People invest for all kinds of different reasons; some invest to see their child through university; some invest to buy their dream car or set foot on Europe for a snowy vacation; and some invest because it is just so much fun (that’s us at the Motley Fool!). But, for whatever reason that people invest, the desired outcome’s always the same – we want our money to grow. The stock market’s actually one of the best places to grow our money and build lasting long-term wealth as we benefit from the growth of Singapore’s economy through ownership of…
People invest for all kinds of different reasons; some invest to see their child through university; some invest to buy their dream car or set foot on Europe for a snowy vacation; and some invest because it is just so much fun (that’s us at the Motley Fool!).
But, for whatever reason that people invest, the desired outcome’s always the same – we want our money to grow.
The stock market’s actually one of the best places to grow our money and build lasting long-term wealth as we benefit from the growth of Singapore’s economy through ownership of corporate Singapore.
But not everyone has the time or the ability to study individual companies and invest accordingly. For such individuals, the next best alternative would be low-cost index funds or ETFs that track market indices, a move that Warren Buffett approves of as well.
One of the benefits of owning index trackers is that it allows investors to invest in a broad basket of shares at one go. For example, in Singapore, there are two ETFs that track the Straits Times Index (SGX: ^STI). They are the SPDR Straits Times Index ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B).
Investors who own these index trackers, are in fact, owning actual shares of the STI’s 30 constituents, which consists of some of Singapore’s largest publicly-listed companies such as telecommunications operator SingTel (SGX: Z74) and South-East Asia’s largest bank DBS Group Holdings (SGX: D05).
While it’s true that investors in the ETFs would be able to own 30 different shares at one fell swoop, there are also risks present, chief of which is the outsized influence that a handful of shares has in determining the index’s movement. That said, an index tracker is still one of the best avenues available for an investor to gain broad exposure to the market.
To find out more about the kind of returns an investor could have obtained with the ETFs, a theoretical portfolio with fuss-free maintenance was constructed. The portfolio, starting from 2003, requires a person to invest only $500 at the start of every month into the SPDR Straits Times Index ETF.
The investment strategy would be familiar to some as a form of Dollar Cost Averaging, where an investor mechanically invests a fixed sum of money into an investment instrument at regular intervals.
We won’t go into the relative merits of a DCA approach vs Investing-in-a-lump-sum approach here but let’s just say that the former is a lot more achievable for most.
Bear in mind too, that the $500 monthly-investment figure is purely theoretical, because the ETF only allows investors to invest in board lot sizes of 1,000 and at a current price of S$3.10, would require a minimum investment of at least S$3,100 (before various fees and expenses are factored in).
The Nikko AM Singapore STI ETF on the other hand, allows investors to invest in lot sizes of 100 which would make incremental monthly-investments in the hundreds of dollars achievable. But, since the Nikko ETF was set up only in Feb 2009, we’ll be looking at the returns for the SPDR STI ETF instead.
And with the similarities between the ETFs, long-run returns for the SPDR ETF can also give us a good basis to form future expectations for the Nikko ETF as well.
With that out of the way, let’s return to our theoretical portfolio.
After engaging in some exciting number crunching, some interesting results for the portfolio, without accounting for any dividends, emerged. They are shown below:
1) The $6,000 invested in 2003 would have turned into $12,636 by now – an investor’s money would have more than doubled in 10 years, excluding dividends (which would surely have improved returns).
2) To date, every year from 2003 has seen positive returns besides 2007 and 2013. The returns from the year of investment to today have ranged from 2003’s 111% to 2007’s -10.5%, with the lowest positive return for a full-year being 2011’s 0.9%.
3) The compounded annualised return for the portfolio stands at 4%, after taking into account the time at which the investments take place. While that figure is hardly eye-catching, it has beaten Singapore’s average historical inflation rate of 1.7%, according to MAS. The dividends from the ETF also provide additional returns each year which can be used for re-investment, juicing returns further, or for income. The SPDR STI ETF’s current dividend yield stands at 2.72%.
4) The total amount of $66,000 ($500 for 132 months) that has been invested since Jan 2003 to Dec 2013 would be worth $82,679 now.
5) Staying invested in the stock market for long periods of time helps to improve returns. 2003 and 2004 (61.6% gain) provided the best returns for the 10 year period.
Foolish Bottom Line
Here at the Motley Fool Singapore, we don’t recommend investing in the stock market for people looking to get-rich-quick. But, for investors who stay the course and invest regularly, and not flip in and out of stocks, the payoffs can be good. We believe that the best person to manage your finances is you.
Even if there’s a lack of time and ability to study individual companies for investment, it is still worthwhile to know what the stock market can offer and help you to grow your nest-egg – slowly, but surely.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Chong Ser Jing and first published on fool.com. It has since been edited for re-publishing.