Invest in stocks for the long term

In a chapter in my financial planning book, I quoted an important statistic that investing in the component shares of the Straits Times index over the past 15 or 20 years (up to 2006) produced an average yield of 9.2% per annum. This is a good yield.

However, this result could be due to factors that may not recur in the future, e.g. the stock market was under-priced at the start of the period, over-priced at the end of the period or the economy went through high growth during this period (and may see slower growth in the future).

To offset these factors, we can apply a discount of 30% on the total appreciation. Suppose, the stock market was 30% higher at the start or 30% lower at the end of the period, the yield would have reduced from 9.2% to 6.6%. This is still attractive.

For the next 10 years or more, I use an average yield of 5% per annum. This is quite conservative, and reflect a low interest, low inflation environment.

Many investors are afraid of the risk of investing in stocks as the price can be quite volatile. In my view, it is better to take the risk as stocks provide a better yield compared to other asset classes. The investor should diversify the risk by investing in a low cost indexed fund (such as the exchange traded fund or ETF) and by invseting for 10 years or longer (to average out the good and bad years).

An example of a good ETF is the StateStreets Traker Fund, which is traded in SGX. The investor pays a transaction fee of 0.3% to the stockbroker and an annual fund management fee of 0.3% to the fund manager. The bulk of the underlying return on the ETF goes to the investor.

Thee are other ETF that are invested in other asset classes. Learn about them. But, if you are not sure, choose the StateStreets Tracker Fund (or other similar funds) that mirror the Straits Times Index, as it reflects the Singapore stock market.

Tan Kin Lian