How to invest with little risk

In September last year, many retail investors were anxiously waiting for their financial consultants to call and e-mail them with the good news that they had been successful in their latest investments.

But they were not betting on securing a red-hot new initial public offering share that was expected to jump in value when it made a debut in the stock market.

Neither were they hoping to get their hands on some exclusive “by-invitation” private investments that could offer higher-than-usual yields.

Instead, they were banking on getting their hands on a very conservative investment that would produce only $18 in profit for every $1,000 that they put in.

The product in this case was a three-year single-premium endowment plan which pays 1.8 per cent guarantee yield annually. Within hours, the capital guarantee and limited tranche plan was fully subscribed.

In today’s low-interest-rate environment, such guaranteed return is better than bank fixed deposits and is very attractive to conservative investors.

Even if you are keen to apply, it is not readily available.

The most recent offer was the Temasek five-year bond at an annual 1.8 per cent yield which had an overwhelming subscription rate in November.

We have a client who has been with us for more than 15 years. She is in her 60s and is a high-ranking executive. She will only look for fixed deposit or short-term guaranteed endowment plans. As she had lost money in the stock market, she doesn’t like the volatility risk.

The ups and downs of the market affect her emotions which in turn affects her work.

If you also share her risk appetite, here are some financial products that you can look at.

Singapore savings bond
This is backed by the Singapore Government and you can get back your investment with no capital loss. You can invest from as little as $500 to the $200,000 maximum, subject to a small service fee.

The January 2022 issue is offering 1.64 per cent annually if you hold this for 10 years. As the rate of return is based on your investment period, any early termination will have lower yield, such as 0.52 per cent for first year.

Single-premium endowment plan
Insurance companies do offer short-term single-premium endowment plans from three to five years. There are plans which provide guaranteed annual yield of 1.5 per cent as we are in a low-interest environment.

You should reach out to your financial consultants or insurance advisers to express your interest so they can notify you when there is a good offer. You will need to hold to maturity for such plans as early withdrawal will carry penalties.

Corporate bonds
You will normally need to invest a minimum of $250,000 for listed companies’ corporate bonds.

Such bonds are dependent on the company’s credit solvency and you may get returns that range from 2 per cent to 7 per cent annually. But those who choose to play in this arena should also know that higher returns generally mean higher risks.

There are also higher investment charges to consider.

Some online platforms let investors put their money in such bonds, starting from $5,000.

With the overall inflation rate which hit a high of 3.2 per cent and core inflation at 1.5 per cent in November, there are also risks in not investing because you may not generate returns that can beat inflation.

Inflation can erode purchasing power and this can affect long- term goals like retirement. You will need to save a lot more every month to accumulate the intended retirement sum. If you have financial commitments which don’t allow you to save the required amount, you will fall short of this goal.

For example, if you plan to save $1 million in 20 years, with returns of 1.5 per cent annually, you will need to save around $3,600 every month.

Saving with annual returns of 6 per cent means you will need to save around $2,200 monthly.

The investment returns will affect the monthly saving you need to set aside.

Many investors prefer safer investments because putting your money in equities will subject your nest egg to volatility and risk.

But while it is important that you invest according to your risk profile, playing safe doesn’t mean you won’t lose money. We need to constantly monitor the inflation rate.

If the “safe return rate” cannot counter inflation, you are losing the real value of your money. Your purchasing power will reduce in the future.

So rather than putting all your money in just safe investments, you should put some money in a diversified investment portfolio.

A portion could be used to invest in equities which can provide better returns over a long period of time. The proportion will depend on your comfort level and familiarity with investment.

That said, if you have a high- stress job which requires your undivided attention, a low-return but safe investment plan will give you the assurance that you are looking for.

Author: Alfred Chia
Courtesy of The Straits Times