• jeffreyleezq

How my buddy started investing with $5k

$5k can invest or not?


Source: Pexels



This post talks about how my good buddy, Darius*, started investing with $5k with no prior investment knowledge. I would be sharing about his background and investment portfolio.


It all started in early February 2020 when he took an interest in investing after I told him that his money in his savings account was earning next to nothing and he could consider investing it instead to get higher returns. This coupled with the COVID-19 crash, presented a good opportunity to enter the market.


I briefly summarised for him some of the various financial derivatives and jargons, as well as investing strategies first, and asked him to decide for himself the type of investing he wants to focus on. Eventually, he decided that he wanted to focus more on dividend stocks in his portfolio, and to a smaller extent, some growth stocks.


I thus suggested to Darius to split his money into U.S (~40%) and local stocks (~60%), for growth and dividend payouts respectively.



SOME BACKGROUND OF MY BUDDY

  • 24 years old

  • Currently still pursuing a degree

  • Claims to have 'some' investment knowledge

  • Reality has no prior investment knowledge :P (Sorry bud it's true)

  • No bad debts

  • ~$5k available for his disposal, after setting aside sufficient savings and emergency fund



RECOMMENDATION


For his U.S stocks, I recommended the sturdy Vanguard S&P 500 index ETF (Ticket: VOO).


The Vanguard S&P 500 index ETF tracks the S&P 500 index, representing 500 of the largest U.S. companies. As the S&P 500 index captures over 80% of the total U.S. equity market value, it is also widely considered a gauge of the overall U.S. stock returns.


As for his local stocks, I recommended:

  • [Blue-chip stock] DBS Group (Ticket: D05),

  • [Blue-chip stock] Singapore Telecommunications (Ticket: Z74)

  • [Market-cap Index ETF] SPDR Straits Times Index ETF (Ticket: ES3)

  • [Smart Beta Index ETF] Phillip SING Income ETF (Ticket: OVQ)

  • [Singapore REITs ETF] Lion-Phillip S-REITS ETF (Ticket: CLR)


DBS Group and Singtel are two local blue-chip companies that are well-known for their track record to pay steady dividends, and to keep a good balance sheet. They are also the market leader of their respective industries in Singapore, with each holding the largest number of customers in their respective fields.


SPDR Straits Times Index ETF tracks the performance of the 30 largest companies in Singapore by market-capitalisation. As these companies are mostly blue-chips, the SPDR Straits Times Index ETF has for the most of history been paying steady annual dividends of ~3.5% to ~4%. This ETF is also widely considered to be the closest gauge of the overall outlook of the Singapore's economy.


Phillip SING Income ETF, on the other hand, uses the 'Smart Beta approach' to track its own defined top 30 SGX-listed companies. For anyone who is interested, I have briefly talked about it before in one of my portfolio update posts. While less than 2 years old, this ETF has so far been delivering a decent annual dividend payout of ~4% so far, which isn't surprising given that 50% of its holdings are local blue-chip stocks like SGX, DBS, OCBC, UOB and Singtel that have a track record of paying steady and sturdy dividends across the years.


Lastly, the Lion-Phillip S-REITS ETF is an ETF that invests in Singapore REITs listed on SGX. It provides investors with a low-cost access to a total of 28 high-quality Singapore-listed REITS that offers a sustainable income stream. I have also talked about it before here in slightly more details if you are interested. This ETF has been paying annual dividends of ~4% to ~4.5% since 2018.


I recommended these counters as a way to diversify his portfolio into the different local blue-chips and REITs to reduce his overall risk, as well as maximise his dividend payouts while achieving some capital gains in the long run.


Darius agreed to the recommendation and went on to structure his portfolio accordingly to the 40:60 suggestion over the subsequent months with his $5k.



MY BUDDY'S CURRENT PORTFOLIO



Original investment capital: ~$5k

Current portfolio value: ~$5.8k

Unrealised capital gain: ~$0.8k (i.e. ~$800)

For simplicity, I would just use an average dividend yield*** from 2019 to now. While it may not be the most accurate figures now due to the COVID-19 pandemic, it should still give a decent estimate for the few years down the road of recovery.


Dividend yield for S&P 500 index ETF: ~1.78% (~1.25% after 30% withholding tax)


Dividend yield for SPDR STI ETF: ~3.75%

Dividend yield for Phillip SING Income ETF: ~4.00%

Dividend yield for Lion-Phillip S-REITS ETF: ~4.30%

Dividend yield for DBS Group Holdings Ltd: ~5.00%**

Dividend yield for Singapore Telecommunications Ltd: ~5.00%


With these in mind, Darius's portfolio would have generated a rough average annual dividend yield of ~3.90%, or a total annual dividend payout of approximately $226. Not too shabby considering that 40% of the portfolio is made up of growth investment, which does not give much dividend in the first place.


While $226 may not seem like a lot, it is definitely way more than what he would have received from his savings account.


His portfolio has also gained a value of $800 (unrealised) so far, though I would attribute the bulk of the fast gains to the covid-19 recovery.


Back in February, I also advised him to put his remaining funds into his Standard Chartered Jumpstart Account that used to pay out 2% interest per annum (now 1% per annum). As of now, his additional savings and emergency fund set aside have mostly been transferred to his Singlife account that pays 2.5% interest per annum instead.


All in all, Darius has been pretty happy with his current investment portfolio so far, and he is already looking forward to adding more dividend stocks into his portfolio in the future when he starts working and has a salary.


More important than not, he is extremely glad to have taken his first step in his investment journey.



CONCLUSION


The purpose of me sharing Darius' story is to encourage my fellow peers and Singaporeans to start investing.


I also wanted to show that investing is really not as difficult or terrifying as what the general masses put it out to be. All you have to do is to put in some effort to read it up and learn, and don't procrastinate. How many times have you strike this off your New Year Resolutions, or the "next time" that we all know never arrives?


Investment is a life skill that I think everyone should have some basic knowledge of.


And if you are looking at achieving financial independence or aiming to retire early (or very comfortably), then you can't really be counting on your savings alone.


There's no better time than now.


Think about it.



* Name has been changed to ensure confidentiality and privacy.

** The Monetary Authority of Singapore (MAS) has asked all locally-incorporated banks to cap total dividends per share for FY2020 at 60 per cent of what they paid out in 2019, in order to conserve capital and increase capacity to lend to businesses and individuals due to the grim economic outlook caused by the Covid-19 pandemic. As such, DBS' dividend yield for the FY2020 will be lower than originally expected. You can find out more about the MAS announcement here.


***These are rough figures, in case reader is very particular about accuracy.

Disclaimer: All information contained herein this blog is solely the writer's personal opinion, and does not constitute an offer, recommendation or solicitation of an offer of any kind. Readers are also advised to do their own due diligence, and to consult a financial adviser for any financial advice.

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All information contained herein this blog is solely Jeffrey's personal opinion, and does not constitute an offer, recommendation or solicitation of an offer to enter into a transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. It also does not constitute an offer to buy or sell an insurance or financial product or service nor is it intended to provide insurance or financial advice. Readers are fully responsible for their investment decision, including whether the product or service described (if any) herein is suitable for them. Readers are also advised to do their own due diligence, and to consult a financial adviser for any financial advice. Jeffrey will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of the information herein, and makes no representation or warranty of any kind, express, implied or statutory regarding any information contained or referred to herein.