Another reason beginner investors are often recommended index funds is that they offer instant diversification.
Let’s say you want to start investing in Singapore stocks. You don’t want to put all your eggs in one basket so you decide to buy a handful of blue-chip stocks.
Since the Singapore Exchange only allows you to trade in standard lot sizes of 100 units, you’ll need about S$7,500 just to own one lot each of the three local banks. (It’s possible to trade in lot sizes smaller than 100 units, but that will have to be done on the odd lot market.)
But investing in broad-market index funds, by its very nature, means you’re never going to beat the market. If your goal is to make big gains and have the stomach for higher risks, then index investing may not be right for you.
What else is there besides the S&P 500?
Until now, we’ve mostly talked about the S&P 500 index, which tracks large companies listed in the US.
There are plenty of other indices that track the stock markets in other countries or groups of countries. In Singapore, we have the Straits Times Index, which tracks the top 30 companies listed on the Singapore Exchange. Hong Kong has the Hang Seng Index, and Japan has the Nikkei index.
There are also indices that track specific sectors, such as energy, real estate or healthcare, or investment instruments besides stocks, such as bonds.
Which ones you pick will depend on your overall investment strategy. As an example, at Thrive’s fireside chat with investment experts last year, one panellist suggested that beginner investors put 60 per cent of their portfolio in an ETF that tracks the US market and the other 40 per cent in one that tracks the markets in the rest of the world (excluding the US).
How do I decide which fund to pick?
For each of these indices, there’s typically a number of different companies offering index funds or ETFs that track these indices.
Among the most popular funds are ones provided by the Big Three asset managers – BlackRock, Vanguard and State Street Global Advisors.
Investors often compare these factors when they deciding between funds.
Cost: The lower, the better. A difference of less than 1 per cent may seem small, but it can have a major impact on your portfolio over a long period of time. (See the graph above.)
Liquidity: A fund that is less liquid has fewer buyers and sellers in the market. That means when you want to cash out, you’ll usually have to wait a longer time to find a buyer or settle for a lower price.
