Financial experts offer advice on some of the safer options to choose from. -ST
Fri, Jun 04, 2010
The Straits Times
By Gabriel Chen
It is getting bumpy out there in investor land, and you may be wondering where to put your money now.
Asian stocks are at 10-month lows amid fears that tensions will keep escalating on the Korean peninsula.
There were reports last week that North Korea may be priming itself for combat, after South Korea officially blamed the regime for the March 26 sinking of one of its warships, which killed 46 sailors.
A Korean war is not the only downside risk to markets.
Before that, fears were festering that Europe's debt crisis could spread, and that China's real estate bubble could pop horribly and cause problems around the globe. Both these worries persist.
Another scare came when the Dow Jones Industrial Average plunged almost 1,000 points in less than 30 minutes earlier this month, for reasons yet to be fully explained.
The ups, as well as the downs, are also getting sharper - with the Dow often rising or falling 200 points or more in a single day.
It is natural to feel disheartened if all that volatility is wreaking havoc on your investment portfolio.
But it is important to take a long-term view and not panic and sell your stocks in a knee-jerk response to the market ripples.
'For long-term investors, they should not be reacting to the short-term volatility and be derailed from their long-term plans,' said Citibank Singapore's head of wealth management, Mr Shrikant Bhat.
'In times like these - while there can be an appropriate shift of risky assets to less risky assets - totally exiting from risky assets may not be the most advisable strategy.'
Fidelity International's managing director for Singapore and South-east Asia, Ms Madeline Ho, advised people to stay invested during these volatile times.
'If one is uncomfortable putting in a lump sum of money, regular investing is a disciplined approach and more palatable if you are uncertain about the market,' she said.
Still, the question for you, the investor, is whether this level of volatility is keeping you up at night.
If your main concern is limiting your losses and saving what cash you have, then you may want to put a lower percentage of your money into stocks and stock funds.
To be sure, you can put all your money in bank deposits just because they are very secure, but that is not wise as your purchasing power will be reduced by inflation - which exceeds bank deposit rates by a fair margin.
Experts say that a sensible combination of products with varying risk levels can provide good returns.
What are some safer investments you can choose from? The Straits Times investigates.
Bonds
Just as people often need to borrow money, so do companies and governments.
One way for them to raise money is by issuing bonds to the public via the market.
You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).
Assume you buy a bond that has a face value of $10,000, a coupon - the annual interest payment - of 6 per cent, and a maturity term of five years.
You would earn a total of $600 (6 per cent of $10,000) in interest a year for the next five years. When the bond reaches maturity after five years, you would get your $10,000 back.
You can trade your bond before maturity, but you may receive more or less than you paid for it, depending on market conditions.
Bonds can be bought through most banks and brokerages.
Consider buying Asian bonds, said UBS Wealth Management's chief investment strategist in Singapore, Mr Kelvin Tay.
'On a risk-adjusted basis, due to the relative strength and strong fundamentals of the Asian economies and hence corporates, Asian bonds are a very attractive asset class to invest in,' he said.
It is worth mentioning that while bonds are generally safe bets, they are not risk-free either.
The bond issuer could default on its debt payments.
Investing directly in bonds does not come cheap. The average bond is usually sold in blocks of $50,000 to $1 million at a time, depending on the issue. For retail investors, opting for a unit trust or fund that invests in bonds may make more sense. It is easy, provides diversification, and if chosen properly can be cost efficient.
'For bond funds, the concentration risk is minimised because for the same amount of money invested, it is spread across many issuers,' Mr Bhat said. 'Hence, the impact of the issuer's default on the fund is more muted compared to direct investment in the issuer's bond.'
Mr Albert Lam, IPP Financial Advisers' investment director, suggested three bond funds that investors could consider given their decent performance over the last three years. They are Franklin Templeton Global Bond (8.8 per cent annualised return), Schroder ISF Emerging Market Debt (6.49 per cent annualised return), and DWS Lion Bond (2.8 per cent annualised return).
However, in terms of risk-adjusted returns - or returns adjusted for the amount of risk involved in producing that return - DWS posted the highest number, followed by Franklin Templeton and then Schroder ISF.
Money market funds
Money market funds invest in high-quality short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.
These funds are a good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 per cent and 2 per cent - than banks' savings deposits.
'The (Prudential) Cash Fund, for example, invests primarily into Singapore dollar deposits which most investors are familiar with,' said online fund distributor Fundsupermart's analyst, Mr Cheong Chee Kin. 'Its three-year annualised return was 1.06 per cent, while banks' savings deposits return was 0.22 per cent.'
Not all money market funds are the same. Do your homework and read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.
Multi-asset funds
The rationale for investing in such funds is straightforward.
No single asset class can be guaranteed to top the performance charts each year, so it makes sense to have exposure to a broad mix of investments, such as stocks, bonds and property. Multi-asset funds are riskier than fixed deposits, but they are usually less risky than a stock-only portfolio.
Mr Al Clark, regional head of multi-asset at Schroders, cited the recently re-launched Schroder Multi-Asset Revolution as such a fund, adding that it is designed to help investors maximise opportunities in any market environment.
'It has the ability and flexibility to invest in not just traditional asset classes like equities, bonds and cash, but also alternative asset classes like commodities and property,' he said. 'The fund also tactically moves into asset classes that are most appropriate for the prevailing market cycle.'
Gold
Many people invest in gold as a hedge against stock market declines, burgeoning national debt, currency failure, war and social unrest. In fact, there are a number of studies which show that gold prices generally move in the opposite direction from stock prices: Gold soars when stocks tank.
'Gold protects wealth as a safe haven in troubled and uncertain times. This appeal remains compelling for modern investors,' said Mr James Sim, president of the Financial Planning Association of Singapore. United Overseas Bank sells physical gold that can be bought from, and sold back to, the bank at its daily buy-sell market rate.
Perhaps the easiest way to buy physical gold is to walk into a goldsmith and buy 22-karat or 24-karat jewellery. You can also buy gold mining stocks, though they tend to be more volatile than the gold price, Mr Sim added.
Mr Rajiv Baruah, Royal Bank of Scotland's head of sales for private wealth management, expects the price of gold to rise 6 per cent by the first quarter of next year.
This is not an 'unreasonable return' for a six to nine-month investment, Mr Baruah said.
Fixed deposits
If your top priority is to have cash at hand, then fixed deposits are the usual place to park your money.
They let you save a fixed amount of money for a fixed period at a fixed interest rate.
DBS is offering 0.7 per cent a year for a 24-month term deposit. You will need to lodge a minimum of $1,000.
However, Mr Tay from UBS argues that even for conservative investors, staying in fixed deposits is not an option 'due to the increasingly negative real rate of return as a result of higher inflation in the near term'.
This means that people with fixed deposits in the bank are getting a rate of return that is too low to compensate them for the loss of their purchasing power.
gabrielc@sph.com.sg
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