Thursday 16 April 2015

Motivations to invest

It is actually not too difficult to find a motivation to invest. Look all around us right now, banks are offering miserly interest rates for deposits into their saving accounts, the usual POSB account offering only a miserable 0.05% for money put in their accounts. Sure enough, I did blog about how OCBC360 is a much better alternative offering as much as 3.05%, but that will be bound to change come May 1, with interest rates about to be reduced to a maximum of 2.05% if all 3 conditions were to be fulfilled. We cannot avoid the inevitable fact that we are actually at the mercy of these changes. 

But yet, I am not complaining. At 2.05%, it is a far cry from the miserable rates offered by the other banks, plus given that money are insured as much as $50k by SDIC while we have a peace of mind earning an absolutely risk-free interest rate. Why not right?

Then why invest then?

Looking at the maximum interest rate OCBC will give us from May 1, assuming we even fulfill all 3 conditions, it is hardly enough to cover the inflation rate of 3+% these past few years. Sure enough, inflation rates have fallen, but that is mainly due to falling oil prices and residential prices, which are not really things which we would buy on a daily basis.

Based on the STI at 3400 points, the Singapore market is valued at 14 times earnings. In other words, if we owned every single component companies of the STI, we would be paying $14 for every dollar of profit earned by those companies.

Now we put that in another way. If all this profits are paid out like interest rates from a bank, that works out to be a yield of 7.1%! But hold your horses, its not really time to plough all your hard earned savings yet. The thing to note is that these companies do not pay all their profits out to their shareholders, most of the cash earned are kept for free cash flow, or to pay back their loans or kept for future investment opportunities. Some do give part of their profits as dividends and so the dividend yield is a widely measure valuation metric.

The STI dividend yield is about 3% now. But its worthy to note that about a third yield about 4%, and if your are willing to concentrate on just one fifth of them, we can get a yield of more than 5%.

Now compare this to the miserly bank interest rates, and even against the OCBC360 interest rates, 5% is enough to cover inflation as well as grow your wealth as time goes by.

Of course there are other factors to consider, such as risk management, in which I would gladly exercise the many tools we have right now to achieve my financial objectives.

Don't just think, act now in securing your financial freedom!

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