|JUST ASK: How to earn 5% a year, more or less assured?|
|In this new, occasional series titled JUST ASK, we invite readers to send in questions on stock investing, and personal finance. We will ask an expert to provide answers. To kick off the series, below is a question from a reader and a response from Leong Sze Hian, the President of the Society of Financial Service Professionals. We had follow up questions for Sze Hian, who has a remarkable string of credentials (please see bottom of the article).
Q I am conservative with my investments. What would you suggest that I park my money in if all I want is 5% return a year, more or less assured?
Leong Sze Hian: The problem is that sometimes, the greatest risk may be not taking any risk. Just look at what happened with structured products like the Minibonds saga – most perceived them as low risk!
If you “want 5% return a year, more or less assured”,the general consensus is that Government bonds carry the lowest risk – so, if one puts all his or her money in diffierent countries’ Government bonds, the returns over the years will vary depending on interest rate movements and the price of the Government bonds.
Having said that, evenGovernment bonds can and have seen defaults. The yield on the longest tenure Singapore Government bonds is now about 3+% only, with the 10-year Government bond at about 2.5%.
Hence, in my view, the only way, to manage risk and have a high probability of getting 5%, is to have a globally diversified portfolio comprising approximately 40% equities, 10% commodities (natural resources), 10% real estate and 40% bonds.
NextInsight: How can people go about achieving a globally diversified portfolio comprising approximately 40% equities, 10% commodities (natural resources), 10% real estate and 40% bonds?
NextInsight: What is the longest SG Govt bond that yields 3%?
Leong Sze Hian: 20-year Government bonds.
NextInsight: Typically people view Reits as a source of steady dividend payout of at least 5%. Of course, the last 12 months have been terrible – but under normal circumstances, wld Reits be a good way to try to earn 5% with a high degree of certainty?
This led to some investors buying on the basis of focusing on the high yield. One should not forget that like everything else, there is no such thing as a free lunch in investing – such as high yield and price stability!
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