My Mum is turning 60 soon and she had just opened her CDP account.
She has always been a cautious person when it comes to money and it is natural that she has not parted her money in anything beyond fixed deposits and insurance.
She knew that I have always been investing by myself and this year, for the very first time, she asked me to invest for her.
I guessed she has a substantial amount of savings and her CPF minimum sum is pledged, so she had a peace of mind and could afford to take more risk with her excess cash.
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There is a danger mixing money and relationship together. Dan Ariely called it “social norms” and “market norms”. I liked his illustration in his book, Predictably Irrational, to explain the difference:
“Take sex, for instance. We may have it free in the social context, where it is, we hope, warm and emotionally nourishing. But there’s also market sex, sex that is on demand and that costs money. This seems pretty straightforward. We don’t have husbands (or wives) coming home asking for a $50 trick; nor do we have prostitutes hoping for everlasting love.”
Dan went on to emphasise that the two norms cannot coexist together with the same person.
My relationship with my mum has always been on social norms. Would it transit to market norms if I were to invest for her?
For a start, she is looking at a small sum of S$2,000. So I am agreeable with it because I do not think our relationship would be tested by this small amount. If she loses it, I could bail her out 🙂
It is quite difficult to minimise the investment risk with this amount of capital because she would have to put everything in one counter. Should bad things happen she would lose everything or most of it.
That said, assuming I explain to her the possibility of losing money and she accepted it, I was running through my mind a series of investment options.
1) Singapore Savings Bonds
This would be the safest choice. The downside would be the low interest rate and she has to invest a lot more to see meaningful interest payments. Safety has a price.
2) STI ETF
Another obvious choice. She could achieve instant diversification with just one counter. And being equity, it is going to be more volatile than SSBs, but with higher expected returns.
With $2,000, the commission would be more than 1% of the capital, and this cost is huge in relativity – investment is down more than 1% at purchase.
Moreover, STI is not exactly at an attractive price to invest in.
3) Oxley Bonds
For my mum’s age, it makes sense to focus more on cash flow than capital gain. And bonds are better than equities due to the fixed and regular payments.
But I am unlikely to buy it for her because it would be too risky to own just one bond. And this bond isn’t investment grade.
A cash flow alternative would be a REIT. Similarly, I am unlikely investing just one REIT for her because the unsystematic risk is too high. The yields would not be as stable as compared to bonds.
5) CIMB APAC Div S$D ETF
One way to diversify with little capital is to purchase an ETF. I would pick a dividend focused portfolio and a suitable one would be CIMB S&P Ethical Asia Pacific Dividend ETF, going by the stock code QR9.
The downsides are that the fund expenses would be 0.65%, higher than STI ETF’s 0.3%.
STI ETF is yielding about over 3% while CIMB APAC Div ETF has been doing over 4%.
There is higher currency risks as CIMB APAC invest in many different countries and is primarily denominated in USD.
Hence, the additional 1% dividend may not be justifiable fully.
6) iShares J.P. Morgan USD Asia Credit Bond Index ETF
A bond ETF would also be possible. This ETF has 63% investment grade bonds, with a mixture of government and corporate bonds. The rest are junk bonds.
This ETF yields more than 4% and being bonds, they would be relatively lower risk than the CIMB APAC Div ETF.
That said, the interest rate risk has always lingered in investors’ minds. No one knows exactly when is Janet Yellen going to raise rates. If that happens, it is going to be bad for bond prices, and my mum could possibly be incurred with some degree of capital loss.
What Would You Do?
Now you know the situation and the considerations that I have.
If you were me, what would you do?