Tan Kin Lian's Blog: Invest in stocks for the long term

Wednesday, September 23, 2009

Invest in stocks for the long term

In a chapter in my financial planning book, I quoted an important statistic that investing in the component shares of the Straits Times index over the past 15 or 20 years (up to 2006) produced an average yield of 9.2% per annum. This is a good yield.

However, this result could be due to factors that may not recur in the future, e.g. the stock market was under-priced at the start of the period, over-priced at the end of the period or the economy went through high growth during this period (and may see slower growth in the future).

To offset these factors, we can apply a discount of 30% on the total appreciation. Suppose, the stock market was 30% higher at the start or 30% lower at the end of the period, the yield would have reduced from 9.2% to 6.6%. This is still attractive.

For the next 10 years or more, I use an average yield of 5% per annum. This is quite conservative, and reflect a low interest, low inflation environment.

Many investors are afraid of the risk of investing in stocks as the price can be quite volatile. In my view, it is better to take the risk as stocks provide a better yield compared to other asset classes. The investor should diversify the risk by investing in a low cost indexed fund (such as the exchange traded fund or ETF) and by invseting for 10 years or longer (to average out the good and bad years).

An example of a good ETF is the StateStreets Traker Fund, which is traded in SGX. The investor pays a transaction fee of 0.3% to the stockbroker and an annual fund management fee of 0.3% to the fund manager. The bulk of the underlying return on the ETF goes to the investor.

Thee are other ETF that are invested in other asset classes. Learn about them. But, if you are not sure, choose the StateStreets Tracker Fund (or other similar funds) that mirror the Straits Times Index, as it reflects the Singapore stock market.

Tan Kin Lian

10 comments:

Anonymous said...: Very true.
I was lazy and dare not take risk. End up being "tricked" into buying Minibomb, which the adviser said was very safe.
I thought if the words of an adviser cannot be trusted, who else you can trust? If the big names cannot be trusted, then who can you trusted.
Then you see what happened.
As the Chinses saying " the most risky place could also be the safest place. "
The risky stock is actually the safest investment, if you know how to invest!!!!!!!; September 23, 2009 9:25 AM
Anonymous said...: Hi Mr Tan

Key words "invest...long term". Unfortunately in my observation, when it comes to stocks and ETFs, many Singaporeans adopt a gambler's mentality and end up playing the short game.

I think it would take a while for people here to learn to appreciate value-investing when it comes to stocks...and try as far as possible to divorce emotions into the game, and use rationality and common sense when it comes to investments.

Your thoughts?; September 23, 2009 9:29 AM
Anonymous said...: Hi Mr Tan,

I fully agreed with you that investment in shares market offers the best return compared with e.g. bank deposits (near zero interest rates), properties (high cost e.g. stamp fee, commissions, legal fees; also need much more time and efforts to buy and sell). Since, invest in individual stocks can be risky especially if you depend on others' inputs or advices, including "top picks" from analysts. Hence, just go for ETF. And since the component stocks in the ETF are reviewed by official expert panel regularily, the not so good ones will be replaced by the better ones based on a set of criteria from time to time. So, someone will do the job of ensuring quality of the component stocks.

Now, Mr Tan, you mentioned Reits are worth investing. Could you give some of your top picks? And briefly provide the reasons. Thank you.

CCL; September 23, 2009 11:11 AM
Anonymous said...: The riskiest investment is the bank deposit or FDs because they gaurantee you the interest rate and also the loss.
How many consumers know?; September 23, 2009 12:33 PM
Anonymous said...: ""The riskiest investment is the bank deposit or FDs because they gaurantee you the interest rate and also the loss.""
Wrong. The riskiest "buy" are the minibomb products.
You loss you principal. In Sg you may recover nothing.
It is very unethical to sell such products to unsuspecting clients and ignorant retail investors.; September 23, 2009 1:23 PM
Anonymous said...: Many think that owning cars is better than owning UOB shares.
Cars depreciate and have running costs. COE can cost 12K to 80K
1000 shares of UOB costs 16K to 18K with returns of about S$400 annually, and it can be used to pledge as collaterall for a loan. Try that with a car.
Investing is not the same as "playing" the market.
Everyone thinks they are very smart in the simple task of buying & selling.
Good luck to them.
I agree that investing in good company shares is
a good way to get returns.
In fact, it should be mandatory for anyone above the age od 21.
Instead, they burn their money on rubber tyres.
Luckly, I invest in companies that sell cars and lends money.. I get the $$.; September 23, 2009 2:11 PM
Anonymous said...: Anon 12.33 pm
It also depends on how much you have in FDs.

If you have a large amount(high 6 or even 7 figures), then even a small interest rate is quite Ok in absolute terms. And you will feel assured.

Of course, the thing is how to build up to the big amount. Realistically only 2 ways, besides luck or inheritance. Have a good income or do a good business and save over a good period.

Few can make big money solely by investing as the chances are also high that it may go the wrong way. Few are like Warren Buffett.; September 23, 2009 4:00 PM
Anonymous said...: I agree if you have a 10 millions putting in FDs and losing 30% in 12 year's time you still have 7 millions , it is still a lot. But for many, they can't afford to lose, they need to grow.
To grow your money you need time. It starts with a small amount by investing. You can invest in a business which is high risk but can be managed; you can invest in other people's business, also high risk; you can invest in stocks and shares, also high risk. What have they in common? High risk, right? This is how wealth is accumulated.
Warren Buffet invests in out of favour companies, companies about to collapse, isn't this high risk? Buffet is a value investor , he has long term view.
As Mt. Tan used to say, "risk is to your advantage". Mr. Tan is right. Without risk there is no gain.
GIC or Temesek investment could not have grown to this current size if they didn't take risk. They are rewarded with 17% compounded return , hard to replicate.
FDs gaurantee you a return , a loss.
Recent launch of Capital Plus by ntuc is also a guarantee of loss.; September 23, 2009 6:02 PM
Anonymous said...: If we put aside $400 each month for 12 months, there will be $4800. Take that amount and buy Semcorp Industries or Singtel ( both are trading at about $3.20 for 1 share) It will cost $3300 for
1000 shares for either of the 2 including GST etc.

Do this for 3 or 5 years, you will have 3000 or 5000 shares. Whats so difficult to do? People become wealthy through time, and of course a little luck. There is no instant wealth. ( you can try TOTO for the next 100 years and you will not get the million)

This method is the most basic of all. It may not get you your million, but it will give you a good start and a good return over 5 years.

It also depends on the current fixed deposit rates. Use the CPF Ordinary account rate as a benchmark. Any return lower than 2.5%, it would be wiser to leave it in the CPF. Any higher, consider investing it. For the current climate, its better to leave it in the CPF.

But its good to diversify. So risking $3000 for stocks like Sembcorp or Singtel is still worth the risk. Personally, I do not see them going belly-up anytime soon.

The alternative is what Mr Tan suggests: STI-ETF
just spend $2800 for 1000 shares.. it is still cheaper than a car.. in fact, with the dividends, you can enjoy taxi rides that costs $12 per ride for at least 3 rides.; September 23, 2009 6:24 PM
Anonymous said...: Recently so many insurance companies are cashing in on the fear of consumers. They rolled out short term fixed and gauranteed return endowment with returns and maturities from 1.4% for 2 years to 2.75% for 5 years.
It is a wonder Singaporeans ever get to retire with this type of products which exploit the fear and ignorance of the consumers. of course , the situation worsen by incompetent agents who peddle them like their wholelife products.
Consumers education is much needed that risk is not loss but growth over the long term.; September 23, 2009 9:02 PM