Recently, I have been approached by a family member who is keen to put some money in investments. Her objective was simple enough: earn a higher return than the negligible banks' interest rates.
We all can agree that the banks' interest rate is unappealing and the reason why we keep our monies there is because we have bills to pay and some form of GIRO arrangement with our insurance companies or mortgage loans. I think in Singapore, most of the people know this fact very well but the problem is how, what and where to put our hard-earned savings to work.
The approach
While she is relatively new to investments, she has heard about Singapore Savings Bonds (SSBs) which she understood that it is very safe and the yield is higher than 2% according to the information shared from an article. Additionally, she is also considering topping up her own CPF-SA because this was highlighted in a recent article on Straits Times on tax savings and also building up your retirement portfolio.
So from the information gathered, I would presume that she is looking for something that is conservative, but is still able to generate higher returns than the banks.
I went ahead to ask these questions: 1) when do you need this sum of money? 2) can you accept some form of risk? 3) what kind of returns are you looking at? She replied – I do not need this sum of money for the next 10 years or more; I can accept risk, maybe just 10% loss; I just want a higher interest than the banks' interest rates.
I thought this is quite simple because beating the banks' interest rates which are at 0.16%1 as of Feb 2019 will not be that too difficult, the level of risk taking is acceptable and lastly, the investment horizon is long. Nevertheless, I said to her that I will think through and propose some ideas for her to consider.
There is one thing that I need to be clear is that this family member is relatively new to investment and does not know anything much about stocks, ETFs and bonds apart from a Regular Savings Plan (RSP into a fund) which she has right now.
The research
So I took the approach to construct a portfolio rather putting all the eggs in one basket. Next, I sat down thinking what the possible options are available for a new investor. Here is the information I found, inclusive of her considerations.
- Singapore Savings Bond (SSB)
- Retirement Sum Topping-Up Scheme (top up to CPF-SA)
- Buy a retail bond → e.g. SIA retail bond (5 years)
- Dividend paying blue chip stocks
- Funds
- Managed portfolios
From the available options, I can probably allocate the investable amount into 3 portions:
1) Conservative investment instruments that provide stability during volatile market conditions
2) Build the base with products that can outperform during favourable market conditions and are resilient during market downturns
3) Products that could generate higher returns but may also have higher volatility.
What we will usually do is to determine the client's risk profile and allocate based on that. A balanced investor should have 50% in equity and 50% in fixed income. Subsequently, we could allow a +/- 10% overweight or underweight in equity or fixed income depending on our investment house view.
For this family member, I'm taking a balanced investor approach because information relating to risk taking is lacking, the investment time horizon is along and given that she is new to investing. So I will allocate her investable amount in 50% fixed income and 50% equity.
Now, let's look at some numbers.
| Product | Yield/Past performance (annualised, SGD terms) | Expected duration | Additional notes |
|---|---|---|---|
| Singapore Savings Bonds (SSBs) (SBAPR19GX19040X) | 2.49%3 | 10 years | Can withdraw anytime before maturity but subjected to lower yield. |
| CPFA-SA | 4%4 | Until age 65 | Tax relief benefit. |
| SIA retail bond | 3.03%5 | 5 years | - |
| Portfolio of SG banks stocks (DBS – SGX:D05, OCBC – SGX:O39, UOB – SGX:U11) | Refer to the Appendix for the performance | Can be sold any time | Dividends can be expected on a quarterly basis |
| First State Bridge (recommended balanced fund) | Year-to-date (YTD) return: 5.17%6 2018: -2.82% |
Can be sold any time | Dividends can be expected on a semi-annual basis |
| FSM Managed Portfolios (FSM MAPS) | YTD return: 6.1%7 (Balanced Growth) | Can be sold any time | Portfolio management team will decide the allocation |
Note: information as at 22 March 2019
The elimination
Before I start to evaluate what are the options for the portfolio, let’s start with why I remove some options and why they were there in the first place.
The SIA retail bonds have been discussed widely and here at FSMOne.com we offered our view as well. Since SIA is a household name for many, I included this retail bond into my consideration. However, my relative has a considerable investment horizon so after five years, she will face the issue of having to reinvest into something else at that point in time so I removed the bond from the final portfolio allocation. I took the approach that the portfolio should have a 10 years time horizon.
One of the funds that I suggested was First State Bridge. This is one of our Recommended Funds for many years and it is a testament to its ability to manage risks and yet be able to generate a consistent outperformance over the years. Coincidentally, my relative is not new to this fund because she has an existing RSP into this fund that has been performing very well for her. On that basis, I decided not to add on to her existing investments and look at alternatives instead.
The portfolio
Armed with these information, I started to sketch out what the portfolio should look like, bearing in mind that the investable amount is quite small.
So let's start with the easiest part: 50% in fixed income to build the portfolio. I thought that the SSB option was quite attractive given that interest rates have gone up. However, I noted that the investor has to open a CDP account and knowing that she is quite clueless over these things, I decided to skip this option.
Next, I contemplated of suggesting to top up her CPF-SA because 4% per annum guaranteed is quite attractive. The downside is that this amount of money will be locked in until she is 65 (assuming no change in CPF policy rules). I mentioned this to her and she is quite happy to let the returns compound until she is 65. She is also aware that she will receive tax benefit from this topup. Basically she will get a one-time tax relief capped at $7,000 for the amount that she top up to her own CPF-SA.
Based on that, I will use CPF-SA as the 50% fixed income allocation and work on the next 50% on equity. Since CPF-SA provides a very stable foundation, I can suggest a more aggressive approach on the equity portion.
I put in the banks’ analyses because we have written an article recently on why we like them and where the positive growth are that we are looking at (3 reasons why we believe Singapore banks still have ample room for growth). Besides the growth potential, we also noted the average forward dividend yield is about 4% which is quite decent. Coming from a Singaporean perspective, I think it is easier for her to relate to the local banks and invest in them.
I chose OCBC (SGX:O39) because of its favourable outlook, and its investable amount is within the total amount for the portfolio.
After deciding on CPFA-SA and OCBC (SGX:O39), I decided to look at the FSM Managed Portfolios (FSM MAPS) for her portfolio. Here at FSMOne.com, we highlighted the reasons why we like Asia ex Japan and especially China. For FSM MAPS, our GM shared why we have added ETFs into the portfolio to ride on this growth and generate excess returns.
The other consideration that I had was that FSM Managed Portfolios is handled by a team of investment professionals who look at it on a daily basis. They will be in the best position to analyse and make the right judgement calls on how to rebalance the portfolio when necessary. For this family member of mine, she does not need to look at it so closely and she knows that her monies are well taken care of by a team of professionals.
So here is how the portfolio will look like.
| Product | Allocation | Investment Amount |
|---|---|---|
| CPFA-SA | 50% | $5,000 |
| OCBC (SGX:O39) | 25% | $2,500 |
| FSM Managed Portfolios (Aggressive Growth) | 25% | $2,500 |
The summary
So taking this approach, I am confident that she will be satisfied with her portfolio returns 10 years from now. CPF-SA provides the foundation, OCBC (SGX:O39) is the base which will generate returns during favourable market conditions while remaining resilient. Lastly, FSM Managed Portfolios (Aggressive Growth) is the aggressive approach to deliver higher returns but she also understood that these will come with higher volatility.
In fact, this portfolio can be replicated quite easily if you have some knowledge of the products and what you are investing into. Many a time, we will scratch our heads and unsure on how to get started but in fact it is not that difficult. We need to ask ourselves, do we need the money any time soon? How much can I accept a loss on my investments until I cannot sleep at night and what are our financial objectives?
Here at FSMOne.com, we are a source of information on products that you may be keen to get started and we have the tools, expertise and also the know-how to help you to invest globally and profitably.
Appendix
A comparison of the 3 banks' performances on a year-to-date (YTD) basis and 2018 respectively.
Note: All information taken from Yahoo Finance, dated 25 March 20198.
1 https://secure.mas.gov.sg/msb/InterestRatesOfBanksAndFinanceCompanies.aspx
2 https://www.cpf.gov.sg/Members/Schemes/schemes/retirement/retirement-sum-topping-up-scheme
3 http://www.sgs.gov.sg/savingsbonds/Your-SSB/This-months-bond.aspx
4 https://www.cpf.gov.sg/members/aboutus/about-us-info/cpf-interest-rates
5 https://secure.fundsupermart.com/fsm/article/view/14897/sia-launches-new-sgd-5y-bonds-with-retail-tranche-at-3-03-fpg
6 First State Bridge
7 https://secure.fundsupermart.com/fsm/maps/portfolio-materials/factsheets
8 https://sg.finance.yahoo.com/quote/O39.SI/?p=O39.SI
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