POSB Invest Saver: My First Investment Decision
Why POSB?
When it comes to making your first investment, novice investors like me tend to get overly excited and eager to start.
However, at the final point before you start the investment you so badly wanted to, you may have second doubts. "Is this the best choice?", I asked myself. I then started to Google the pros and cons and looked at a few bad reviews and stop in my tracks. Were you like this too?
After months of researching and reading (mind you, I had a job for 6 months before I finally decided to commit to POSB Invest Saver), I finally made my choice. The POSB Invest Saver and other similar products are also known as 'Regular Savings Plan' or 'RSP' for short.
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| Image Credit: POSB |
Simply put it, POSB Invest Saver allows you to invest as low as $100 per month via GIRO, with two ETF funds to choose from, the Nikko AM STI ETF as well as the ABF Singapore Bond Index Fund. STI ETFs are investments in stocks, and the STI index is made up of the top 30 local companies. Therefore, when you invest in Nikko AM STI ETF, you're technically buying stocks in 30 companies. Such investments have very good benefits, and the risk is reduced as opposed to buying stocks of a single company.
Bonds are investment in debts, which means you loan money to most of the time the government or a corporate identity at a variable or fixed interest rate. The returns are typically lower than stocks, however it is a much safer option. Most investors recommend investing in ETFs when you are younger as you have a longer time horizon to park the money for returns, and start to balance your portfolio into bonds as you get older to have a safer form of investing. When it comes to the balance of stocks/bonds, it depends on your risk appetite, if you are young and can handle market fluctuations, I would go more into stocks. And when I get older, I will rebalance my portfolio and go more into bonds. I'll share more bout the relativity of stocks and bonds when I've done enough reading about it!
These 2 ETFs tracks the STI and iBoxx ABF respectively, meaning it tries to replicate as closely as possible to these indexes.
The few advantages are:
- With your shares diversified, the risk of losing your capital is reduced (i.e if one company goes bankrupt, you still have shares from the other 29 companies.)
- The returns historically are positive, however do note that previous returns do not illustrate the future and risk is still present.
- You get to enjoy the benefits of compounding interest and dollar cost averaging with a monthly GIRO commitment.
- Lower fees means more returns. POSB IS charges 1% for the STI ETF and 0.5% for the ABF per GIRO deduction (sales charge). As this point of writing they do not have other charges applicable.
- You can liquidate the units for cash and it will be given back to your account in 7 business days.
I am currently investing $300 into POSB Invest Saver, with $200 into Nikko STI ETF and $100 into ABF, so a 2:1 ratio for stocks : bonds. However within the next few months I intend to increase it to 3:1. If you have a larger risk appetite, feel free to go all into stocks.
Anyway, if you intend to invest more than $500 a month, there are other avenues like POEMS, OCBC Blue Chip Investment Plan and so on. Many bloggers have given their comparison and it is up to you to decide which is the best for you. For myself, as I am just starting out, I would stick to POSB Invest Saver as the fees are the most reasonable. As I get more knowledgeable and have more funds, I would definitely consider doing it myself instead.
I've shared the magic of compound interest in my previous blog post. When you combine it with dollar cost averaging, your money really starts to work for you.
Dollar Cost Averaging
For most new investors like me, DCA is a very new concept. However, it only takes a few minutes to understand. It is a given that stock value rises and falls. Therefore it is almost impossible to time when it would rise or fall. In fact, a lot of research has shown that an actively managed fund over a long span of time, has rarely beaten index funds, which an ETF follows. A quote I really love from the book Millionaire Teacher by Andrew Hallam (which I really recommend as a first book) , "It's not Timing the Market that matters; It's Time in the Market". The concept of DCA embraces this quote fittingly.
Instead of having to commit time and research into buying low and selling high (which many fail to do, why do you think Channel 8 dramas always portray people being 'burnt' by stocks?), you just commit a certain amount to buy stocks at the given price every month. Here's a short 5 month DCA illustration.
Note: Not in relation to POSB Invest Saver, but a general DCA illustration
To make it simple for you, it means you have invested a total of $500 in 5 months and have bought units at different prices at every month. How much did you earn?
The average amount you've spent on 1 unit is: $500/467= $1.07
However, the average price for 1 unit is $1.11.
This essentially means that you paid 4 cents lesser per unit. If you decide to sell all 467 units, you would make a profit of $18.68, or 3.73%.
Do take note though, for your ETFs to make returns, it is normal to have negatives at times, as the market must have ups and downs in order to make DCA effective. Therefore, don't panic and sell all when you see that you're in the red. Most index funds on a 10 year performance record shows good performance. However I always stress that past performance is not indicative of the future.
You are also open to receiving dividends when the company is performing, which in return adds to your returns (see what I did there?).
Conclusion
There are many avenues to purchase ETFs, especially if you are interested in foreign ETFs like IWDA. However for a start, my personal view is that POSB Invest Saver is the way to go for monthly commitments below $1000SGD.
Questions or opinions? Leave a comment below!
-WC
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