Should You Invest in STI ETF if you are in your 30s? Is it worth it?

Singapore’s Straits Times Index (STI) Exchange Traded Fund (ETF)

This would be one of the instruments that most of us would have considered when we are first getting into investing.

But is investing in the STI ETF worth your money?

If you are currently in your 30s, should you consider investing in STI ETF?

If you are currently invested in it, should you consider other instruments instead of STI ETF?

Today, we will be debunking this question that I often come across it when talking to friends, clients and even in online platforms with questions such as this:

What is the STI?

An STI ETF is essentially an exchange-traded fund that is created to recreate the performance of the Straits Times Index.

A Straits Times Index is a portfolio consisting of 30 stocks – blue-chip companies – that together represents the economic growth and development of Singapore in general.

To invest in an STI ETF means that you are investing in Singapore’s economy.

This means to say that your portfolio performances are largely dependent on the performance of Singapore’s economy.

Keeping that in mind, let us take a look at the historical performance of the Straits Times Index.

More specifically, let us look at what you could expect if you invest a monthly of $1,000 into the STI between the year 1994 – 2008 (25 years) and 2004 – 2018 (15 years).

At the end of the day, here is what your portfolio would look like:

4%? 5%? Where does the return come from?

To invest in STI means that you are investing in Singapore’s economy.

As the market behaves like a voting machine in the short run but a weighing machine in the long run, by investing in the long run, you are actually capturing the fundamental growth of Singapore’s economy over the specific time period which looks something like this:

It is evident that over the years, Singapore’s GDP growth has slowed significantly.

Having low and slowing economic growth is actually normal for a country like Singapore.

Now that we are a developed country, you cannot expect our economic growth to perform at the level that is close to a developing country as compared to 25-35 years ago.

What can you expect in the next 15 or 25 years?

Moving forward, I personally believe that a reasonable investment return that you can expect from an investment duration of 15-25 years should be approximately 2-4% per year.

Your investment returns from your STI will be driven mainly by dividend returns rather than capital gains due to the stagnation of our economy as well as the company’s earnings.

Is STI ETF suitable for you?

To understand if STI ETF is suitable for you, you must first ask yourself this million-dollar question:

For what reason are you investing for?

Is it to have enough money to provide for your children’s education fund 15 years down the road?

Or maybe you are looking at building a passive income portfolio for your retirement 25 years down the road?

Just like other investment/saving instruments in the market, the STI ETF is, at the end of the day, a tool - a means to an end.

Simply put, it should be nothing more than a stepping stone for you to get to your end goal.

Like any other tools, if it does not help you accomplish your goal, it is as good as useless.

Hence, whether the STI ETF is the right investment tool for you would depend largely on your investment goal.

Investing for children’s education and retirement

With an education inflation rate of 5% and a cost of living inflation rate of 3%, the returns from your STI will barely mitigate the effects of the inflation rate.

While it is possible to provide for your children’s education fund, you can kiss your retirement goodbye should you rely solely on STI ETF.

The returns are simply not enough to provide anything meaningful for someone who needs to focus on accumulating wealth.

Even so, using the STI ETF for your children’s education fund is obviously not efficient for the inflation rate is higher than your expected investment return of 4%.

Hence I personally would think that STI ETF is not a suitable tool to help you accumulate wealth for children’s education or retirement fund.

What's more suitable then?

As we have previously established:

When investing for the long term, you are capturing the growth of the underlying asset - company/industry/country/region

if you need to have a higher investment return, you just need to find an underlying asset that is expected to grow at a rate that you need your investment return to be.

Here are a few suggestions to get you started

For wealth accumulation objectives, you should turn your attention to developing countries and structure your portfolio accordingly.

Here’s some suggestion from which you can consider incorporating into your investment strategy

• Asia region (as a whole)

• China

• India

• Indonesia

• Philippines

For further reading, I would suggest that you pick up the following books:

For stocks:

• The intelligent investor – Benjamin Graham

• Security Analysis – Benjamin Graham

For fund investments:

• Common sense on mutual funds – John C Bogle

Bottom line

Ultimately, investment planning is all about connecting the dots.

By understanding:

• yourself – what you want to have at the end of the day

• the market – what instruments can provide you with the returns

You can easily tailor an investment portfolio that is designed to provide the returns you need without exposing yourself to unnecessary risk at the end of the day.

If you do not understand yourself and what you want, you will definitely fail at your investment endeavour regardless of what investment instrument you use. It doesn’t matter if you use ETF, Robo Advisor, dividend stocks, etc.

If you find yourself investing with the mentality of: “I invest in (x) because it promises good return and it is easy to use.” but do not understand the nature and the suitability of the investment.

You, my friend, is going to fail at investing and when that happens you have no one else to blame but yourself.

Don’t be tempted by the convenience and illusionary promise of x% returns a year by Financial advisors and Robo Advisors.

It is your job to understand the big picture of your personal finance and it is our job as financial advisors to help you tailor an investment plan to fits your overarching strategy.

Sadly to say, good financial advisors are hard to come by and with the rise of Robo Advisory, more and more people are starting to be tempted by the guarantee of convenience and attractive returns without fully understanding what they are getting themselves into.

Everyone wants to be rich, but no one is willing to put in the minimal work to understand the tools that will help them grow rich.

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Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore.