OCBC Life Goals

Engaging with the three siblings
By Michael Lai
You have invested in a wealth management product and are feeling pretty satisfied. But did you ever pause to ask why this particular one? Clue: Saying someone told you it is a “good investment” is the wrong answer.

There is never really a “good investment”, only investments that suit your needs and appetite. That’s why a successful football club does not invest singularly in a bunch of young people; they hire people well into their sixties and seventies as well (in different roles that ultimately form the total game plan)!

When you go in to make an investment, bear in mind the three broad categories for investing: growth investing, income investing and balance investing.

Using equities, as an example, growth investing tends to pique most ears as it aims to produce potentially higher returns (than its two supposedly poorer siblings), by selecting companies whose earnings are growing swiftly to achieve capital appreciation. Bear in mind, growth companies tend to use all of their earnings to expand their businesses and, for the most part, do not distribute dividends to shareholders. Technology stocks, for instance, are possible candidates for growth portfolios. Growth stocks are optimal for long term investors as, generally, a person nearing or in retirement might not be suited to withstanding the higher volatility of growth stocks.

Unlike growth investing, income investing is the dissimilar sibling who tends to shy away from shiny growing stocks and towards more mature companies that are generating high cash flow. These stocks generally include utility companies, real estate investment trusts (REITs), healthcare and consumer staples names. Think Nestle (Milo or Nescafe) and other companies that are more cardinal to investors in search of a steady stream of income.

These companies are sometimes called "defensive" or "non-cyclical" due to their lower correlation to the market, as they tend to merchandise products that consumers will continue to need even during economic recessions. For example, consumers will always need food, electricity and medicine, recession or otherwise. Apart from stocks, income investing may additionally invest in government and high-quality corporate debt apace with equities, to provide another route to safer interest streams. As such, the audience for this investing style should consist of less aggressive investors or investors close to planned retirement with less time to withstand market volatilities.

Lastly, the balanced style of investing assimilates ingredients of its growth and income siblings into one. The objective is to provide a balanced mix of safety, income and capital appreciation which will consist of a portfolio of riskier and safer assets (or mixed asset as it is sometimes called). A typically balanced style will have substantial weightings of both equity and fixed income, with the preference to rebalance according to market conditions.

Common to any consideration of the three siblings is the importance of risk and time horizon when investing. If you have been a bit careless in your approach, it is never too late to make adjustments. Investing is never about dumping your hard-earned cash into anything stamped with the title ‘investment’. It is necessary to maximise the efficacy of your investments within the ambits of your risk appetite and ability to withhold current consumption. And do time yourself (not the market). Focus on the goals you want to achieve with your savings, such as retirement, financial security, education or property, to properly drive your investment strategy.

Following GE14, investors are understandably nervous as the nation’s newly elected government works to calm financial markets as adjustment takes place. Over the extended holiday following GE14, market participants raised concerns over the promises made by the newly elected government; two of the well documented ones being the abolishment of the Goods and Services Tax (GST) and the review of mega infrastructure projects. The equity market is expected to adjust to these new uncertainties. These events should not side-track investing activities as the long term consensus outlook is positive, on the back of proposed institutional reforms and improved governance and accountability. Income portfolios, on the other hand, are likely sitting on unexpected capital gains as the policy direction of the government is to increase consumer purchasing power and disposable income.

So, coming back to our earlier question, do you know why you selected that particular investment product? And was this indeed the type of investment suitable for you given your age and financial goal?

I hope you appreciate by now the need to focus on goal-based investing in the long run. Take a total wealth approach beyond profit and loss to your job type, age, location, family situation, and other personal circumstances to apprehend your total resources available, as well as your potential limitations.

If you are nearing retirement, perhaps a heavier weightage towards income style investing might be desirable. If time is on your side and the need for income is not imperative you might consider slanting towards a growth strategy.

Think about it. There is a reason why the younger guys are on the football field and the older ones on the bench, coaching; and that both remain equally important to the success of the team.