Europe.
The Nikko AM SGD Investment Grade Corporate Bond ETF counts reputable Singapore banks in its mix, such as DBS, OCBC and UOB (these names are among the bond issuers that the ETF invests into as of 31 July 2020 which are provided for illustration purposes and are not securities recommendation.). Like the Nikko AM Singapore STI ETF, which holds stocks of these banks, these banks do not just operate within Singapore, but are diversified regionally as well.
2. Watch Out For Fees
Management and other operating fees, even seemingly small percentages, can eat away at investment returns. Keeping costs low is the best way to protect your investments.
The key thing to look out for in any ETF is the total expense ratio. Say you earn an annual return of 5% on your investment. If the total expense ratio of your ETF is 1%, this means that your annual performance minus fees is actually 4.00%. This may seem negligible, but keep in mind that fees also compound over the long run, so it does add up.
To me, financial freedom isn’t about the amount of money I have in my bank account, or how my investments are doing in any given month.
True financial freedom means having ‘enough’ so that I don’t have to think or worry about money on a day-to-day basis. It also means investing in a way that keeps my life simple. Even if the stock market falls 50% tomorrow, and my investments lose half their value, it won’t affect my mood or change the way I make decisions.
If I’ve signed up for a Regular Savings Plan, my plan will tell me to do the exact same thing, no matter how the market is performing.
This sounds like simple advice, but most people rarely follow it. That’s because sometimes we get tempted to make the same move when we see all of our friends making money on all sorts of fancy investments, like Bitcoin or Tesla. It makes us feel like we’re missing out, so we invest when prices are sky-high. Then, when some of these investments inevitably crash, we get swept up in the panic and sell when prices are cheap.
The way to start accumulating ‘investing’ experience first-hand, is to start on your own and for a beginner’s comfort zone, possibly with ETFs. This could be the way forward to building your investment portfolio. You’ll learn lessons that are relevant to your economic situation and unique set of values and priorities along the way.
With its diversified ETF offerings, such as Bond ETFs like the ABF Singapore Bond Index and Nikko AM SGD Investment Grade Corporate Bond ETFs, and Equity ETFs like the Nikko AM, Singapore STI ETF and the Nikko AM-Straits Trading Asia ex Japan REIT ETF, Nikko Asset Management Asia has the right financial instrument you need to start your investment journey.
The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks’ interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.
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