S$100,000 in a bank account? You are losing money!
If you're trying to save for the future using your savings account, you are probably losing money. The concept of losing money while saving may not sound logical. But it is simply due to the fact that the value of money in bank accounts is eroded over time through the negative effects of inflation.
So the question is, how to avoid losing money? And one simple answer is “through investment”. Investments can be very broadly categorized into three major types; these are zero risk, medium risk, and high risk.
Zero risk (or risk free) investments
Zero risk investments will usually have the lowest returns, and with virtually no risk of loss of principal, are usually backed by Governments. These investments are highly recommended for risk-averse investors. Examples would include Singapore Government Saving Bonds and Singapore Government T-Bills. Singapore government bonds are actually high yielding, yet risk-free, so are especially attractive investments in the risk free category.
If you invest S$100,000 at the latest rate as of February 2016, the effective rate of return will be 2.5%, so that at maturity, your S$100,000 will earn you S$25,620. Selling before maturity will reduce the effective rate of return, so for example, if this investment is withdrawn after 6 years, the total amount earned would be S$9,560, for a rate of return of 1.89%.
Medium risk investments
Medium risk investments generally refer to investment grade corporate bonds. These are debt securities, and interest is paid in the form of annual or biannual coupons. The annual rate of return for an investment grade bond depends on the underlying issuer, but currently tends to range from 1% – 3%. If you invest S$100,000 with a 3% annual interest rate in an investment grade bond, your investment will be worth S$103,000 at the end of one year. The difference between these and government bonds is that these bonds are guaranteed by the issuing companies, and hence there is always a risk, however minimal, that there could be an insolvency event.
A mutual fund is another medium risk investment. Investing in mutual funds means a fund manager will take care of your investment, and returns can vary depending on the performance of the individual fund manager.
High Risk Investments
For high risk takers, direct investment in stocks is recommended. Once you invest your money in a stock, you are entitled to receive any dividends payable. This dividend is included in your return on investment. Since the value of the stock will fluctuate, the risk is high. In addition to dividends from the company, capital gains on share trading can make money for you as well. Suppose you had bought 1000 shares of a company at S$4.5. If you sell it at a later date at S$4.6, you will make a profit of S$.10 per share, or a total profit of S$100.
Risk can be minimized by buying blue chip stocks. Blue chip stocks are well-established companies and are financially very stable. Currently, there are 30 blue chip companies out of the 800 companies listed on SGX. These companies provide consistent dividend payouts as well. Your money is relatively safer with these companies. Typical Singapore blue chips listed on SGX include SIA Engineering, Singapore Press Holdings, Singapore Telecommunications and Starhub.
You can maximize your risk and return by buying small-cap stocks. These companies are in the early stages of growth, and the shares are often extremely volatile. If you think that a small company of today has great potential, consider buying its stock. If luck is on your side, it may become the next Google! In that case you will make millions from your small investment. Wilmar International, Keppel Corp., Hongkong Land Holdings and Genting Singapore PLC are some of the small-cap stocks you might consider.
There are better options than saving money in a bank account. Above are just a few ideas.