Investing in S'pore stocks

22 August 2012
Geoff Howie

Ask the average Singaporean to name the things he would want to invest in most and, chances are, the answer will be property and stocks, followed by fixed deposits and mutual funds (or unit trusts, as they are more commonly called). Stocks and property are particularly popular investment choices here, for a good reason.

Over the last 10 years, Singapore's economy has grown an average of nearly 6 per cent each year, taking into account inflation. Over the same period of time, the Straits Times Index (STI) has averaged an annualised gain of 6.4 per cent.

Dividend distributions over this 10-year period boosted the average annualised gain of the STI to 9.2 per cent. At the same time, the Urban Redevelopment Authority Property Price Index measure for residential properties has also averaged an annualised gain of 6 per cent. As investors, we look to invest in an asset that will appreciate to a higher price over time.

The asset's historical performance, though it cannot be used to predict future returns, can be a useful guide for investors.

Singapore is a highly developed market economy which has evidenced strong and consistent growth over the last decade and both stocks and property have performed well. There is a particularly good case for investing in stocks, even with associated risks. We can take the following three key facts into consideration:

Low bank interest rates

The days of people keeping their money under the mattress, even figuratively, are long over.
Expansionary monetary policies by central banks across the globe over the last four years have left interest rates and interest rate expectations markedly low, making it no longer worthwhile to leave your money in the bank.

During the '70s and '80s, savings could be left in a fixed deposit and earn interest payments of 15 per cent per annum, Mr David Gerald, the President of Securities Investors Association (Singapore) said in July. But these days, said Mr Gerald, you would be lucky to obtain a fixed deposit rate above 1 per cent.

And, even then, your interest earnings would be wiped out by inflation, which was last reported as 5.3 per cent in June.

In short, the real value of your money will not keep up with inflation if left idle, or invested in low-yield assets such as fixed deposits.

This is a strong reason for investing in higher yielding assets such as stocks.

Flexibility

Stocks are a more flexible investment compared to others, most notably property, and are also relatively easier to buy and sell.

As an example, the STI is made up of 30 stocks. Given that the average price of an STI stock is nearly S$9.50, a minimum investment of 1,000 shares in a blue chip stock at this prevailing price would amount to about S$9,500.

This is a much more affordable asset than property, especially since the transaction costs of stocks are much lower.

But for investors who are diehard supporters of investing in property, they can do so with a small capital outlay by investing in Real Estate Investment Trusts (REITs).

Dividends

Ownership of a stock is essentially part ownership of the company. As a stock owner, you will usually have the right to receive some of the annual income of the company, distributed in the form of dividends.

Stock ownership also comes with non-monetary entitlements. As a stock owner, you will have a management stake in the company.

You will be eligible to vote in company matters as deemed appropriate by the company's board of directors and the guidelines set out by the Monetary Authority of Singapore.

Whether investing in Singapore stocks or other asset classes, investors should bear certain points in mind.

Firstly, we should understand that occasional speculation is not investing. Investing is a skill in its own right. It begins with understanding the risks of buying and holding a stock, or a portfolio product such as a REIT or exchange-traded fund (ETF).

As an investor, it is also important to understand and manage your own tolerance for risk.

If you wish to be a stock investor, it is not necessary to put all your money into stocks. Rather, you should invest only as much money as you feel comfortable risking.

Finally, investors must be aware of not only the good points of a stock or portfolio product, but also its associated risks.

Investment is, ultimately, a financial decision that requires information and preparation like any other.

Geoff Howie is a markets strategist at Singapore Exchange.