Tan Kin Lian's Blog: Investing savings of $10,000

Tuesday, January 05, 2010

Investing savings of $10,000

Someone wrote to ask for my advice. He has savings of $10,000 and wish to have a better return compared to bank interest. He wanted to pick some stocks to buy and sell when there is a profit. I advised him that it is not suitable to trade in stocks, as the transaction cost and spread will eat away the gain from the stock. There is the risk of capital loss that he must also consider.

I hesitate to suggest that he invest in ETF, as the stock market is rather high and the economy is has not recovered. Do you have any suggestions?

26 comments:

Anonymous said...: Hi TKL,

In my personel opinion, investing is really a personal choice depending on his risk appetite & whether the $10k is his only saving. If the later is true, then better to leave it in the bank as emergency fund.

If this $10k is his surplus saving and will not hurt if he losses all, then stock market investment is an alternative.

Investing in ETF, I suppose is safer than in individual stock. He should not just ask around but take resonsibility to monitor the suggested stock or ETF. Each has it's own characteristic and once he is comfortable i.e. fully understood the risk, then with an exit plan in place, he can then buy that particular stock or ETF.

If he prefers to depend on advice of friends or advisors, then we just return to the days of Minibond where investor refuse to take responsibility of the product they are buying & totally depend on the incompetent FA who only sells to earn commission instead of putting the interest of their client first i.e. selling without risk analysis or understanding the product nature.; January 05, 2010 9:21 AM
Anonymous said...: Anon 9:21am comments "then we just return to the days of Minibond where investor refuse to take responsibility of the product they are buying"
The above comments are not fair because the main complaints from the minibond holders are:
(1)minibond products are unsound products and unfair(return of 3 but risk of 9)
(2)the newspaper advertisements and sales brochures misled investors into believing that they were buying a bond issued by the six leading banks.; January 05, 2010 9:59 AM
Anonymous said...: $10K is too small to think about investing, if that is about all one has.

Better save to accumulate more. Which means having a job (or better still a good pay one) and be prudent in spending.

Realistically no better way, unless strike Toto.; January 05, 2010 10:04 AM
Anonymous said...: imho
its never a good idea to give specific investment advise
if the fellow made a profit - all is well
but if he/she made a loss - u just become a convenient person to blame; January 05, 2010 10:11 AM
Financial Freedom Warrior said...: if the $10k is the persons life savings, I suggest that he parks it in the bank account and invest in the stock market via ETF during the next downturn.

I would advise against going in now.; January 05, 2010 10:36 AM
Anonymous said...: I would recommend converting the money into ringgit and making a deposit with a reputable Malaysian bank like Maybank. The current interest rate for a 1 year deposit is 2.25% to 2.50%. This is significantly higher than S$ deposit rates.

The ringgit is a relatively good currency to put some surplus funds into given the proximity of Malaysia to Singapore. In the event the ringitt depreciates vis-a-viz the Singapore dollar, you can easily cross the border and covert the ringgit into goods and services. There is usually a time lag before changes in the exchange rate translate to a change in actual good and services. You can therefore cross the border and minimise any losses by consuming Malaysian goods and services.

Also it should be noted that Malaysia is a huge raw material exporter. If there is a signficant increase in the price of raw materials like oil, rubber and tin, the Malaysian ringgit will tend to appreciate vis-a-viz the Singapore dollar. Many expect that this will eventually happen if the US continues to print money and the world faces higher inflation.; January 05, 2010 10:41 AM
Robert Tan said...: If he does not need to use the funds for an extended period of time(say at least 1-2 years), he should consider investing in shares/ETF. If he does not have much expertise in selecting stocks, it is better to invest in an ETF.

Although the market is rather high, the probability is that he will get better returns in the medium to long term investing in shares than in fixed deposits. Even though the market is higher now, the dividend yields for quite a number of stocks are still higher than FD interest and in the longer term, the potential for appreciation is greater than the potential for loss, particularly in an inflationary environment. He must however be able to withstand the volatility of the stock-market and not be pressured to sell because of margin calls or some other reasons when the market drops from time to time.

He can of course wait for the market to come down before going in, but who knows when and by how much it will come down by? I thought the Singapore market recovered too quickly when the STI hit 2000 in mid-2009 and decided to wait a bit. When the STI hit 2500, I thought it might do back down to 2000. When it's around 2900 now, I'm still wondering whether it will go back down to 2500.

So, I think I will never know where the market will be in the short term. Even in the long term, I cannot be sure but based on probability, it will probably be up unless the share prices for particular stocks is way higher than the intrinsic values of the companies they represent. But one must be prepared that in some exceptional circumstances, the stock market may take more than a decade to recover(if one started investing at its peak) and some may not have the luxury of time to wait that long. The good thing is one can go into the market gradually so that there is some dollar averaging effect to mitigate the risk of going in at the peak of the market.; January 05, 2010 11:00 AM
Parka said...: There's nothing wrong with investing in stocks if you know what the company you're investing in is doing.

A 5% increase in stock value is already a $500 gain. Surely transaction cost aren't that much.; January 05, 2010 11:37 AM
Anonymous said...: I tend to agree that transaction cost for stocks is not too high.

If he does not want to take too high a risk, I think he should consider investing in some good reits. He can expect annual yield of about 7% plus some capital gains when the underlying assets of these reits increase in value as the economy recovery gains momentum.; January 05, 2010 1:41 PM
Anonymous said...: I agree - stocks or ETF are not bad if liquidity is not your problem. You should be able to get better return than bank interest within 5-year or 10-year timeframe.

Personally, I have been trading secondary SGS bonds via fundsupermart to get returns better than bank interest. About 5%return annual. In my opinion, it's very safe, liquid (i.e unlikely you will lose too much if forced to sell) and low cost. But don't expect to make returns higher than 10% unless there is a huge swing in interest rates.; January 05, 2010 1:58 PM
kate said...: 1-2 years is too short a period of time if s/he wants to invest in shares. (Note I didn't say speculate). And I agree with Mr Tan, investment cost CAN be substantial and erode returns. Most speculators don't sit down with Excel and calculate the cost of investment. High cost of investment and failure to diversify risk are two common mistakes investors make.

This person should take a portfolio approach when he's looking at investing. Here're two links on how to think about portfolio:

http://forums.sgfunds.com/viewtopic.php?t=1143
http://forums.sgfunds.com/viewtopic.php?t=2587

The above forum has plenty of resources on investing in Singapore. Of course, like in all forums there are plenty of bad advice, so the person has to be discerning and know what he/ she wants.

I would strongly suggest reading books like "The Boglehead's Guide to Investing" and "The Four Pillars of Investing". Investing is not about the products you buy. It's about psychology. Why do you want to invest? From "Four Pillars", you are either maximizing your chance of getting rich, or minimizing risk of becoming poor:

"This issue gets to the heart of why we invest. You can have two possible goals:

One is to maximize your chances of getting rich.
The other is to minimize your odds of failing to meet your goals or, more bluntly, to make the likelihood of dying poor as low as possible.

It’s important for all investors to realize that these two goals are mutually exclusive. "

Do not rush into investing, I made this mistake when I was younger and suffered some losses because I rushed to buy the hottest stocks of the moment.

Take a few weeks or months to research, think through one's own values and needs, and PLAN. $10,000, plus subsequent investments, can grow to be a comfortable retirement fund.; January 05, 2010 2:40 PM
Anonymous said...: Replying to 9.59. There are many different scenarios when one purchased Minibond. There is a group, like me who bought from FA from a reputated FI. Both the marketing dept of the FI and the FA are suppose to provide a professional service to me and ensure the product meets my risk appetite & needs. They did not.

I am lucky as I was compensated but what happen to those who bought on-line, whose FA had left the company, who signed up after a marketing seminar, who bought for LFA?

General rule. Take responsibility. Ask for opinion but you must do your homework before making a decision. Understand the risk involved. Just like 10.11 said, when you win is all smiles but when you lose, TKL will be blame had he advise to buy STI ETF.; January 05, 2010 2:40 PM
Anonymous said...: invest in oil !! sure rise above $82 per barrel for $95-$100 within next 12 months for 25% return per annum; January 05, 2010 4:16 PM
Anonymous said...: $10k is amount to go buy. Suggest to indulge in wine, women and song.; January 05, 2010 4:22 PM
10K said...: With all nations determined to keep their economy going and determined to avoid global depression, the stock market will remain volatile.
Neither will it go back to the good old days.
Interest rates will remain low. Many reports suggests that interest rates need to go up. This must be read in context to the rates now, and from the perspectives of central banks. To these institutions, "up" means 0.025%. To you and me, its insignificant.
Same with reports describing currency "jumping", or "leaping"
Ignore them, it means nothing to you and me.

For $10,000, its better to buy shares that pays dividends. Ignore suggestions of buying Hong Kong stocks, US stocks.. the brokerage fees and taxes will dilute any gains.

Buy shares in Singapore. ( ignore malaysia too ) Some suggestions:

1000 Starhub @2.14= $2,140
1000 Sembcorp@3.71= $3,710
1000 UOL@4.13 = $4,130
Total = $9,980
add 2.5% to this and its slightly over 10,000.

Why these?

Starhub: only cable operator, ignore all the noise about EPL

Sembcorp: Multi business. from waste disposal to ship building

UOL: properties in Singapore and overseas.Hospitality and investment properties.

They all pay dividends and should continue to do do ( maybe less )
Throw away the key and forget about them for the next 2 years.

No guarantees though. In life there never was.. except death.
Thats why I do not buy life insurance... we will die .. see you guys in heaven.. if we make it
ha! ha!; January 05, 2010 6:26 PM
Anonymous said...: Difficult to answer with a number of unknowns (age, portfolio - is the 10k his/her whole savings, risk tolerance, etc.).

Anyway, from the little information + likely assumptions - I agree with Mr Tan's suggestion on ETF BUT now the index is not cheap now (although the market still has upside momentum). It's a dilemma which most investors face now - market is not cheap but yet bank account is earning close to 0%. That's why asset allocation is IMPT. If the person has zero equity exposure, dabbling a bit is fine (S'pore mkt is not cheap but neither bubblish at 2,900).

I just have "nagging feeling" on the real economy, in particular the sustainability of the recovery, particularly with an OVERLEVERAGED/money-printing US economy.; January 05, 2010 9:27 PM
Tan Kin Lian said...: Hi
Thanks for your useful suggestion. I only block a suggestion to invest in Penny stocks, which I think is rather dangerous.

I don't mind the suggestion to invest in oil, although I disagree with this type of speculation. At least, the market for oil is less likely to be manipulated, compared to penny stocks.; January 06, 2010 9:03 AM
chanks said...: Hi all

I am a full time trader on stock and forex, I recommed to take some stock trading courses and learn how to look at the stock market (may take six to a year to learn), do not rush into the market, the opportunity and the market are alway there for you,24 hour a day, 5 day a week. Need to learn...

Thank you

Chanks; January 06, 2010 11:58 AM
Anonymous said...: Hi TKL, I am the one who suggested putting the mere $10K into penny stocks. It is your judgement call to decide whether to show the post or not but thanks for clarifying.; January 06, 2010 12:55 PM
Anonymous said...: To anon 2:40pm
It is not fair to ask the minibond holders to be responsible for:
(1)unsound/defective minibond products
(2)misleading newspaper advertisements and sales brochures; January 06, 2010 12:55 PM
STG said...: invest n trade are different.

invest means u buy n hold. hoping for a better return than alternative like depositing money in bank. for this i think studies have shown human do no much better than monkeys at random.

trade means u buy or sell to make. its not as easy as buy low, sell high. generally, returns and losses are potentially much higher than investing. however the key question is consistency. please do not be misled by claims or stories of big time traders or fund managers and believe all is well. there are many who have failed miserably.

in watever one choses, its most important to understand one's objectives and directions.; January 07, 2010 1:52 PM
JW said...: Hi,

not all penny stocks are dangerous. One needs to be extremely prudent to sieve through everything to ensure safety. When you have a fixed set of criteria to fulfill, and the discipline to stick to it, then the probability of success is improved greatly.

To me, anything less than a dollar is a penny stock. Breadtalk, certain REITs, etc, are good in their own ways.

Question is, does he know how to do his homework properly. And since he asked the question of where he can put $10k, I guess not. So penny stocks would be dangerous for him.; January 08, 2010 10:54 AM
Anonymous said...: Alamak! Its only 10K guys!
There is a good chance the returns will be better if invested in the stock market.

Benchmark returns to CPF interest rates in the Ordinary Account which is currently 2.5%
Aim for returns higher than that and it will be ok.. its only 10K!! for goodnes sake!.. dont bother about age, sex, years to retirement, loans.; January 08, 2010 6:51 PM
Anonymous said...: Keep it in a saving account or money market account as emergency fund if you haven't had one yet.Don't listen to all the noises. You have plenty of time.
Meantime invest on a regular basis to accumulate and build up your asset and you don't have this worry of volatility or right time or wrong time.; January 08, 2010 10:06 PM
Penny Stocks said...: Thanks for your information. Most of the posts in the blog is really valuable. Regards; July 01, 2010 7:55 PM
Steven Anderson said...: Excellent tips here, well done for sharing this information.; May 20, 2011 5:47 PM

Tuesday, January 05, 2010

Investing savings of $10,000

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