MoneySENSE 4: Personal Investing

15 06 2009

According to the article ‘Unit trusts overtake shares as CPF investment choice’ (The Straits Times, 30 Jan 2008), Singaporeans are increasingly turning away from shares, and putting their Central Provident Fund (CPF) cash in unit trusts instead. The article suggests that some Singaporeans turn to unit trusts because stock market volatility generates a dislike for shares. Moreover, the shift to unit trusts can be traced to more people enlisting the help of financial advisors. These advisors tend to advise their clients to invest unit trusts as they may offer more diversification for investors’ portfolio.

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares? Also, what are some of the key areas you should keep a look out for before making an investment decision?
 

Suggested Readings:
– ‘Unit trusts overtake shares as CPF investment choice’. The Straits Times. 30 Jan 2008. <http://www.straitstimes.com/Free/Story/STIStory_201594.html>.
– ‘Introduction to Personal Investing’. MoneySENSE. July 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/IMAS%20Personal%20Investing.pdf>.

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28 responses

15 06 2009
Lim Wei Sheng / RI(JC) / asdfghjkl

In my opinion, the reason why stocks are still a popular choice when it comes to investment is due to the greater availability of information and supposed “control” over one’s investment, which may result in greater confidence. Nevertheless, it must be acknowledge that this factor may be more of a psychology/mentality one than a necessarily rational one.

Stock market volatility would not pose a major issue for long-term investors who have long-term capital appreciation as their final goal. The advantage of diversification offered by unit trusts to hedge against losses in a particular industry or class of stocks can also be emulated to some extent if the investor invests in different securities, for example, shares of different industries and those of local and international companies. If a long-term investor has the time and resources to research on company annual reports, broker research and publications, intra-diversification within the stocks asset class can also be achieved. This factor would also explain why less experienced or involved investors may choose to place their trust in professional advisors who have the time and resources to watch the market.

Stocks also provide a psychological “security” of some sort to some investors. As unit trusts often boast a portfolio of multifarious asset classes, the sheer choice available may be bewildering to investors who may find it cumbersome or risky to make a choice if they have imperfect information about the details of each portfolio. Also, by placing your funds in the hands of a manager, issues undoubtedly arise about the quality of the unit trust and the manager’s performance. Some may also feel restricted by the investment portfolio that a manager may have drawn up.

In conclusion, the type of asset class invested in (unit trusts or stocks) depends on many factors: appetite for risk, aim of investment (capital preservation or appreciation), expectations of returns, etc.. These all affect the ultimate choice of asset class that different types and profiles of investors will choose.

15 06 2009
Jeremy Foo

Shares are securities released by companies to raise capital from
investors. One owns a percentage stake in a company, which is proportional to the number of shares he owns. Due to the volatile nature of shares, shareholders have to bear a high risk of losing their investment. However, people are still enticed to buy shares as they offer the highest rate of return as compared to other form of investments such as bonds and unit trusts. They earn when they receive dividends from the company’s profit and when they sell the shares once there is captial appreciaton of shares, i.e. value of the shares rised. Shares also give a sense of ownership of the company to the investor, particularly if he/she is an avid supportor of the company. Records have actually hypothesized that shares are one of the better hedges against inflation, and they can protect and enhance the real value of savings.

Also, with careful planning and research, people can reduce the risk of shares while still enjoying the high rate of returns. This is done by buying shares from various industries. This help soften the blow should one particular industry collaspe. By planning and specualating when to buy shares, one can buy at a relatively low price too.

In comparison, unit trusts has a bad reputation for low returns – acquired during the market downturns of the dot.com crash and Sars epidemic. Hence this may put people off. Although unit trust poses lower risk than investing in shares, proper planning can reduce this disincentive, making shares more appealing.

15 06 2009
Low Guang Heng

One has to consider the level of risk one can take before investing. This is due to the fact that potential returns are inversely proportional to its risks level.
One needs to invest time and effort in doing thorough research (in areas like movements in interest rates and people’s confidence level of the market) and monitoring market conditions to decide what to invest in. For example, when there is an economic slowdown, bonds may be a better choice for investment since it provides a regular stream of income and entails lower risk level. On the other hand, when there is a boom in the economy, it would be more advisable to invest in shares. This is because shares provide higher returns which are a good hedge against inflation.
One also needs to consider the relationship between time and risk. For example if one needs money in the near future, one should not invest in assets that put one’s capital at risk. On the other hand, if one does not need cash in the near future, one can invest in assets that have higher risks and higher returns. This is to benefit from the long term upward trend of the economy.
One should diversify (through investing in various asset classes) and not put all their capital into one particular type of investment so as to reduce the risk of making a loss.
One has to consider gross returns and net returns after transactions costs and fees. This is because transactions costs eat into your returns, resulting in fewer profits earned.

15 06 2009
sharron liyuan team spectrum, JJC

The difference between unit trust and shares is that by investing in unit trusts, it means that one invests in a wider spectrum of companies, e.g. you can invest in china or india companies which ever looks more profitable to you. Whereas buying shares is an investment on just one firm. Therefore, unit trusts would seem safer for many due to more diverse spread of investments. But there are some who still prefer shares, perhaps it’s due to the extra functions which playing with shares hold over unit trusts. In the world of shares, you can do “shot selling”, which is speculative in nature and is a means to earn more keep through higher risks. Perhaps due to a presence of such a function, many would want to take more risks in the stock market compared to unit trusts, where no such functions exist.

Another reason could be that buyers probably want to freedom to choose which company to invest in, in unit trusts, you can’t really choose the companies to invest in. It’s basically throwing a lump sum of money to a bunch of companies and these companies will invest the money for you. Whereas in the stock market, you can choose the company you want to invest in and how much you want to invest in that company. Many a time, the ability to choose and benefit from that choice brings about more satisfaction then letting others make the decision for you.

Before making an investment choice, you must consider the prospects of this investment. Will it be worth it? Will i make a loss? Will it be too risky? Will i be spending too much of my savings on this investment? All these are important as investment is a form of risk taking and without proper financial planning and consideration. You may find yourself suffering a loss rather then a profit from an investment.

15 06 2009
Ze Ming / RI(JC) / TTWW

There’s a very psychological reason why stock markets are still popular.

You have your hand on the mouse (or telephone) and you decide every single thing that’s going to happen. It’s your money, and YOU make the choices what to do with it. Your heartbeat races everytime you see the little numbers go up or the arrow go green. Your heart plummets when you see the numbers inching down, then you get excited when it goes up again.

Compare this to a unit trust. Gosh, I can’t say how less uneventful it is.

I guess to the clueless “investor” (and let’s be honest, I believe there is a sizeable number of people out there), there is a marked difference between these two outlets for your money. I’m not talking about life savings here, probably just that 5-10 thousand dollars that you have lying around. Personally, I would rather do stocks, and that little thought nagging at the back of your mind of a sudden windfall does sound good as well.

If it’s my life savings, I’ll have a totally different idea.

15 06 2009
Jocelyn Tan/ SAJC/ 19-ers

Unit trust appeals to people not only because it is a low risk investment. There are many other benefits of unit trusts too, such as professional management, diversification and greater investment opportunities. As such, those who are inexperienced and with lower risk appetite may invest in seemingly less risky investments like unit trusts.

On the flipside, there are disadvantages as well so unit trusts may not be the ultimate choice for investors. By investing in unit trusts, the investor will have little choice and control as the fund manager would be the one in charge of making the decisions. Also, investors have to pay fees and charges like management fees and redemption fees which may be a turn-off to some people. There is also a chance of depreciation because the returns from unit trust investments fluctuate according to market conditions. Unit trusts only diversify the risks and do not eliminate them fully.

More experienced investors with greater risk appetite and who want to be involved, would prefer more volatile/risky shares because of higher returns and greater control over the fate of their investments. Perhaps, it is more exciting and fulfilling to invest in shares. If the shares you invest in are making profits, you get a sense of achievement and satisfaction and this may not apply when you buy unit trusts (for it is the fund manager who helped you make money).

Different types of investment appeal to different people with different objectives. Hence, there are buyers of shares and buyers of unit trusts. Most importantly, do your homework, know what you are investing in, and have confidence in your investment. Do not just follow the crowd.

15 06 2009
Jennifer Wu/ HCI/ Team 9

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares? Also, what are some of the key areas you should keep a look out for before making an investment decision?

Contrary to what the comments posted earlier have stated, I feel that diversification may not be a wise choice for investors, which may be a reason why people still prefer to invest in shares. The rule of diversification basically means holding stocks, bonds and mutual funds – investments of various portifolios and risks. Diversification, however, did not protect investors from the steep 40% plunge in the stock markets recently and losses in the unit trusts. As Warren Buffett says, “Wide diversification is only required when investors do not understand what they are doing.” Generally, under a diversified portfolio, when one asset class goes down, the other goes up, which means that the investor does not gain anything significant in the end. Given such likely scenarios, it is likely that investors, especially those who are more experienced in the stock markets, prefer to make their own investment decisions and specialize in a certain investment category instead of the common act of diversification.

There are basically two classes of investors: the amateurs and the professional. The professional investor would already have many years of experience and will know how to look at charts, analysis of major events in the world and certain releases of information by corporations which may affect their share prices or profitability, profit margins, senior management and many other areas in their decision making. For the amateurs, many would turn their money to a mutual fund so that they would not have to bear the responsibility and burden of investments. In this case, the most important area they should look out for is the background, credentials and experience of the fund manager. After all, they are offering their money to the fund manager on a silver platter – it is necessary that they critically evaluate whether the fund manager is able to generate profits for them, by checking on the fund’s past profitability and credentials of the manager as mentioned above.

16 06 2009
Muhammad B Rahmat/vjc/vjc006

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares?
One difference between unit trust and investing in shares is the time period.Unit trusts are generally medium to long-term investments, which may not suit all investors,especially those looking for quick returns.
Another reason might be the risk appetite of the individual. They might be tempted to invest in shares rather than unit trust due to the higher potential returns.
Another reason is also the loss of control involved when investing in unit trust as you are not directly involved in deciding how your money is invested. thus investors who feel the can be better off making their own investments would be attracted to investing individually.
Another disadvantage of unit trust is the fees and cost involved which include the initial sales charge and redemption charges. Thus investors not willing to incur this cost would rather invest on their own.

16 06 2009
Huang Sui

unit trust differs from share in two ways.

firstly, when buying unit trust, unit holders actually invest in a variety of assets. However, buying one share is to invest in only one firms. In a sense, the nature of unit trust makes itself a safer investment compared to shares as the diversification spreads out the risks, strengthening the risk tolerance. However, this feature also make unit trust a more “fixed” investment. Shareholders could also own different shares to reduce the risks and they can change the combinition of shares according to the market situation. For instance, they could pull out their money from firms in declining industries and reput into those in uprising ones. However, unit trust may not afford such quick changes due to its notable fees, such as the front-edg fees and the total expense ratio (TER).

secondly, unit trust allow the trust owners to tap the skills of professional fund managers while shares not. the unit trust pool is managed by a team of full time professionals and a trustee is appointed to protect the interests of trust holders. However, this does not mean investers need not to put in their time and effort to take care of their wealth. They need to research on the financial situation of the trust-giving companies as shareholders did. In addition, they need to do extra investigation on the performance of managers, who will operate the investment. Furthermore, the indirest participation would not offer the investers as much sense of controlling and much enjoyment of adventure as share does.

in conclusion, I think the strengths of unit trust also acts as the negative sides. Therefore, even it may outperformed shares in some aspects, people still preferred the long-established form of investment-shares.

16 06 2009
Yang Zhengzhi

Yang Zhengzhi/SAJC/Sparks
Unit trust is a collective investment, which is quite different from share. Such diversification ensures lower risks, especially during the period of economic crisis. However, people do not choose unit trusts may not because they are not willing to have less risk. Trustees need to invest in many different forms of goods, hence they need to get much more information than share holders required. Although trustees are usually proffesional, it is inevitable to get imperfect information or analyse incorrectly. Therefore, some people do not prefer unit trust because they think it does not deserve their trust.
Another reason may be that some amateur investors have held shares of a certain firm for quite a long time, and they have benefited from these shares. They still believe that they can earn more. If they shift to unit trusts, the investing method will change, and some people are afraid of change. This is also one consideration people have, and usually they decide to keep on investing in shares.
Different forms of investments need people to consider different aspects, but there are still some common factors we should take note of. For people who want to invest in a firm, they should know the reputation or popularity of this firm first. Affordability of majorities is also important. The percentage of this firm owned in the market and its competitors are significant factors which may affect your investing profit as well.

17 06 2009
Tay Liang Yu R

I’d always remember the oxymoron “Never trust unit trusts”.

For once, I’ll be a ‘one-hand economist’.

1. Unit trusts collect exobitant fees, imo, for their work. few % is a rip-off for the petty two-digit return figures a year.

2. Stocks are bad because people focus too much on the intangibles instead on the tangibles. They view ‘outlook’ for the industry over the intrinsic worth of the company itself.

3. I disagree with the article. I believe more people are taking up unit trusts due to the tellers and financial officers who eagerly persuade their customers to take up unit trusts to get a duh, commission. How much from stocks? Since point 1 makes the unit trustee rich, it would give the referrer nice kickbacks too. It is the customer service officer who persuades the holders of cash all the benefits of unit trusts and discrediting stocks, which is why spore stocks have low p/e lvls compared to stocks in other countries.

4. Huang Sui assumes unit trustees are experts in all their ways of investment. Such experts cannot perform well due to the volatility of funds being withdrawn and entered, which disrupts the overall performance of the trust if it were really just a one-time off purchase.

5. I disagree with Muhammad B. Rahmat of VJC. He states that stock is a short-term vehicle for investment. Investment in stocks is unlike speculation. Most CPF holders treat the stock market like a game. It should not be the case. Stocks should be viewed as a tool of investment, not speculation. Thus the notion of ‘investment funds’ flowing to unit trusts is flawed in this sense. Rather, it is the consecutive losses at trying to speculate (contra) which brings them to unit trusts along with other reasons.

5b. I disagree with Jocelyn Tan from SAJC. She states that ‘investing’ in shares is a high-risk activity. It is not always the case. Her view of ‘investing’ is again, flawed. It is based on the bigot view that shares are meant only for speculation, akin to a game. Shares are tools of investment, not meant for day trading, (contra), which is speculation in the price movements.

I agree with Lim Wei Sheng of RJC or RI JC? haha. He states that information provided by the exchange gives a sense of “control” over one’s investments.
This is correct, but to an extent. Information may be falsified. Like the recent case in China Sun Bios whatever which claimed to invest 1/2billion RMB in corn futures, but the auditor KPMG couldn’t find it. Thus, information is useful, but one must be discerning. As per se, unit trustees may believe that the information is true and purchase some shares of the company, inevitably exposing the ‘investor’ to risks.

I find it disturbing to note that Ze Ming of RI JC view of the stock market as a game. Too much games is it? It is not some dota or cs where your accuracy calls the shots, the accuracy cannot be practiced. The stock market is totally random in nature and trying to predict its movement in the short run is akin to predicting the next 4d number!

the jjc team is right and wrong. short selling, not SHOT selling does exist. However, in the Spore context, it is very limited as a form of investment. Heavy fines are in place for short sales which are not covered quickly, unlike in US, where you can place short sales for a long period of time. Therefore risks are obvious in short term trading. Yet, from another point of view, short selling is a part of trading, not investing. Thus it shouldn’t be part of personal INVESTING.

Jeremy Foo is right. Unit trusts have a holding period which they’ll hold your $ captive for a period. anything that happens during this period is unpredictable. Stocks, conversely, are more liquid and the market for it is larger. Disposal of an unwanted stock for cash is relatively much easier.

Low Guang Heng assumes a theoretical equation of risks proportional to returns. Answer: there is no such equation, although there is, a weak correlation. If one follows Guang Heng method of investment, we’ll all be dead if he’s the fund manager. Investing in bonds during a downturn provides little future potential capital returns. Investing shares during a boom would be almost fatal because d2y/dx2<0, where the value for maximum returns would have reached and capital returns would be minimised also. The only thing Guang Heng is right is his view of gross returns and nett returns.

23 06 2009
Chng Wei Yang/HCI/Team 5

Many of the comments have pointed out about the disadvantages of unit trusts and extolled the virtues of shares. However, I would still like to speak in favor of unit trusts.

Unit Trusts are good mainly because:

1. Expert fund managers are employed to manage your money.

Even though some people have bad experiences with these fund managers, and fund managers may make blunders sometimes, they are after all professionals who work full-time in say stocks investment. They will have read many financial reports, done they fundamental analysis and consult their colleagues to come up with wise investment plans. Most people would have less expertise and thus less success in the stock markets as compared to them. If you can do better them in the stock markets consistently for years, then you are a genius, but most mortals like us would still benefit from employing their services.

2. It saves you a lot of time and effort.

In order to invest in the stock market and gain better returns compared to the unit trusts, we probably have to read countless of financial data, magazines and do all sorts of analysis. And even so, we may not be able to earn huge profits. More importantly, the rime that we use to stare at stock charts and annual reports of firms would be better used to spend quality time with our families or do some sports to keep us healthy. Investing in stocks is very stressful and takes toll on our health and personal relationships. Thus, unless you like investing in stocks as a hobby, it would be prudent to turn to unit trusts instead.

As for the problem about high management fees and less competent fund managers, that is where your effort as a unit trust investor comes in. We should go around to survey different unit trusts to learn about how much fees they charge and about the historical performances of these unit trusts. We can then choose unit trusts with reasonable fees and competent fund managers. This would increase the profits that we can earn from our unit trust investments.

17 06 2009
Tan Toon Wei / RI(JC) / The Classicals

Previously, unit trusts reaped poor returns and were thus unpopular during the years of the SARS outbreak and dot.com bubble.

However, the tides have turned radically now. FIRSTLY, the economic booms in India and China have resulted in a diverse array of attractive stocks which have huge potential to reap large profits. These new players (India and China) are relatively unknown in the local scene, thus Singaporeans become more dependant on the experiences of financial advisers to invest in the profitable stocks.

SECONDLY, the volatility in the stock markets of recent years-think 2001 when airline stocks were high but plunged overnight post-911. Not to mention, the bubble boom also saw the overnight bankruptcies of several technological companies. To avoid replays of such episodes, Singaporeans have become more financially-savvy and increasingly prefer diversification of their investments. The impending loom of a recession in 2008 (which we are facing now in 2009) may have been a strong motivation for diversification of investments to avoid huge overnight losses. Huge losses by investors in DBS’ High Notes 5 (linked to Lehman Brothers) have reinforced the concept of diversification in the average Singaporean.

THIRDLY, new CPF rules which state that a maximum of up to $60,000 is allowed in to earn higher interest rates in CPF Ordinary and Special accounts, but cannot be withdrawn for investments. Also, money from sales of shares have to be returned to the CPF Ordinary Account after a specific time period, whereas unit trusts do not follow such rules and can be held for a longer period of time. Moreover, as unit trusts tend to have higher returns than CPF interest rates, CPF holders are motivated to switch over from shares to unit trusts.

FOURTH, one must note that CPF funds are mostly “capital for the old age” and the average Joe in Singapore is especially conservative regarding savings for old age and will likely use the funds carefully and invest in less risky products. Moreover, the birth rates in Singapore are low—showing that ageing Singaporeans will have less financial support in their later years. A conservative psychological mindset, especially after economic recessions, coupled with declining financial support in the later years cause prudent investments of CPF funds and a shift to investments in low-risk unit trusts compared to high-risk shares investments.

17 06 2009
Garrett/VJC/VJC001

By investing in a unit trust, you are giving up control over the choice of the bonds, shares and other assets that go into the fund, since the fund manager would be the one making these decisions. To some people, they would not trust the fund manage completely and may be skeptical about whether the fund manager will do a good job to generate profits. Hence, most people would rather invest in stocks as they have complete control over what kind of shares they would want to invest in. I personally feel that this is a psychological effect, where people want to control their own decisions, feeling more comfortable and confident.

Also, shares offer a greater rate of return as unit trusts charge numerous fees such as trustee fees, management fees and redemption fees, such that the total expense ratio usually lies between 2-4% of the net asset value, eating into the expected returns. Thus, investors who do not need the expertise of the fund mangers can purchase the shares themselves directly so as to maximize their returns by not paying the extra fees.

One key area that one should look out for before making an investment decision is how much risk one is willing to bear. This differs from individual to individual depending on one’s age, financial situation and investment objective. Young adults have a longer investment time horizon and can afford to take more risk, having an investment portfolio containing a greater percentage of shares and a lower percentage of bonds and cash equivalents. However, those approaching retirement age would have a lower tolerance of risk, and would rather make an investment portfolio containing a greater percentage of bonds and cash equivalents.

Diversification is also important in creating an investment portfolio that can weather most economic uncertainties. First, this can be done by investing in different asset classes such as cash equivalents, bonds and shares. Second, one can diversify further by investing in different securities in each asset class. By diversifying one’s investments, one is avoiding putting all of one’s eggs in one basket. Instead, one will have a diversified portfolio that addresses one’s investment goals and can weather different market conditions.

17 06 2009
Soo Guo Kai / HCI / Team 9

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares? Also, what are some of the key areas you should keep a look out for before making an investment decision?

I think the main reason why people still prefer to invest in shares is because they have control over what they choose to invest in, unlike unit trusts where the fund managers do the job. Also, some people feel that they are responsible for their own money and hence, they should invest themselves, rather than relying on professionals. Shares are very convenient to invest in because they only need a computer and Internet access to monitor the progress of the stock market daily. Moreover, people choose to invest in shares as they offer a higher rate of return if they are invested correctly even though they are riskier.

I think one should look at the risk tolerance level before investing and be aware of their own financial situation. If a person can tolerate making losses, then he can invest in newly founded companies as these companies often offer much higher profits than those established ones. To be aware of the financial situation means that one needs to know when money will be needed, i.e. to buy property etc so that all the cash will not be ‘locked up’ in these investments. If a person is going to buy a new property next year, then he must make sure that he has enough money to pay the 5% down payment and the subsequent 15% via instalments.

17 06 2009
Tay Liang Yu R

I do not agree with Tan from RJC on investing in unit trusts to be better.
I am not target the specifics of the CPF system, but rather on the issue of unit trusts being a ‘superior’ investment class.

1. He assumes units trusts are stable.

According to Lipper, a fund research and analysis firm, unit trusts available under the CPFIS retreated 40.24% on average, while investment-linked insurance products (ILPs) fell 36.06%

-40.24%
-36.06%

one needs about 100% returns to get back to the principal.

Coupled with the DBS Hi Notes events, where investors of certain series get NOTHING back… I wonder the rational in investing in unit trust.

Just hold cash. Simple. Isn’t cash an asset class which under this deflationary environment, doesn’t deflates? (cash=cash)

If you use the argument of inflation against my point, isn’t inflation also present in the financial instruments one holds?

2. He assumes Singapore is a saturated market. (‘huge potential to reap large profits’).

Sheng Siong. Astons many others upcoming ones… prove of saturated? proves the contrary.

Tata motors India?
Soho China?
Unit trustee are never daring enough to purchase the small foreign company. Why? Because they are afraid to. Why? Because they don’t know anything abou it and if they screwed up their capital, it would hard to get it back. So most unit trusts in emerging markets simply buy the big companies. Isn’t it harder to elicit higher growth rates from a ‘developed’ enterprise?

Capital for the old age. That’ why the elderly have been in the spotlight after losing their “life savings” from the DBS Hi Notes issues.

That is why Soo Guo Kai from GJZX and Garette from VJ are right in many ways.

18 06 2009
Ze Ming / RIJC / TTWW

I kind of disagree with Liang Yu about the point that the stock market is totally random and that predicting short term trends is impossible. Well, I acknowledge that predicting short term trends is difficult but it is possible. The stock market, down to the basics, really actually works by the same old system of Demand and Supply. When demand increases or supply falls, stock price increases. Basically, by analyzing demand and supply, it will give us some knowledge about the trends in the market.

For long run trends, these are easy to predict. After all, as they say, business cycles last about 7-10 years. So, buy during a recession when the demand and prices are low and sell during a boom when the demand and prices are high. The position of the economy at any time is quite obvious to even the most financially illiterate investor, so such investments are quite easy to undertake. Of course, there is always a risk that when you invest during a recession, the stock prices dip even more and eventually the value becomes zero. Therein lies the rationale behind diversification, to spread the risk.

For short term trends, prediction is still possible, but more difficult since information is more difficult to gather and the investor must be sharp. But it can be possible to hazard a guess regarding the market trends and some savvy investors have actually made profits from that. For example, after AIG’s near collapse in October last year, their stock prices plummeted to nearly zero. Everyone was waiting in trepidation for the U.S. government to announce whether they will be bailing AIG out. In hindsight, it is quite obvious that the U.S. government will bail AIG out since AIG is an integral part of the US finance industry and the insurance giant’s failure will have major repercussions for the US economy. So, to preserve it, the government will definitely bail it out. Assuming this is true, when the government chooses to bail it out, AIG’s stock price will rise since people are selling all their AIG stocks in fear of its failure. So, stock prices will be very low but after the government announcement, stock prices will rise again. Knowing this, Singapore businessman Oei Hong Leong actually invested in 1 million AIG shares and made an instant profit in 2 days of more than 100%. This shows us that with the correct information, the right guesses and dare to take risks, money can be made in the short term from shares.

So, I believe this proves my point that the shares market is not entirely random.

18 06 2009
Jason / VJC / VJC008

Depending on risk profiles and investment objectives, shares can prove to be a more suitable investment than unit trusts. Experienced investors can choose to be in the driving seat and pick individual bonds and shares that match his or her investment objective, minus the charges that need to be paid when buying unit trusts instead. Considering a person with sufficient capital and foresight, it is perfectly wise to buy shares which generates significant, sustainable returns with low risk (how Buffett acquired the shares of Wringley’s). Diversification in this case reduces the capital to exploit on opportunities and is only for the ill-informed.

Bearing in mind that unit trusts differ in risk depending on the type of assets they are invested in and the strategy employed by the fund manager, less experienced investors can choose to buy unit trust instead of shares. Besides having a professional team to manage your investment, fund managers also have an increased spectrum of assets to invest in due to the larger pool of money. Therefore, unit trust can be more suitable for some of the lower-income, inexperienced Singaporeans.

Diversifying risks does not reduce risks entirely. Noting the volatility of the market, buying unit trusts does not ensure a ‘sure-win’ situation or establish an acceptable limit to losses. Trusting someone else to do the job definitely adds to the risk. Diversification is also possible while investing in shares. A good way is diversify by buying both shares and unit trusts. We will not be clear of all the industries and assets to estimate the profitability of the investment and therefore will need professional help. Nevertheless, those who are confident and experienced can choose to avoid unit trusts.

Not all the time but often, buying unit trusts reduces flexibility and quantity of returns and risk while buying of shares with lack of diversification increases the chance of losing money. Nevertheless, with proper monitoring and intelligent investments, the disadvantages on both sides can be significantly reduced. Areas to look out for when buying unit trusts can be the Total Expense Ratio, the similarity of the investment risk with your risk profile, similarly, the investment strategy with your preferred strategy and the competency of the fund manager. Generally, people should take note of their financial situation and the time horizon that they can accept which will determine the ability to finance other expenditures.

19 06 2009
Max Pang/ SAJC/ Team SLIFF

Unit trusts have advantages such as a lower risks through diversification. However, it also means lower profits. Coupled with adminstrative costs for professionals to manage your account, profits become even lower. In addition, unit trusts are much more complex to understand than stocks, hence amateur investors would probably start their nascent foray into the markets through purchasing unit trusts.

Also there exists several disadvantages of unit trusts. Firstly, there are dilution possibilities. This means that when there is a large cash inflow or outflow, all investors’ percentage of the underlying assets will change. Secondly, larger funds have a smaller universe of available opportunities which may hinder future performance.

Thus long term investors may prefer shares, which can reap them higher profits. To reduce the risks involved, many also do dollar cost averaging whereby investors invest fixed sum at regular intervals regardless of market conditions to eliminate “market timing”. Buying shares may not ensure a profit. But with a sensible and long term approach, it can smooth outmarket fluctuations and reduce risks while still having a substantial potential profit.

Before starting an investment, it is imperative that we ‘begin with the end in mind’. Hence we must ask ourselves a few questions. What is our investment objectives? How much can we afford to invest? How much can we afford to lose? We must also assess the risks and benefits of our investment and be clear of the fees and charges it would incur on you. It is also a bonus if the investment is regulated by the Monetary Authority of Singapore as it would not be as risky compared to those that aren’t.

21 06 2009
Daryl/ SAJC/$ensibilities

People still prefer to invest in shares as:
1.Shares pose a higher risk but often higher gain compared to Unit Trusts.
2.They have the control over their own funds and not left to Fund Managers of Unit Trusts.
3.The costs are lower as management fees/ administrative fees are eliminated
4.They do not incur the spread between the bid and offer price
5.They love the thrill and excitement!
6.Satisfaction and sense of achievement in earning own money is priceless.

Areas to keep a look out for before making an investment decision:

Basically research and homework on the investment
-Technical and chart analysis
-World and country economy
-Sun rise or sun set industries
-Fundamentals of company eg. aggressive management team
-Price earning ratios (debts)
-Gearing ratios
-Net tangible asset (NTA)
-Cash position (liquidity)
-Monitor insider transactions

22 06 2009
Agnes Tung/ JJC/ RAW

One advantage unit trust have will probably be the lower risk taken. However, shares are still being prefered. This is because, compared to unit trust, shares have a higher returns. The higher returns will probably too tempting than the risks can deter people for buying shares.

What are the factors that have to be taken into consideration when doing investment. First, we must recognize the fact that there are various types of investment available such as bonds, shares and unit trust. There are different risks invoved and different returns. It depends on ividividuals on whether they are more for the risks or the profits.

When buying shares, one factor to consider will perhaps the reputation of the companies. A company with high reputation will probably generate more dividends paid to shareholders and the price of shares will not fall easily.

Time horizon is another factor that must be taken into consideration. When time period increases, the risks involved is lesser. This is true for all types of investments.

22 06 2009
Shang DianJun / HCI / Team 1

Given the advantages of Unit Trusts, why do you think some people still prefer to invest in shares? Also, what are some of the key areas you should keep a look out for before making an investment decision?

Mankind is largely driven by desire and greed. Such desire and greed, too, dictates our behaviours. Be it in daily lives or financial market. The prevalent high return of shares have attracted millions into the game. and most of them tend to ignore the fact that with high returns, comes high risks. Of course, as mentioned above, the psychological effect of having control over one’s money in his own hands plays a major part too. and there is also people who are simply greedy and desire for ever higher returns that Unit Trust can never provide. Sometimes, people just make irrational decisions.

John Kenneth Galbraith once said, “Wealth, in even the most improbable cases, manages to convey the aspect of intelligence.” Investment is a game for the intelligent few of mankind. All the rest, just provide them what they are earning.

This is scarily true. Many people, never bother to read the fine prints of their contract, never understand what they are committing themselves into. They do not even bother to find out what are the possible alternatives. They follow the financial advisor representatives’ opinions and only check if they are making money. THAT IS ALL and i think that is very conclusive about their intelligence to a certain extent.

We may not be the ones making millions on the financial market, but we can avoid being the ones that donate to the pool of raw capital. Making careful observations of the market trend, study company profile or the information booklet of desired financial products, assess your risk profile with the help of financial advisor representative, evaluate your financial circumstances are just some starting steps you can take before committing yourself into any investment.

Alas, may we all be wealthy.

23 06 2009
Ly Vu/SRJC/SRJC

There are plenty of reason explain why people still prefer to invest in shares. One might provide uncountable number of positive factors affecting his choice. Let us now examine some of the negative factors.

One of them could be the lack of investors’ patience. It is often a traditional belief that shares would genrate profit at shorter time compared to the other. Impatient people who are rushing for fast earnings, therefore, would probably put their bet on shares.

Other reason is the susceptibility of investors. The inexperienced investors have high tendency to follow the crowd. And very often , the crowd would promote the fact that even though stock contains high risk, it does indeed a big source of money. Media plays a role too. Many articles, books witten about achievement of successful investors have continuously inspired young men and ladies integrate themselves into the world of shares without a second thought.

What are the key areas we should look out before making an investment decision? Not an easy question, i think. Investments have appeared jus as long as human existed. There are many and many kinds of investment one can consider. shares and unit trusts, as the article mentioned, are just 2 our of many more. Many key areas have been discussed earlier on, let me just add on a few more. Ultimately, we human beings make investment decision, hence our ability must come 1st. We should first realize our capability and talents. This means we must know know what kind of investment we are really good at. It is a hard task and take long time. Many do not realize their own talents and soon face the failure. If u are not good in investments, An advisors good be neccessary. Along the ability, interest should come about. People work best in their interest areas. If u have no interest in investment, consult some else or simply Don’t do it.

Looking for your talent , interest and work towards it, you will succeed

23 06 2009
Ang Zheng Da/SAJC/19-ers

Among the key areas to look out for when investing are the objectives of investment and the amount of money available and willing to be used for investment. I believe that the increase in popularity of investments in unit trusts over shares using CPF money is hardly surprising.

A major reason would be that CPF is seen as a retirement fund for most and hence, less risks would be taken with CPF funds. An effective and popular way of reducing risks is through diversification and unit trusts offers the chance to diversify with only a small amount of investment commitment.

The majority of SIngaporeans are also not sophisticated investors and do not have large amounts of money available for investments. Unit trusts would allow such people to diversify with professional help without commiting large sums of investments. For example, one lot of UOB shares cost about $14000 and one lot of capitaland shares cost about $3500. For a Singaporean with about $50000 to invest, it would be impossible to diversify into different companies in a number of markets. However, by investing in a unit trust, he is able to enjoy returns from various asset classes in different countries and in different industries. Thus, he enjoys a diversification which he could not afford previously. This diversification, coupled with professional management, gives such investors who are less sophisticated a better chance at stable yields for his retirement.

For sophisticated investors with a large amount of money in their CPF, they may instead prefer to invest in shares for the potentially higher yield. This would likely be due to the resources and ability of the investors to effectively manage and diversify their investments without the pooling of resources as with unit trusts.

23 06 2009
Jolyn / VJC / VJC003

As the article points out accurately, unit trusts market themselves on two main points, that they require far less time to manage as they are left in the hands of professional fund managers and that they are supposedly less volatile as the investment involves wide diversification. The fact is, these characteristics heralded as unit trusts’ greatest strengths, are at the same time, their greatest weaknesses.

Let us first deal with the presence of the middlemen – the fund managers. In the hands of the right managers, unit trusts would be profitable and well worth the investment, yet not every manager makes the right decisions, and the investors are the ones being punished for their managers’ mistakes. One has to pay the sales charge up front on initial purchase and an annual management fee, all contributing to the lucrative incomes that top fund managers enjoy. Whereas admittedly the managers have sufficient incentive to make profit of which they enjoy a cut of, their incomes are arguably more stable than the investors themselves. The investors are like employers who take a risk with an employee, paying not just for the work they want done but for the labour itself.

As for the advantages of diversification, world-renown investor Warren Buffett once said, “Wide diversification is only required when investors do not understand what they are doing.” Indeed, it would be difficult for an individual to keep tabs on a highly diversified personal portfolio without a dedicated fund manager and for him/her to gather enough capital to do so but this diversification is achieved through pooling together varying contributions by an entire range of investors. In the event of a crisis, some people with a lower stomach for risk and losses may choose to withdraw their funds and redeem their cash. Any large-scale cash redemption has to be met with partial liquidation of selected holdings to obtain the cash to pay the unit holders and thus fund managers will be forced to sell stocks at ludicrously low prices just to meet cash requirements for fund redemptions. Holding out for a long-term recovery isn’t even an option as one would be dragged down no matter what because fellow investors have forced the liquidation of the unit trust’s holdings. When the crisis is over, the unit trust may receive new fund injections but the same stocks may then be repurchased at much higher prices. The overall effect is that the same investor who held on through the crisis, instead of being rewarded for his steadfastness, is punished by effectively being diluted in his unit trust holdings.

These are very critical flaws of unit trusts, and thus it is not hard to understand why some people still choose to trade with their own accounts in stocks or other options.

23 06 2009
Chai Jie Yang / RIJC / The Classicals

We all know that unit trusts, generally being diversified and lower in risk, appeal more to the this respect, as my fellow posters have noted, it can be seen why unit trusts have gained popularity. The lay investor does not wish to spend much of his lifetime on monitoring individual stock movements so much as to keep himself vaguely aware on general sector or market conditions. Should an investor decide to put his money in a unit trust rather than directly into shares, they could spend the time saved from having to monitor market developments on working more on their daytime job as a risk-free way of earning more money, or on leisure.

There are cases to which even the lay investor can prefer shares to unit trusts however, beyond the already well-discussed higher risk appetite of more daring individuals. The well-worn motto of “to buy and hold” still holds true today, and even more so given the rise of many potentially undervalued stocks of well-established companies following the sub-prime mortgage crisis. This view of long-term investing prevents one from having to stomach the heart-shattering moments of short term price drops, and instead ride out volatility in the market as the share follows an upward trend in value. This can make shares attractive options, even in the current times of volatility, insofar as to outperform unit trusts that risk stagnating if they make too many short-term investment choices.

Additionally, we have been talking about unit trusts and shares as different-behaving investment vehicles, but what of shares of investment companies with the same risk spread? These can also outperform unit trusts, as such corporations, while having the same diverse portfoilio and profit motivation, are much simplified in structure, making it still more appealing to the lay investor. For instance, the unit trust has a dual-pricing mechanism which always makes the sale price (from the perspective of the investor) lower than the purchase price. With an investment company, the market value of the share reflects both how much you pay and how much you get back. This makes value monitoring easier for the individual as he would not have to monitor two prices for each entity, but rather just one. In fact, this is why several unit trusts have converted to investment companies, not only to save on internal administrative charges otherwise spent on maintaining a complex system of middlemen within middlemen, but also to appeal more to the man in the street. In all, these could very well contribute to the phenomenon of shares being preferred despite unit trusts also becoming more popular.

23 06 2009
Chai Jie Yang / RIJC / The Classicals

Amendment to first paragraph, corrections in square brackets:

We all know that unit trusts, generally being diversified and lower in risk, appeal more to the [lay investor in] this respect, [and] as my fellow posters have noted, it can be seen why unit trusts have gained popularity. The lay investor does not wish to spend much of his lifetime on monitoring individual stock movements, [but rather] keep himself vaguely aware on general sector or market conditions. Should an investor decide to put his money in a unit trust rather than directly into shares, they could spend the time saved from having to monitor market developments on working more on their daytime job as a risk-free way of earning more money, or on leisure.

23 06 2009
Jingyi/ ngee ann poly/ JAE

Firstly Unit Trusts are not cheap. They are costly. You have fees such as managing fees and commissions imposed on the trust. For e.g. you may have bought the trust for 100k, but the value that is invested after deducting the expenses could be 80k.

There are also risks involved in investing in unit trusts. Some of the risks are market risk which is related to the price fluctuations in bonds and equities which thus affects the unit trusts. Another risk is manager performance risks. Unit trusts are handled by professional individuals or group, and unit trusts are also subjected to human errors. Some unit trusts may not perform as well as others do due to the element of human skills.

As for shares,by investing directly in the shares, you could have made more money instead of buying unit trusts. Stocks has been proven to be one of the tools for investments due to the potential of capital gains. Compared to investing in unit trusts investing in stocks may be “cheaper”.

Unit trusts are more meant for those that don’t have much time to manage their investments and does not have much knowledge or expertise with regards to investments and wishes to spread and diversify their risks.

As the saying goes, low risk low return, high risk high return. Therefore if you were to seek for high return, stocks may be a better alternative as compared to unit trusts and for that you will have to bear a higher risk and give up the advantages of a unit trusts which provides liquidity, diversification, security etc…

Before making any investment decisions. The first thing you have to do is to identify your risk appetite and then go and find the suitable financial products for yourself. Do not invest in risky investments such as warrants if you are not a high risk taker.

Secondly, read up the prospectus if you are investing on the unit trusts or stocks.

Constantly update yourself with the market conditions to prevent yourself from being burnt.

Diversification is very important. You can diversify by having a mixture of products in your portfolio. E.g. bonds and shares.

Lastly always keep track of your investments.

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