Invest in a large, well diversified, low cost equity fund

Dear Mr Tan

You advised to invest in equities for 10 years or longer. Is there a risk that, at the end of 10 years, the fund will still show a loss for the period? In the past, I have invested in some funds for more than 10 years and still showed a loss.

REPLY:

There is a chance that you may suffer a loss, but the chance is quite small.

You should invest in a large, well diversified, low-cost fund for 10 years or longer. Preferably, the fund should be invested to follow the market benchmark.

Since 1980, there has never been a period of 10 years when the Singapore equity market (as reflected by the Straits Times Index) shown a loss. For some periods, the average return is higher and for other periods, they are lower.

Over the past 20 years, the average return on Singapore equities is 9.2% per annum (including reinvestment of dividends). The average return on global funds for the same period is 7.7%, after conversion to Singapore dollars.

If, at the end of 10 years, the market is weak and produces a low average return, you have the choice of waiting a few more years for the market to recover to get a higher return.

If you invest in a small fund that is not well diversified, your fund may perform worse than the market, due to poor stock selection by the fund manager. You may suffer a loss for the 10 years period. If your selected fund incurs a high expense ratio, it will also give a lower return than the market.

Lesson: Invest in a large, well diversified, low cost equity fund for a period of 10 years or longer. This will reduce your risk and give you a better return