Passive Income via Investment
CPF Life
For those living in Singapore, contributing to the Central Provident Fund (CPF) may be the easiest thing to do for passive income. Each month, we contribute 20% of our wages to the CPF and our employers will also add another 17% to the bucket (for those below 55). This is split into 3 buckets: Ordinary Account, Special Account and Medisave, with interest rates ranging for 2.5% to 4%.
Note: the first $60K of these gets an additional 1%. So this is 3.5% for the initial $20K in the Ordinary Account and 5% for $40K in the Special Account.
Upon reaching 55, the funds will then be moved to the Retirement Fund. Depending on how much we have at 55, we will then be eligible to get a monthly payout from 65 onwards for the rest of our lives.
Typically, one is expected to achieve about $1K to about $3.3K monthly income, depending on the type of plan (Basic - Standard - Enhanced). Majority of financial planners would advocate taking the Standard Plan for the $2K+ monthly income to provide better flexibility. In other words, take some money out for other stuff (starting a business, vacations, gifts to loved ones, philanthropy, etc.) rather that putting them all into 1 basket.
Annuity
This is a very similar concept as CPF Life, but from private companies. We contribute either a monthly sum or 1 full lump sum each year over the next 10-20-30 years. Typically, this is about $10K to $20K per year. Then at the end of the period, we will get the monthly income for life, and in some case a small "bonus" at a certain age.
Singapore savings bonds
Available to those 18 and above who has an account in the 3 local banks (DBS, OCBC and UOB), these are Singapore government bonds (yes, fully backed). One can get back the full sum with no capital loss, invest up to 10 years, and able to exit in any month with no penalties. Probably one of the safest place to park the money, besides the US Treasury Bills.
Money market funds
These are low-risk, short-term funds that comprises of government bonds, cash and cash equivalents. These usually have no lock-in periods and can be purchased with zero or minimal entry/exit charge. Many use this to park a portion of the 3-6 month emergency funds.
Fixed deposit (certificate of deposits)
The 3rd alternative for the emergency fund, these are typically issued by banks. The basic premise is that they earn you a guaranteed interest if you park the money for a specific time, usually $10K or higher for a period of 3-6 months. Because they are issued by banks, FDs or CDs are thus guaranteed up to $75K by the FDIC in case the bank fails. The only downside is that there is a penalty if one withdraws early.
The next step up is to invest via the banks. This can be done by paying a physical visit to the local branch of the bank and talking to the Relationship Manager (RM). One good news is that the 3 local banks in Singapore, namely DBS, OCBC and UOB are ranked highly in the world top 100 banks worldwide, coming in at 12, 13 and 14 respectively.
What and how to invest?
Rather than investing single stocks, the majority of RMs that I have spoken to advocated the ideas on investing in the overall market. In other words, rather than buying into a single company such as Apple or Nvidia, one would purchase the US S&P500 index, or something similar.
Exchange Traded Funds
This can be done Exchange Traded Funds (ETF), of which the most famous and the one that is highly recommended by Warren Buffet himself is the Vanguard S&P500 ETF or VOO. As the name mentioned, VOO simply buys into the top 500 companies that is listed in the US stock market that is tracked by the Standard & Poor's Index. An alternative to VOO is VTI, which is the Vanguard Total Stock Market Index ETF. This one tracks not just the top 500 companies but the entire stock market.
So why VOO and VTI? The reason is that both are low cost ETF...which charge 0.03%. Because they track the index, they require virtually no effort from fund managers except for a small admin fee. According to many investment experts, you will be rich if you put in a certain amount into VOO every month/year and leave it for the 30 years.
Caveat: one does NOT need to talk to banks. In recent years, there has been many investment sites that allows one to buy via the Internet via apps with lower fees. Of course, there are risks as not all all the companies are legit so proceed with caution - or do a mix of 50% invested via banks and the other 50% via the apps.
One can also expand to other types of ETFs. One example will be Vanguard US Total Bond Market (BND) which tracks bonds instead of stock, or GLD which tracks the price of gold.
Unit Trust and Mutual Funds
What if one wishes to have a little more work done and do not mind paying a little more for active management? This where unit trust or mutual funds come in. Although used interchangeably, they are not 100% the same. The concept, just like ETF is that one is buying a group of companies rather than just one so the risk is spread out.
So, which ones to buy? The answer is: it depends.
One thing that is for sure is that there is no answer that is definite and we certainly do not have sufficient information that make all the good decisions. Even if we do, all it take is 1 bad decision, 1 downturn and we lose all our money. So the best bet we can make is none other than DIVERSIFICATION and practice DOLLAR-COST AVERAGING.
Diversification: make sure that we buy into different markets, ideally all are unrelated so that we can reduce the risk and potentially increase our returns in the long run.
Dollar-cost averaging (DCA): this is when we buy into a certain stock, or fund (and even crypto) across several months each time putting a little amount. This strategy will allow us to buy the highs as well as the lows with the assumption that over time, the overall tend is an upwards one.
One good example is to see how gurus do it. If we examine Warren Buffet's holdings (this is available on the Internet), he invest in the Vanguard S&P500 ETF and several companies such as Apple (tech), Occidental (oil and gas), Geico (insurance) and Kraft (consumer goods).
Another guru is his buddy, Charlie Munger who invested a large portion in Berkshire Hathaway, Costco and several Chinese companies such as BYD and Alibaba.
An alternative to investing in individual stocks, some financial advisers would take the more diversified route of putting money into regions. For example, units trusts that invests into companies based in US, Europe, Japan, China and BRICS + ASEAN.
Another form of diversification will be add money into technology (Apple, Alphabet, Nvidia, etc.) and financial companies (Blackrock. JP Morgan, Bank of America, etc.).
Last but no least, gold and bonds need to be considered as well.