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More Bang for Your Buck

cannon In a recent survey by Manulife Financial, three interesting points about Singaporeans and how they manage their finances were revealed.

Firstly, it was found that Singaporeans hold 35 months personal income in cash – the second highest in the Asia after China.

Next, 42% of Singapore investors do not invest their cash because they are worried about making the wrong investment decision.

Lastly, investors expected between 11% to 15% returns per annum in the next 12 months on equities, bond funds and real estate, even though the actual average annual returns in the past 15 years has been below 10%.

How much cash to hold?

By having too much cash, inflation erodes our money away. Inflation averaged around 2.8% per annum in Singapore and the bank gives us an interest of less than 1% per annum. Money sitting in the bank is being eroded at a rate of around 1.8% per annum.

In general, it is prudent to have 6 to 12 months of expenses in cash. This will serve as an emergency fund in the event of a job loss. Only after having this emergency fund, should one invest in the markets.

By having some buffer cash in the side-lines, your emotions are also less likely to be affected by any investment decision. Let’s look at an average $2,500 per month salary. Setting aside 35 months of personal income would equate to $87,500. If the same person has a monthly expense of $1,500, his expenses for one year would be $18,000. If the person saves for 12 months of expenses before investing, he would have $18,000. The difference between $87,500 and $18,000, which is $69,500, can be invested in the STI ETF (SGX: ES3).

Expectations of returns

The investors surveyed expected an annual return of 11% to 15% in the next 12 months by investing in a basket of stocks, bonds, and real estate. Expecting such high returns within one year might be unrealistic as it is highly dependent on the market’s performance. However, when the timeframe is lengthened, to say 10 years or more, this figure is not unachievable.

Let’s take a look at the returns of stocks alone. For the past 10 years, STI ETF has returned 11.31% per annum, including dividends. Since inception in April 2002, the ETF has given 8.56% per year, including dividends.

By investing $69,500 (from the first point) for 10 years, at a conservative compounded annual growth rate (CAGR) of 8.56%, gives $158,009 at the end of the 10th year. If you can afford a 30-year timeframe, the ending amount would be around 5 times more, at $816,733.

Investing in individual companies may yield better returns. CapitaLand (SGX: C31) gave investors an annual return of 15.6% for the past ten years while Jardine Cycle & Carriage (SGX: C07) delivered returns of 27% a year over the same period. Both returns include dividends.

Foolish Takeaway

We must exercise prudence and determine the right amount of cash to hold. After determining the right amount of cash needed as per our lifestyle needs, we can invest the difference to grow our money for the long-term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.