Suppose that you had S$5k which you are prepared to invest. This means that you will not need to use this money in the foreseeable future (at least 7 years from now). I cannot stress this enough. If you might need to use a certain sum soon, for example, to apply for a BTO in 2-3 years’ time, you should not be investing that money in stocks.
Back to the question, how should you invest that S$5k? The answer is index funds. In fact, the answer for most questions to do with long-run investment decisions is index funds. Index funds have proven to be an efficient and reliable vehicle to invest your savings in. If you have not already, take a look at our 4-part series explaining all you need to know about investing in index funds.
But suppose you think you can beat the market. Suppose you are itching for action. Suppose you are willing to put in extra time and effort to do research on businesses. Then read on. We will limit ourselves to stocks listed on the Singapore Exchange (SGX).
(If you have not read our earlier article explaining what value investing is, you really should.)
Getting started
First off, you will need a trading account. The first trading account that I opened was with Standard Chartered Online Trading (Stanchart) back in 2018. I have been reasonably satisfied with it and continue to use this trading platform currently. About a year ago, I also opened an account with Saxo Markets (Saxo), which is also serving me well. As these are the only two trading platforms that I have ever used, I can only discuss these two.
Both Stanchart and Saxo have been operating in Singapore for many years, and they are both regulated by the Monetary Authority of Singapore (MAS), our local financial regulator. As such, we can be reasonably confident in putting our money into their trading platforms. However, Standard Chartered, as one of the oldest banks in Singapore and also a Qualifying Full Bank with numerous physical branches around Singapore, may be slightly safer than Saxo.
One of the most important aspects of a trading platform are the fees. Both Stanchart and Saxo have quite reasonable fees. For smaller investment amounts (such as a S$5k portfolio), it is the minimum transaction fee that really matters. As such, you will be paying twice as much for each transaction if you use Stanchart as opposed to Saxo.
| Transaction fee | Minimum fee per transaction | |
| Standard Chartered Online Trading | 0.20% | SGD 10 |
| Saxo Markets | 0.08% | SGD 5 |
(Note that an additional SGX Market Fee of 0.04% of each transaction is also applicable. This is unavoidable regardless of trading platform.)
Both Stanchart and Saxo’s trading platforms allow you to buy shares listed in other stock exchanges, which is useful if you wish to invest in an S&P 500 index fund, for example. You will have to read up on the applicable fees yourself. Saxo also allows you to trade many other securities such as options and Forex. As a value investor, we do not encourage such trading.
| Fees | Physical branches | Other services | Choose if you…. | |
| Standard Chartered Online Trading | 0.20%; min SGD 10 | Yes | Full suite of banking services | Value face-to-face assistance at branches or want convenience with other banking services |
| Saxo Markets | 0.08%; min SGD 5 | No | Purely investment services | Want to minimise fees |
Standard Chartered has physical branches, so you can get face-to-face help if you need it. Also, it is a Qualifying Full Bank, so it might be more convenient if you also wish to open bank accounts and use their credit/debit cards. In contrast, Saxo Markets is purely an online broker and provides no banking services.
NB both Stanchart and Saxo only offer custodian trading accounts. This means the stocks you purchase are held by Stanchart/Saxo respectively, and they then assign them to you. This is in contrast to CDP-linked brokerage accounts, in which the stocks you purchase are held in a CDP account in your own name, and the brokerage only assists you in the transactions but does not have custody over your stocks. There are some who believe that custodian accounts are risky and only use CDP-linked accounts, but I am personally fine using custodian trading accounts (the fees also tend to be much lower).
You can apply to create a trading account with either Stanchart or Saxo completely online using MyInfo, which is really convenient. Alternatively, you can also visit a Stanchart branch to create an account in person (which is what I did about 3 years ago).
Picking stocks
The next question is what to buy. You should aim for about 4 different stocks. This is a delicate balance between diversification and keeping transaction fees low. If you were to start with S$5,000, then dividing this sum into four pools would leave each investment in a distinct stock with S$1,250. Assuming that you use Saxo, the $5 fee would be 0.4% of your investment sum. That means that you have essentially lost 0.4% the moment you started investing. Dividing S$5,000 into even more pools, each smaller, would make the transaction fee more significant.
On the other hand, diversifying over anything less than 4 different stocks would be quite risky. Suppose you put $2,500 into each of just 2 different companies. If it then emerges that one of them were cooking the books (extremely difficult to discern from financial statements alone), you will stand to lose half of your total investment immediately.
You should also ensure that your 4 businesses are in different industries and are not affected by the same macro factors. If you were to choose 3 out of 4 of your stocks to be DBS, OCBC, and UOB, then you would be exposed to significant concentration risk in the banking sector. Here is a non-exhaustive list of sectors:
- Banking & Investment Services
- Chemicals
- Consumer Goods
- Food & Beverages
- Healthcare services
- Industrial Goods
- Insurance
- Real Estate
- Software & IT Services
- Technology Equipment
- Telecommunications Services
- Transportation
How should you identify specific businesses to invest in? You can use stock screeners such as those provided by Yahoo Finance or Financial Times to get ideas, or read our own analyses of specific businesses under the Business Analysis section of this blog. Stock screeners are like sieves. By setting your chosen criteria, you can see the list of companies that satisfy your criteria.
You do need to do your own research on businesses. First, think about whether a company is worth considering as an investment. Our earlier article Intrinsic value of a business will help you with this, laying out two criteria that companies must pass to be considered as investments. At some point in the research process, you will need to get your hands dirty with financials. A good place to start will be the most recent annual report, which usually includes a 5-year financial summary (usually in the form of a bar or line chart).
Buying stocks
When should you buy a stock? When it is trading at a significant margin of safety below its intrinsic value. If you have not already, you should read our earlier article Intrinsic value of a business, which details a full sample of the valuation process.
You should also aim to spread your purchases over time. While the small investment sum (S$1,250 per stock) may limit you to buying a stock in a single transaction, spread out the four purchases of the 4 different stocks over at least a year.
Start by identifying a single wonderful business that you can invest in at a fair price and do so, then spend the next 3 months identifying the next one, and so on. If you buy all the stocks within the span of a month, your luck may run out and the overall stock market may just crash the following month. The Covid-19 pandemic is a good reminder of the importance of spreading out buying and selling. If, on the other hand, you buy over a year, the chances of a sudden crash wiping out a large chunk of your investment is greatly reduced. Furthermore, forcing yourself to spread out your stock purchases also enforces the discipline to do proper research into the business before putting your money in.
What’s next?
Well, just sit back and relax. You should reinvest the dividends received in order to maximise the compounding effect, but accumulate them before buying more stocks to make the transactions worth the fee. Furthermore, you may accumulate more excess funds as you work and save. You can then redirect these fresh investable funds to existing stocks (if the company is still wonderful and the price still fair) or new stocks (assuming you do your proper research into them).
Now, you can go to sleep knowing that someone somewhere in the world is working to make profits for you. Therein lies the beauty of capitalism.
Note that we have not discussed selling in this article. This is because a true value investor with a buy-and-hold philosophy will not be thinking of an exit strategy when they are thinking about investing. But clearly, some stocks should be sold at some point. This will be covered in a later article, but one way of thinking about it is that when you review a business you have invested in and realise that the factors that made it a wonderful company to you no longer hold, you should consider selling.
To sum up
- Create an online trading account.
- If your investment sum is small (e.g. S$5k), prioritise low fees.
- Slowly purchase stocks in a diversified selection of at least four undervalued businesses.
- Hold until you decide that the business is no longer a worthwhile investment.
SG Squirrel 