17 September 2010

Expectations of returns on investment

Once, an ignoramus went to a distant island (Guam), and patronised a diner for a meal. Though he could not understand a word of english on the menu, he proceeded to call out his order, "I dun wan beef.  I wan cow."  I guess for many, investing is also somewhat similar.  Oft heard is this comment, "I want high returns, but I don't want any risks."  This is simply incompatible.  The corollary is probably, "There are no free meals" or "if it's too good to be true, it probably isn't".

My gauge on the the risk-reward of each investment instruments are as follows:

Bank Savings Account.  Now at <1%.  Only as risky as the bank's viability.  Liquidity is very high.

Fixed Deposits.  <2%.  Locked in until mature, but capital is safe.

CPF.  ~2.5% for OA, ~4% for SA, MA, RA.  As good as risk-free.  Stuck till age 55 for sums above minimum sum, and the rest upon retirement age.

SGS Bonds for 10-20 year tenure.  2-4%.  Yield would fluctuate over time, but the face value is always guaranteed.  In many ways, NCPS are very similar.

Unit Trust - Money Market Fund (MMF).  1-3%.  Generally very low risk.  Liquidity is high.  I tend to treat this as similar to a Bank Savings Account, except that withdrawals may take a week or so.

Unit Trust - Equities.  6-10%.  Volatility is high.  Liquidity is high.

Unit Trust - Bonds.  2-4%.  Volality is mild.  Liquidity is high.

Unit Trust - Balanced (mix of Equities and Bonds).  4-8%.  Volatility is medium.  Liquidity is high.

Equities (shares).  8-12%.  Liquidity varies, generally much better for the big caps, and low for the small/micro caps.

Exchange Traded Funds (ETF).  Similar to corresponding Unit Trusts, but possibly +1% better returns.  Liquidity is high, but subjected to bid-ask spread.

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