Financial Planning (5) - How to invest your savings?

You should invest 80% of your savings for for the long term. Here are the tips for this type of investment:

a) Invest in a large, professionally managed fund as it offers diversification. You will not be badly affected if some investments go bad, as the impact is small and is compensated by other good investments.
b) Choose a low cost fund, where the fund manager takes only a small fee. If you choose an indexed fund, you enjoy diversification and pay a fee of only 0.3% per annum.
c) Invest for the long term, i.e. 10 years or longer. The fund will do badly in some year but will do well in other year. Over the long term, you can get an average rate of return.
d) Choose a fund that invest largely or fully in equity, as equity gives a higher return over the long term. You have already reduced your risk through diversification and averaging out the good and bad years.

You can keep 20% of your savings in a money market fund or in short term assets. The return may be lower, but you can withdraw the savings at any time to meet emergency needs, without having to pay a penalty or suffer a capital loss.

Over the long term, an equity fund should be able to earn you a net return of at least 5%. This is attractive, compared to safe, short term return of less than 1%.

To recap: Invest at least 80% of your savings in a diversified, low cost equity fund that can give a return of at least 5% for the long term. You can reduce the risk through diversification and long term averaging.

Tan Kin Lian