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Cash to Stash
Posted 22 October, 2017 by Clearly
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I’ve got the Cash to Stash – What are my options?

 

Today we attempt to solve one of the biggest headaches of our financial lives – how in the world do we grow our wealth?

Interest rates have remained comatose for the longest time, and inflation isn’t exactly slowing down either. These two deadly duos can really wreak havoc on one’s financial nest egg – which is why so many people are fretting about this.

In this article we are going to run through 3 options that are open to pretty much available to everyone, bearing in mind the following assumptions:

  • You have a stash of cash about 20 – 80k
  • You aren’t exactly keen on hyper-risky options like FX or derivative trading
  • You still want access to your money within a short to medium time frame (within 3 – 10 years)
  • You hope to see reasonable returns on your money

 

 

Yoda Says

Safe and sound, you want to be. Growth also, you desire. True blue Singaporean, you are.

 

We will run through each option, its pros and cons, as well as provide actual case studies where applicable.

Be ready to be informed, you will be.

 

Option 1 : Stocks

 

Stocks

 

This needs no introduction, neither does it need much explanation. We get to partake in a listed company’s rise – and fall – of financial fortune.

We can broadly categorize them into Blue Chip Stocks vs Penny Stocks, Dividend Yield vs High Growth – and anything in between. There are large cap, mid cap and small cap classifications, along with a whole host of others. (Let’s narrow the discussion a little, else we will be stuck here for a looooooong time)

Blue Chip stocks are well established companies that have been around for a long time, with a solid track record.

Penny stocks are companies that have far lesser pedigree and carry with them a larger risk (and potential reward). Penny stocks are so named because their shares are usually less than a dollar (hence pennies!).

Dividend Yielding stocks are those that focus on giving regular dividends, and characterized by companies in stable, mature industries with not much room for expansion. Their share prices typically do not undergo big swings.

High Growth stocks belong to companies in newer, unexplored industries like tech and bio-med. They don’t give out dividends as much, simply because they need the cash to grow like a bodybuilder on steroids. What they lack in dividends, they make up for by (occasionally) spectacular share price gains. Or crashes – that’s how it is. Big risk, big reward.

 

Case Study: Singapore Telecommunications Limited

 

SPH Share Price

Source: Yahoo Finance

 

Investment period: 3 years (start of 2014 – end of 2016)

Starting Price: $3.60
Ending Price: $3.65
Total Dividend paid over 3 years: 51.8 cents per share

Total returns, not taking brokerage fees into account: 15.8% over 3 years (2.51% p.a. compounded)

Comments: Considered a stable and defensive purchase, you can see the share price doesn’t fluctuate much. ST is obviously a stereotypical example of a blue chip stock.

 

Generally speaking, here are the pros and cons of investing in stocks:

Pros
The sky’s the limit when it comes to returns. When invested in the right time, returns of 100% over 5 years or less are possible.

Cons
You could lose all your money. Or most of it. No one is guaranteeing you anything!
(read about this spectacular crash of a trio of penny stocks)

 

Let’s move on to something less polar.

 

Option 2: Bonds

 

A bond is basically a loan given to an entity in exchange for regular interest payments (also known as coupons). The entity could be a company or it be a sovereign nation, and the holder (owner) of a bond is a debtor to that entity.

Fun Fact: Coupons are so named because in the good ole days, bonds were literally pieces of paper with coupons on them, which the holder could tear out and redeem for cash.

 

Bonds

 

Just like stocks, there are plenty of bond categories that cater for a wide range of investment appetites: Corporate bonds, convertible bonds, junk bonds – just to name a few.

Corporate bonds are debt issued by companies (as opposed to those issued by nations, which are known as government bonds). They generally pay higher coupons compared to the government bonds because they are perceived as more risky.

Convertible bonds are those that can be redeemed for stock instead of cash, usually at some predetermined point of time at the discretion of the bond holder.

Junk bonds are so named because their issuers are of high risk of default (their ability to repay is dubious, to say the least). To compensate for that, they usually pay higher coupons (interest) – the more polite term being High-Yield bonds.

 

Case Study: CapitaMall Land Trust Corporate Bond (CAPITA 3.080% 20Feb2021)

 

CapitaMall Bond

Source: Fundsupermart

 

Investment period: 3.4 years (from now till 20th Feb 2021)

Current Price: $103.75

Coupon Rate: 3.08% (but that is based on an issue price of $100)

Total returns, not taking brokerage fees into account: 6.73% over 3 years (1.935% p.a. compounded)

Comments: Bond coupons are fixed, but bond prices do change as well, in opposite step with interest rates. This was originally a 7 year bond, but it can be bought and sold anytime before its 7 years are up. The effective interest rate if you hold it to maturity is also called Yield to Maturity. In our example it is 1.935%.

 

Here are the pros and cons of investing in bonds:

Pros

1. Returns are well defined and there are less surprises, especially if the issuer is financially rock solid. (Hence bonds are also known as Fixed Income instruments)
2. Bond prices are more stable compared to stock prices.

Cons

1. Default risk does exist, reducing the value of the bond dramatically, and sometimes to 0.
2. Because of the relatively safe nature of the debt (the bond), interest yields are reduced accordingly.

 

Let’s move on to the last option.

 

Option 3: Endowment Plans

 

Investor

 

An Endowment Plan is an insurance product designed to enhance your returns in a safe manner, while providing some insurance cover as well. They are also commonly known as Savings Plans, but are not to be confused with the liquidity offered by savings accounts. A short English lesson here: to endow is to furnish, or provide, with a source of income or property. (It pays to understand language a little better!)

There are various categories of Endowments like: Regular Premium (as opposed to Single Premium), Participating Endowments vs Non-participating Endowments.

Regular Premium Endowments require the policy owner to pay/save premiums regularly, over a stated period of time (Usually more than 5 years)

Single Premium Endowments only require a one time premium commitment.

Participating Endowments are those that partake in the Insurer’s investment gains (or losses). This means that the actual returns provided by the plan may vary. The cool way to articulate them: Par plans.

Non-participating Endowments do not participate in the Insurer’s investment gains (or losses). Hence returns upon maturity of a plan are known in advance, and these plans tend to be capital guaranteed. Abbreviated as: Non-par plans.

 

Case Study: FWD Single Premium Endowment Plan

 

Investment period: 3 years

Investment amount: between 1000 to 15,000 SGD

Total Returns upon maturity (there are no brokerage fees): 6.18% of your investment (2.02% p.a. compounded)

Comments: This is a Single Premium Non-par Endowment Plan. To enjoy the returns, the policy must be held till its maturity 3 years later, then the entire maturity amount will be disbursed by the Insurer. It is also a capital guaranteed plan.

 

Here are the pros and cons of investing in Endowment plans:

Pros

1. What you see is what you get. There are no price shocks to be had, and returns are pretty much guaranteed (especially Capital Guaranteed ones!).
2. Endowment Plans are covered under SDIC, which is sort of an extra security blanket. If your Insurer is unable to pay you, SDIC will. You can read more about it here.

Cons

1. The policy must be held to maturity to enjoy the full returns stated. To sell or surrender the plan before it matures usually entails financial loss.

 

What next?

 

Choices

 

This really depends on your risk appetite, your financial situation, and your individual preferences.

If you don’t mind sacrificing financial safety for potentially higher gains, then stocks would be the natural choice for you.

For people who want a stable income and also flexibility to liquidate their investment, then bonds would be a right fit.

And finally, if you value certainty above all else, and can keep a commitment over a period of time, then Endowment plans should resonate with you.

In reality, it does not have to be an either/or type of proposition. A properly constructed financial portfolio is likely to contain various assets, depending on a person’s life stage.

 

While we don’t have any recommendations for a hot stock or a really cool bond, we do have an Endowment plan in mind that almost everyone ought to have:

 

>> Enjoy 2.02% p.a Guaranteed Returns with FWD <<

 

It has a short tenure of 3 years, with a relatively high guaranteed return, and doesn’t require you to break the bank. Buy it online too, with minimal fuss!

 

P.S. A little birdy tipped us off that this plan might not be available much longer – so act while stocks last!

 

FWD Does all

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

This post is brought to you by FWD. All views and opinions presented in the article are those of www.ClearlySurely.com

7 comments

  1. kyith

    its a bit bias isn’t it. You had to choose one of the worse performing stocks so that you can afford a low hurdle to make stocks look much worse.

    1. Clearly

      kyith,

      We didn’t choose the best performing, neither we did choose the worst performing stock. The universe of stock performances is wide, so whatever we choose to represent stock returns, there will always be someone who disagrees.

      You are entitled to your opinion, and FYI we already stated “When invested in the right time, returns of 100% over 5 years or less are possible”

      A stock lover could come in to say, “I’ve done 300% in 3 days!”

      A stock hater could come in to say, “I’ve lost 300% in 3 days!”

      To us, the example we used is fine. You may disagree, that is also fine.

      Clearly

  2. James

    I, for one, think that this is a rather balanced view about the different investment options.

    When I first saw the example used, I was thinking: Could there be a better one used? Then I thought: Is there really a better example? What makes one example better than the other?

    As a seasoned investor myself, I do appreciate the simplicity and fun facts peppered throughout. The writer already did a good job of balancing out the pros and cons, even though it is a paid piece.

    Interesting content, a light-hearted style, and finely balanced views – Not too shabby at all.

    Comments by kyith border on the curt and obtuse, and it’s admirable that the writer essentially agreed to disagree like an adult, while justifying his/her point.

  3. Tanji

    Hello, a thoughtful article!

    What’s your take on robo advisor – something like AutoWealth or Smartly? 5% returns in a low-risk, stable manner and no lock-in period. Their users have shared that they made >2% in the last quarter.

  4. Clearly

    Hello Tanji,

    Thanks for dropping by and we appreciate your compliment!

    As for Investment Autoadvisory, we actually aren’t too hot about it. Not because we are anti technology, we think think that lower fees are great.

    But it is clear to us that STI alone gained 22.7% since the start of January – if you had bought an ETF of STI, your gains would have been 7.5% each quarter. The returns that robo advisors gain are simply not designed to beat the market, even they admit that. Also, the transaction fees that you would have paid on the ETF would be far lower than those investment robos – which brings us back to Clearly Surely mentality:

    As far as investments (and insurance) go, it pays handsomely to dig a bit deeper to uncover the true picture.

    Finally, when the market crashes, the robos cannot rebalance fast enough to prevent a loss in your portfolio.

    Hope this helps!

    Clearly

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