Download - Investment 101
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FEELING OVERWHELMED?
Buy high dividend paying stocks only. Don’t
bother with the rest.~ HuatZone Forums guru
KeyboardWarrior
9413 strike 2 times last month! This time sure strike again!
~ Uncle Wah Boh Lui
My follower made $10,000 in just one trade last week from my call. You can too! Come to my
preview course to find out more. ~ Chart Wizard Hindsight Master
This fund has consistently beat the benchmark for the past 3 years. You probably won’t go too wrong buying this fund.
~ KampungBank Banker
FeetBook is an up and coming tech company.
Target price: $8.88. BUY~ Flip-Flop Securities Research
Latest stock tip. TakeMeOver is rumoured to be a takeover target.
~ Colleague Jin Zui Tips
Don’t risk losing your hard earned money. This
policy is much less risky than stocks and shares.~ Aunty Lulu Insurance Agent
Land is limited in Singapore. You can never go wrong buying property. Grab
as many as you can.~ StreetsOfGold Property Agent
Strategy / Risk Management
INVESTMENTS CAN BE PURPOSEFUL
Plan Execute
Investment Objective
Time Horizon
Financial Goals
Specific Instruments Allocation
Specific Funds / Securities
Target Asset Allocation
Feedback
Changes in Circumstance Market outlook
Risk Appetite
PLAN• What is your investment objective?
• Passive income, retirement fund, children’s education fund, etc.
• What is your time horizon?• Short (3-5 yrs), Medium (5-10 yrs), Long (>10 yrs)
• Determine your financial goal as specific as possible• e.g. to have a retirement fund of $1.5M by the age of 60
• Determine the inputs required to reach that goal• e.g. to set aside $1000 a month, assuming a return of 5% p.a.
TERTIARY EDUCATION PLANNING
Time horizon18 years
GoalProvide for daughter’s
tertiary education (local - 4 yrs)
Current fees/allowances: $12,500/yr
Goal = 1.06^18 x 4 x $12,500 = $142,700
(assume edu inflation of 6% p.a.)
$368.40/mthUse TVM calculator :
PV=0, FV=-142,700, N=18x12, Rate=6%,
WHAT DO PEOPLE COMMONLY INVEST IN?
Unit Trusts
FundsExchange
Traded FundsMoney
Market Funds
ILP
ProductsEndowments Investment
Plans
Bonds Commodities Properties CashStocks
Underlying
COMMON RELATIONSHIPS
Unit Trusts
FundsExchange
Traded FundsMoney
Market Funds
ILP
ProductsEndowments Investment
Plans
Bonds Commodities Properties CashStocks
Underlying
COMMON RELATIONSHIPS
Unit Trusts
FundsExchange
Traded FundsMoney
Market Funds
ILP
ProductsEndowments Investment
Plans
Bonds Commodities Properties CashStocks
Underlying
COMMON RELATIONSHIPS
Unit Trusts
FundsExchange
Traded FundsMoney
Market Funds
ILP
ProductsEndowments Investment
Plans
Bonds Commodities Properties CashStocks
Underlying
STOCKS
Bonds Commodities Properties CashStocks
Underlying
• Share in the ownership of a company• Have voting rights• Entitled to share of profits or claim on assets• Profits are often paid out to shareholders as dividends • Dividends are not mandatory (Many companies do not pay
dividends)
STOCKS
Bonds Commodities Properties CashStocks
Underlying
• Two sources:• Primary market: IPO• Secondary market: Stock exchange
(e.g. SGX)• To buy and sell in secondary market, go
through brokers
BONDS
Bonds Commodities Properties CashStocks
Underlying
• You ‘lend’ money (principal) to an entity (e.g. company, government)
• Entity pays you a fixed interest (usually every 6 mths)• At maturity, entity returns you your principal• Often used a portfolio stabiliser
Payout Period
Fixed Maturity PeriodPrincipal
Principal
Coupon payments (1/2 yearly)
COMMODITIES
Bonds Commodities Properties CashStocks
Underlying
• Precious metals (e.g. gold, platinum)• Energy (e.g. Crude oil, coal)• Agriculture (e.g. wheat, corn, rice)• Difficult to invest in physical asset (other than gold)• Can invest through proxies*
• Companies that deal with commodities (mining, trading)• Funds (ETFs, unit trusts)• Futures
• Generally favoured during periods of perceived high future inflation
*Source: http://commoditiestradingsg.blogspot.sg/2011/04/how-to-invest-in-commodities-in.html
PROPERTIES
Bonds Commodities Properties CashStocks
Underlying
• Types • Residential (HDB, landed, condos)• Retail (shop lots, strata title shops)• Office• Industrial (flatted factories, landed factories)
PROPERTIES
Bonds Commodities Properties CashStocks
Underlying
• Factors • Freehold / Leasehold• Rental yield• Proximity to public transport, shopping malls, good schools• Catalysts (New developments)• Occupancy rate• Feng shui
PROPERTIES
Bonds Commodities Properties CashStocks
Underlying
• Calculating yield
Net rental yield = Gross rental - Expenses
Property price
Yield on invested capital = Gross rental - Expenses - Interest
Invested Capital
CASH
Bonds Commodities Properties CashStocks
Underlying
• Bank savings or in fixed deposit• Protected under Singapore Deposit Insurance Corporation
(SDIC) at max $50,000 per bank*• Work towards 3 to 6 times of your monthly expenses for
emergency needs• Retain savings for short term needs (<3 yrs) in cash
*Refer to www.sdic.org.sg for participating banks.
UNIT TRUSTS
Bonds Commodities Properties CashStocks
Underlying
• a.k.a. Mutual Funds• Basket of stocks and/or bonds• Actively managed by a group of fund managers• Every fund has an objective/mandate which the fund
managers are required to adhere to• Benchmarked against an index
UNIT TRUSTS
Bonds Commodities Properties CashStocks
Underlying
• Exercise: How to read a fund fact sheet
ETF
Bonds Commodities Properties CashStocks
Underlying
• a.k.a. index funds• Objective is to replicate a particular known index• Passively managed, which may result in lower expense ratio
than unit trusts• Traded in a stock exchange• Price determined by market maker, not supply-demand• Types*
• Cash-based• Synthetic• Swap-based
*Types based on available ETFs traded on the SGX. Source: http://www.moneysense.gov.sg/understanding-financial-products/investments/types-of-investments/exchange-traded-funds.aspx
MONEY MARKET FUNDS
Bonds Commodities Properties CashStocks
Underlying
• Low-risk• Invests in cash equivalent assets• Gives slightly higher interest than bank deposits• Not insured under Singapore Deposit Insurance Corporation
(SDIC)
INVESTMENT LINKED POLICIES
Bonds Commodities Properties CashStocks
Underlying
• Hybrid insurance-investment vehicle• Charges for protection benefits are deducted monthly
according to age and sum assured• Advantage: Flexibility to reduce premium / sum assured• Disadvantage: Protection charges increases exponentially with
age
ENDOWMENTS
Bonds Commodities Properties CashStocks
Underlying
• Savings plans by insurance companies• Fixed maturity period determined at start of policy• Maturity benefit consists of a guaranteed and non-
guaranteed portion• Protection benefits varies from plan to plan
• Guaranteed Issuance Offer (no medical underwriting) plans are increasingly popular. Note that their protection benefits are very limited.
ENDOWMENTS
Bonds Commodities Properties CashStocks
Underlying
• Understanding benefits illustration table
ENDOWMENTS
Bonds Commodities Properties CashStocks
Underlying
• Many variants, but can be classified into 3 main types• Classical (e.g. 5-pay-10)
Accumulation Period
ENDOWMENTS
Bonds Commodities Properties CashStocks
Underlying
• Many variants, but can be classified into 3 main types• With cashback (e.g. 5-pay-10)
Accumulation Period Payout Period
ENDOWMENTS
Bonds Commodities Properties CashStocks
Underlying
• Many variants, but can be classified into 3 main types• Retirement (e.g. payout at 60, mature at 70)
Accumulation Period Payout Period
INVESTMENT PLANS
Bonds Commodities Properties CashStocks
Underlying
• E.g. Blue chip investment plans• Allows for regular investment of selected stocks using little
amount of money.• Advantage: may be lower cost than unit trusts• Disadvantage: may be less diversified than unit trusts
Risk Level Liquidity Income Suited for
Medium to High
Medium to High
Dividends (if any)
Trading, Capital appreciation
Low to Medium
Low to Medium Coupons Regular fixed
income
Low to High High NIL Hedge against inflation
Low to High Low Rental(if any)
Hedge against inflation, rental
income
Low High Interest Liquidity needs
COMPARISON - UNDERLYING
Bonds
Commodities
Properties
Cash
Stocks
Risk Level Liquidity Income Suited for
Low to Medium High Dividends
(if any)Long term
capital growth
Low to Medium
Medium to High
Dividends(if any)
Trading, Capital appreciation
Low High Interest Short term investment
COMPARISON - FUNDS
Unit Trusts
Exchange Traded
Money Market Funds
Risk Level Liquidity Income Suited for
Low to Medium Low NIL
Long term capital growth, protection at
young age
Low Low Cashback(if any)
Capital guarantees
Depends on product
Depends on product
Depends on product
Depends on product
COMPARISON - PRODUCTS
ILP
Endowments
Investment Plans
WHAT SHOULD YOU INVEST IN?
Unit Trusts
FundsExchange
Traded FundsMoney
Market Funds
ILP
ProductsEndowments Investment
Plans
Bonds Commodities Properties CashStocks
Underlying
4 MAIN TYPES OF MARKET INVESTORS
Market Timer Long Term Investor
Fixed Income Investor
Managed Portfolio Investor
4 MAIN TYPES OF MARKET INVESTORS• Market Timer (Trader)
• Try to buy at bottom of market cycle and sell at top of market cycle
• Difficulties: • Spotting the top and bottom• Emotions (greed vs fear)• When to cut loss when market moves against you
• Typically alternates between stocks and cash
4 MAIN TYPES OF MARKET INVESTORS• Long Term Investor
• Buy fundamentally strong stocks or funds and hold for the long term
• Catch the general uptrend of the market• Difficulty:
• Maintaining invested vs taking profit• Some stocks or funds may never recover
4 MAIN TYPES OF MARKET INVESTORS• Fixed Income Investor
• Buy bonds and hold till maturity, collecting coupons periodically
• Buy bond funds and hold• Typically fuss-free and low risk, but may run the risk of
company defaulting• Popular for retirees• Difficulty:
• Reinvesting coupons
4 MAIN TYPES OF MARKET INVESTORS• Managed Portfolio Investor
• Typically invested in unit trusts and/or ETFs• Strategic allocation ratio: e.g. 70% stocks, 30% bonds• Tactical allocation ratio allows for minor form of market
timing• Tradeoff: Potential returns are trimmed due to fees
GAME PLAYMoves Modifier Bull Neutral Bear
Stocks 6-sided die (M)
2-sided die +5M +/- M
+M+/- M
-5M +/- M
Bonds 3-sided die(M) NIL +M +M +3M
Managed Portfolio (Stocks
heavy)
4-sided die(M)
NIL +3M +M +M
Managed Portfolio
(Bonds heavy)
4-sided die (M)
NIL +M +M +3M
Cash NIL NIL 0 0 0
Buy-and-hold Stocks
Stocks only
Market TimerCan switch between
stocks and cash
Fixed Income InvestorBonds only
Managed Portfolio
Can switch between MPS and MPB
Moves Bull Neutral Bear
Stocks 6-sided die (M)
+5M +/- M
+M+/- M
-5M +/- M
Bonds 3-sided die(M) +M +M +3M
Managed Portfolio (Stocks heavy)
4-sided die(M)
+3M +M +M
Managed Portfolio (Bonds heavy)
4-sided die (M)
+M +M +3M
Cash NIL 0 0 01 2 3 4 5 6 7 8 9 10
20 19 18 17 16 15 14 13 12 11
21 22 23 24 25 26 27 28 29 30
40 39 38 37 36 35 34 33 32 31
41 42 43 44 45 46 47 48 49 50
60 59 58 57 56 55 54 53 52 51
61 62 63 64 65 66 67 68 69 70
80 79 78 77 76 75 74 73 72 71
81 82 83 84 85 86 87 88 89 90
100 99 98 97 96 95 94 93 92 91
Strategy/ Risk Management
BACK TO THE BIG PICTURE
Plan Execute
Investment Objective
Time Horizon
Financial Goals
Specific Instruments Allocation
Specific Funds / Securities
Target Asset Allocation
Feedback
Changes in Circumstance Market outlook
Risk Appetite