It seems that everywhere you look, there’s some guy hosting a free seminar who’s going to divulge the latest secrets on how to pick winning stocks and other too-good-to-be-true tactics. Sometimes these talks are hosted by financial services companies like RHBInvest and Phillip Capital, or by notable experts in the field, like Mark Lin and Nicholas Tan. Other seminars are held by financial education companies, like Wealth Mentors, where much of what they teach could be found in a good book (free, from the library). As a former financial educator who was not tied to an investment company or to selling certain products (and therefore, I had absolutely no conflicts of interest), I can honestly say that for the vast majority of people, all these seminars are really “barking up the wrong tree.” These are what I found that the vast majority of people need to invest in:
The typical client I had was a middle-aged person whose first question was “what stocks should I invest in?” This, however, was the wrong question. The first thing to consider, is really what your overall financial situation is (which almost nobody who is selling stocks will ask you). What is your net worth? What are your financial goals? What level of risk are you comfortable with? Do you have an emergency fund? And so forth. What I found after asking these questions is that most people were so dazed by the prospects of missing out on high yielding investments that they failed to get their finances in order first. Most still had quite a bit of debt. When you have a lot of debt, (this includes your housing HDB loan), it is usually much, much better to pay off your debt before you consider investing in speculative instruments (i.e., stocks and other “paper” assets). Assuming that you do have a 3- to 6-month emergency fund safely stashed away but readily available, this leads me to my first recommendation for what to invest in:
- Your Housing Loan. People will argue with me and say that their housing loan is only (currently) 2.6% and you could potentially get 8% or more on a stock. However, they forget that their housing loan doesn’t just “cost” them 2.6%. Their housing loan is usually paid for by “borrowing” from their CPF, which would have given up to 3.5% interest. And you will eventually have to pay back what you borrowed from CPF including the interest once you sell your HDB. For stocks, you’re not guaranteed a rate of return, like you are in CPF, so there is higher risk. Sure, you can gamble and try to get a higher return, but paying off your home is not only the safer thing to do, but it also will give you peace of mind and security, which can be priceless. With HDB loans, there is no prepayment penalty so you can choose to pay it off sooner and have a mortgage-burning party. Once you’ve accomplished that great feat, you can focus on the next recommendation:
- Maximizing Your CPF. I am constantly amazed by how people would rather speculate on stocks than to voluntarily contribute to their CPF. Making a voluntary contribution gives you tax relief in addition to giving you guaranteed rates of return. The maximum amount of voluntary contributions a person can make in one calendar year is subject to the CPF Annual Limit, which for 2015, is $31,450. In addition, you can also make a cash top-up of $7000 for you and for your family members. Of course, this cash top-up will also give you tax relief as well as a guaranteed rate of return. Now just these first two recommendations would make it so that the vast majority of Singaporeans won’t have enough money sitting around to play the market and chase yields. But for those who have paid off their home and have maximized their CPF, stay with me… there’s more.
- Getting Enough Insurance Coverage. It’s Just as amazing to me how many people I come across who are just fine having $50,000 in stock or forex trading accounts but don’t have any life or disability insurance yet but have young children to support. I’d rather see that person cover himself/herself against the unexpected and unfortunate incidents in life that can have a major and devastating financial impact. Life insurance, particularly term life insurance, is cheap, and if you have children, I think it’s essential. So is adequate medical insurance. Disability and long term care insurance is also a good idea. You can’t measure these by their rate of return, but the peace of mind and the assurance you get from them can be priceless. If you’ve done all three, there is one last thing I recommend before going into the market (and this is perhaps the hardest and most important of all)….
- Invest in Yourself. Your body is the only one you have. Why wouldn’t you want to make it the best home you have, giving it the best nutrients and the right amount of sleep? How we think, move, eat, and sleep is essential to our health, happiness, and wellbeing. It’s hard to measure these thing in terms of percentages and rates of returns, but they are important investments. As such, they will cost money and/or time. These could include things like starting an exercise programme, participating in stress management, sleeping more, buying organic foods, etc. These are all ways of investing in yourself and increasing the likelihood that you and those you care about will have a better future. Health-related problems are one of the biggest reasons for financial insolvency. Investments toward yourself to preserve your health and wellbeing are definitely worthwhile. After all, YOU are the best money making instrument that you have.
Now that we’ve gone through the list, if you have money left over, by all means, gamble away (responsibly) at your heart’s content and chase yields on speculative instruments like stocks, reits, unit trusts, and the like. But keep in mind that you are a small investor, and that there are other market trading forces that put you at a disadvantage (e.g., high-frequency trading, front-running, high commissions and expenses) and that the yields published are not necessarily the yields you would get if you had invested in a particular instrument. If you want to own speculative instruments but be a bit safer, more sane, and sleep better at night, a good compromise is to own them through a Supplemental Retirement Scheme (SRS) account. At least with a SRS, you will enjoy some tax relief, even if the unit trust loses some money. One last recommendation – avoid those get-rich-quick and pyramid funding seminars held at expensive hotels (how do you think they can afford such luxury venues in the first place?).