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From a young age, my parents inculcated the habit of saving money. I was reminded that I should set aside some savings instead of just spending everything that I have. As such, I grew up with the understanding that the pocket money I received wasn’t just meant to be spent at the school canteen or at the nearby minimart. I tried to save a portion of my pocket money and set it aside for my future – even if that “future” might just be buying toys at the mall or some PlayStation games at the end of the year.
Unsurprisingly, the hongbao (red envelope) that I received during Chinese New Year (CNY) mostly ended up being saved rather than spent. I remember meticulously counting the amount of hongbao I received at the end of each CNY. My mom would then help me deposit the hongbao money into my savings account. Over the years, the amount grew, and by the time I was old enough to manage my own money, I had a few thousand dollars in my account.
Learning the value of delayed gratification and saving a significant amount of money as a child is certainly admirable. However, the reality is that by merely depositing the money in a low interest savings account, the interest earned on my childhood savings was insufficient to outpace inflation. In essence, the few thousand dollars I accumulated were worth less by the time I was old enough to manage my money, as compared to their original value when I first received them.
This leads me to wonder about the possible returns that could have been made had the money been invested.
A Dollar Invested Is Worth More Than A Dollar Saved
“A penny saved is a penny earned” is a popular phrase used to describe the importance of savings. However, from a financial perspective, this statement isn’t entirely accurate due to the impact of inflation.
In reality, a dollar saved today is likely to be worth less than a dollar in the future. Take, for instance, the price of chicken rice at my primary school canteen: it cost $0.70 in my childhood, but today, my daughter pays around $1.50 for the same meal, reflecting an annual increase of approximately 3.8% over 30 years.
In my opinion, a more fitting phrase might be, “a dollar invested is worth more than a dollar saved.”
Assume I had received $500 in total annually over Chinese New Year and for my birthday. Over 20 years, this would amount to $10,000 in savings. However, I believe that investing this money in a market index ETF, like the Nikko AM Singapore STI ETF (SGX: G3B), may yield better returns.
Since its launch in 2009, the Nikko AM Singapore STI ETF has seen an average annual return of 7.97% (based on the December 2023 Factsheet, assuming reinvestment of all dividends and distributions).
If we just assume a simplistic assumed return of 7.97% p.a on our hongbao money, $500 invested each year would grow to about $22,805 over 20 years, or more than double the $10,000 originally saved.
At this point, it’s important to clarify that the example above is purely hypothetical. As a child, I wouldn’t have been capable (or legally allowed) to invest. Also, I was in primary school in the 90s, so even if my parents wanted to start investing in this Nikko AM Singapore STI ETF, it would not have been possible. I also need to stress that historical returns should not be used to predict future returns.
However, the key point here that I want to make is that by investing our savings in a diversified portfolio such as an index-based ETF, we may generate higher returns from our savings over a long-term period.
Let Time (In The Market) Work In Your Favour
Even when we have a strong, well-diversified portfolio, we may not be able to avoid market volatility completely.
While investing in a strong, well-diversified portfolio may help to reduce our portfolio volatility, we need to recognise that markets often move in cycles. Take the Nikko AM Singapore STI ETF, for example: over a shorter investment time period of 3-month, returns are at 1.27% (as of December 2023 Factsheet), and at times, could even be negative. However, over longer investment periods, returns are typically positive (on a total return basis). This is a function of the market, where returns can fluctuate between positive and negative in the short term but typically average out positively over the long term.
As investors, we need to have the time and endurance to ride out market volatility. This is where younger investors have an advantage because they may benefit from a longer investment horizon. Starting our investment journey early and consistently may significantly enhance the likelihood of success.
There are, of course, no guarantees in the financial markets, especially if we are investing in equities. After all, the performance of companies and their share prices can underperform for various reasons. As such, investing in ETFs might be sensible if we are taking a long-term approach. ETFs have a built-in “self-healing” mechanism where underperforming companies are removed from the underlying index and are replaced by better-performing ones. This feature is particularly vital for those preferring a more hands-off investment approach.
Besides the Nikko AM Singapore STI ETF, which gives us exposure to the top 30 listed companies on the SGX by market capitalisation, other ETFs offered by Nikko AM that are listed on the SGX include the ABF Singapore Bond Index Fund (SGX: A35) for those who want fixed income exposure, and the NikkoAM-StraitsTrading Asia ex Japan REIT ETF (SGX: CFA/COI) for those who want exposure to real estate investment trusts (REITs). Each ETF carries its own set of risks, as they are exposed to various asset classes and market sectors.
Regardless of what we choose to invest in, the key point to note is that merely saving money in a low-interest account isn’t an effective way to beat inflation. To retain the purchasing power of our savings, I believe that we need to invest to potentially earn a higher return. However, it’s important to also recognise that investing comes with some risk as our investments may not always pan out. Building our investment knowledge and having a well-diversified portfolio held over a longer time period can mitigate some of the risks that come with investing.
You can also consider investing in ETFs using a dollar cost averaging strategy with a regular savings plan.
Read Also: Why Regular Savings Plans (RSP) Makes Sense If You Are Starting Your Investment Journey In 2024
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This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).
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