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How to be wealthy - Part 3 (Investing)


Definition:

  • FIRE = Financial Independence, Retire Early
  • CPF = Central Provident Fund

The FIRE principle advocates putting the investments into a low-cost investment fund. 

The CPF that one has already saved plays an important part here. The 37% from your salary goes into 3 buckets: the Ordinary Account (OA), the Special Account (SA) and the Medisave account (MA). 

The interest from the OA is 2.5%, while both the SA and MA is 4% - all of which are risk free! The CPF team do review the interest rate periodically but for the most part, the 4% is pretty much here to stay. Also, the first $20K in the OA and the first $40K in the SA get an additional 1% annual interest. So that is $20K at 3.5% interest and $40K at 5% interest, guaranteed by the Singapore government with no management fees. 

To start the investment: most, if not all investment advisors will say to park aside 3-6 months worth of expenses before starting the investment journey. The reason for this is to enable one to have easy access to the funds should there be a emergency - accidents, medical expenses, hospitalization, or losing one's job. This 3-6 months is dependent on the lifestyle. This should be parked into fixed deposits or money-market funds so that one can withdraw almost immediately (1-2 days).

So, what are other low-cost funds that we can invest?

Simply put, the funds that has low management fees such as index fund, either via ETF or mutual funds – talk to your relationship manager or look for info in an investment sites. One of the best quotes on investment is from Paul Samuelson who said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

For those with no clue: a typical starting fund should always be a blend between the S&P500 index funds and a global bond fund with the following ratio: 100 minus age. For instance, if one is 30, then the ratio of S&P500 to bonds should be 70% to 30%. As and when one improves in financial knowledge, then we can consider moving a small percentage into more aggressive (higher returns) funds such as financial equities (banks), energy (oil companies), or technology.

While it is tempting to start off in picking stocks, especially with the bull runs in technology stocks such as Nvidia, take note that higher returns also carries more risk - there is always a chance of losing 10-20% of your hard-earned cash in a matter of weeks.

That said, the main focus is still to do well in your job to get that increment, versus spending time to look for high growth funds/stocks. Anything more than that is likened to gambling which, if not done properly, can have devastating results.

Continue to Part 4
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