27 Oct 2018

Build a S$10,000 stock and bond portfolio from S$400 a month

Many investment beginners may think it is beyond them to build a S$10,000 portfolio of stocks and bonds in 1-2 years. But with a disciplined savings and regular investment regime, it is quite achievable. You don’t need to have Warren Buffett’s money or experience to start your journey. You just need a plan. Here’s how you could do it in three steps.

STEP #1: SAVE MONEY UPFRONT RATHER THAN TAKING WHAT’S LEFT AT THE END OF THE MONTH

Save 20% of all your income first, before paying for anything else. Lock that away upfront to enforce discipline, rather than trying to discipline your spending on a daily basis, and hoping you have something left over. Pay your expenses out of the remaining 80% of your take-home salary. This means you need a budget.

Assuming you earn S$2500 per month, that means you have S$2000 in take-home pay after CPF. Saving 20% of that for investing means S$400 in investment capital saved per month, or S$4800 per year before bonuses.

Now for the bonus: Let’s assume that you work hard and earn a 2-month bonus. That’s another S$4000 in investment capital, bringing your capital up to S$8800. Not quite S$10,000 yet but it’s a very good start for only one year.

Now, if you don’t want to be too harsh with your investment regime, you can keep your bonus in your savings as a cash buffer. Then you take another year of savings to get to S$9,600. Again, not too shabby in two years.

STEP #2: INVEST AS YOU GO

With regular savings plans (RSPs) and the relatively small sums required these days from retail investors, you don’t have to wait until the end of the year to start your investment journey. Do it as you save. Indeed, do it automatically with GIRO.

Banks and stockbrokers offer these RSPs for investors starting from amounts as low as S$100 per month. And the savings can be invested into either 1) an exchange traded fund (ETF) which attempts to track the Straits Times Index’s performance, 2) another ETF which tracks a basket of high quality Singapore government and quasi-government bonds, 3) a choice of so-called “blue chip”, big name stocks.

If you have enough knowledge of “stock picking”, you could try choosing what you think might be the winners from the list of “blue chip” stocks offered under some RSPs. But for most newbies, working out the relative valuations, balance sheet strength, and earnings quality can be daunting. The alternative – or even a complement to stock picking – is to buy an ETF which mirrors the broad market. So, if the Singapore market’s Straits Times Index goes up, the ETF should reasonably closely mirror the gains minus fees. And of course, the reverse is true, if the broad market goes down.

But the idea of investing as soon as you can, and “as and when” you have the capital, is based on the idea that market timing is very difficult, even for highly skilled professionals. So instead of timing the market, the average investor should use “time in market” to boost his returns.

So consistently investing allows you to “dollar cost average”, rather than trying – and for most people, usually failing – to pick the lowest price in any given year.

STEP #3: WORK OUT YOUR RISK APPETITE AND DIVERSIFY AS YOU GO

If you have the stomach for market ups and downs and the hunger for higher returns over the long-run, you can choose an all-stocks portfolio, buying into an ETF with the top 30 (by market capitalisation) stocks on the Singapore Exchange. Note that although you will be focused on equities in this all-stock portfolio, you will enjoy in-built diversification through the ETF – in that you won’t face single-stock concentration risk. The ETF is diversified across most if not all the stocks on the STI.

But if you are uncomfortable with the risks associated with a pure stock portfolio, you can choose to buy into an ETF which holds a basket of high quality Singapore government and quasi-government bonds. This is a stabiliser for your portfolio, even in times of stock market volatility.

And with as little as S$500, you can also choose to invest in the Singapore Savings Bonds, a capital-guaranteed instrument issued by the Singapore government, which can be redeemed without penalty. However, ideally, you will want to hold this to maturity (10 years), when your returns should then match the returns on the 10-year Singapore Government Security. And that should be a lot more than you would get sitting on a Singapore dollar term deposit.

Then stick to your plan! Now that you’ve started, the next thing you need to discipline yourself into doing is to consistently follow your plan. That is, continue to invest, even in the face of potential market volatility. Nobody can guarantee you that your S$10,000 portfolio plan will not be rocked by market volatility. But history is on your side. Stocks may go up or down. But for good markets in good economies, the long-term history of those ups and downs is mean-reversion on rising trend lines. Put more simply, the ups and downs should be on a rising trend.