People often ask us what they should do with the small savings that they have. Most have been rolling the money over in bank fixed deposits (FDs) but are increasingly worried that rising inflation will erode the value of their savings. Are there better options to earn higher than the FD rate of returns? So, we did some research. And for the first time, we have ended with a simple, actionable conclusion.
Historically, investing in equities has proven to be one of the best ways to grow your retirement fund over time. US stocks have been among the best-performing in the past decade. Total compounded returns for the S&P 500 index exceeded 12% annually, on average, over this period. A retail investor (with limited capital) could easily invest in one of the multiple exchange-traded funds (ETFs) that track the index for minimal management fees.
The broader Bursa Malaysia and Singapore Exchange S68 , on the other hand, have vastly underperformed. Total annual compounded return (including dividends) for the FBM KLCI (largest 30 stocks by market cap) was only 2.34% on average — worse than FDs, which earned compounded annual returns of some 2.8% over the 10-year period — while the broader FBM Emas Index fared marginally better, with compounded returns of 3.09% per annum. Over the same 10-year period, the Straits Times Index (STI) recorded an annual compounded return of 3.68%, better than Singapore dollar FD returns of 1.1% per annum, but certainly well below returns from US stocks. Of course, past performance is past. We don’t know if the strong US stock gains can be repeated.
Obviously, select individual stocks can and do outperform, as we have demonstrated with our Malaysian Portfolio — compounded annual returns of 12% in less than 10 years (since inception in October 2014). This is the primary reason why we started the portfolio, to help the average person invest better and, more importantly, outperform the broader market without having to pay exorbitant fees.
We started the Malaysian Portfolio with RM200,000 but it’s okay if you must start with less. What matters is starting, adding to it and slowly building up your portfolio. Over a long period of time, it makes a huge difference. Case in point: The current value of this portfolio is RM617,402. Remember, this is a real portfolio, and all the trades are made through one broker account. If we had left the money in FD back then, and reinvested all the interest income, we would only have RM260,380 today.
There are stocks on both exchanges that pay dividend yields that are consistently higher than FD interest rates. And last week, we showed that the largest real estate investment trusts (REITs) on Bursa and SGX delivered total compounded excess returns of 3% and 3.7% per annum respectively over FDs in the last 10 years. This is a real option for you.
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Equities offer higher returns, but they also come with higher risks. Global equities have risen sharply in recent months, led by the US market and, in particular, tech stocks. All three benchmark indices in the US hit fresh all-time record highs last month. And many are chasing this rally, including analysts repeatedly raising their price targets. The soft-landing scenario for the US economy is a very crowded trade at the moment. Valuations are elevated and this raises short-term risks.
We therefore expanded our search into lower risks alternatives. Fortunately, the current environment of higher-for-longer interest rates means that for the first time in a very long time, savers can now earn meaningful yields, on cash deposits and bonds. Chart 1 shows the prevailing yield curves for US, Malaysia and Singapore government and corporate bonds. US bond yields are higher across the entire spectrum — and the short end of the yield curve has the highest returns currently (an inverted yield curve).
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Foreign currency deposits
Interest rates on 12-month US dollar deposits are well above 5%, double that for ringgit deposits and significantly above Singapore dollar savings rates. Unfortunately, the currency conversion spreads offered by Malaysian banks are very wide, and that really eats up the difference on your potential returns, and more (only the banks profit) (see Tables 1 and 2).
In this case, you will only come out ahead if you also make forex gains, that is, if the US dollar and Singapore dollar appreciate against the ringgit. Therefore, the decision whether to place money in foreign currency deposits is very much dependent on your forex outlook. In the past 20 years, the ringgit has depreciated against the US dollar (by more than 19% from RM3.80 per US dollar to the current RM4.70) and even more so against the Singapore dollar (34% from about RM2.20 per Singapore dollar to RM3.50 today). Case in point: Our analysis last week showed that total returns for Malaysian REITs were more than halved in US dollar terms due to the depreciation of the ringgit against the US dollar in the past decade.
On the other hand, if you have overseas bank accounts and can therefore avoid the unfavourable forex conversion rates, then keeping your savings in US dollar and Singapore dollar deposits for the short term are definitely viable options.
Government and corporate bonds
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The yield curves for US dollar and Singapore dollar bonds are currently inverted (they typically move in tandem). We think investors should stay on the shorter end of the curve for now, to take advantage of the higher-for-longer yields.
Unfortunately, there are limited options for Malaysians in the domestic bond market. Retail investors have no direct access to government-issued bonds (such as Malaysian Government Securities, or MGS) and Malaysian corporate bonds. These are sold through primary market auctions and private placements to banks, institutional and high-net-worth investors. Select MGS and corporate issues are available in the secondary market (via the banks), though they usually require minimum investments of RM250,000. Table 3 lists some of the Malaysian government securities that can be bought on a smaller scale from online trading platform, FSMOne — bearing in mind there are upfront and annual fees.
However, retail investors, including foreigners, could buy Singapore Government Securities (SGS) bonds and Treasury bills (T-bills), and Singapore Savings Bonds, that are regularly issued by the government of Singapore in the primary auction market, via the three Singapore banks (DBS, OCBC and UOB). SGS bonds are tradable through the banks and on SGX but are highly illiquid. The yields for different durations would be similar to what you see in Chart 1. You can check out the issuance calendar and other details on this website, mas.gov.sg/bonds-and-bills.
One thing to remember, though. While sovereign bonds — issued by the US, Malaysia and Singapore governments — are very “safe”, there are still risks for investors as bond prices will fluctuate with interest rates. Right now, we think investing in long-dated bonds is risky.
As mentioned above, the yield curves for US and Singapore bonds are currently inverted. Over the coming months, we think the yield curve will gradually flatten and revert back to its more traditional shape, where long-term yields are higher than short-term yields, when the US Federal Reserve cuts short-term interest rates.
In fact, we think it is quite probable that long-term Treasury yields could move even higher from current levels — given the big US budget deficits and funding requirements and lower demand from key buyers like China (due to geopolitics and weaponisation of the US dollar). If so, rising yields would translate to capital losses for bond investors (bond prices and yields move in opposite directions). Case in point: The one-year total returns for the iShares 20+ Year Treasury Bond ETF (TLT) is -5.66% because US yields have risen over the past one year, resulting in capital losses.
This is the reason why we particularly like the Singapore Savings Bonds option. Unlike traditional bonds, there is no risk of capital loss. There are monthly issuances that one could easily subscribe for through any of the three domestic banks (online banking and ATM). Note that one would also need to have a Central Depository Securities (CDP) account. The bonds have a maturity of 10 years but are redeemable at any time (through the banks). The interest rates for each year are fixed at issuance and are higher than prevailing bank FD rates (see Table 4). Interests are payable every six months directly into the bank account linked to your CDP (pro-rated if the bonds are redeemed early). Each individual is allowed to hold up to S$200,000 worth of these bonds at any one time. This, we think, is a sufficiently substantial cap for the average investor.
There is only one bond ETF traded on each of the Malaysia and Singapore bourses — both are very illiquid. But there are many larger and very liquid bond ETFs in the US (see Table 5). Note that investors are subject to a 30% tax on dividends from US bond ETFs. Interest incomes in Malaysia and Singapore are tax-exempt.
Additional contributions to retirement funds
There is one less talked about option for Malaysians — additional voluntary contributions into your Employees Provident Fund (EPF) account (up to RM100,000 per year). The EPF has delivered compounded annual returns of nearly 6%, on average, over the past 10 years. That is way superior to FD returns, of about 2.8% per annum, and most bond options. Of course, future dividend rates may be higher or lower than historical, depending on the EPF’s investment performance. But we think it unlikely that returns will fall below 5% in the foreseeable future.
The catch? You can only withdraw 10% of the contributions (from the newly introduced Account 3) anytime for any purpose. Another 15% will go into Account 2, which can be withdrawn for specific purposes such as the down payment on a home. The balance of the savings can only be withdrawn at age 55. Though this may not be a bad thing, enforcing discipline, given growing worries that many Malaysians could be retiring in poverty.
Singaporeans can also top up their Central Provident Fund, or CPF, contributions but the annual limit for all contributions (including mandatory) is relatively low at S$37,740. Furthermore, contributions cannot be withdrawn until age 55. The prevailing interest rates (reviewed quarterly) of 2.5% (for Ordinary Account) and 4.08% (for Special and MediSave accounts) are also not as compelling (as they were a few years back when interest rates were very low) compared to prevailing returns on FDs and Singapore Savings Bonds.
Conclusion
This article is intended for the average person with modest savings to invest, not highnet-worth individuals. Here is the conclusion from our expanded research into the range of alternatives, beyond our usual scope but obviously not exhaustive. Naturally, your choice will depend on your risk appetite and outlook for the economies, equity markets and forex markets.
Equities have historically offered higher returns but given the prevailing elevated valuations, we think short-term risks are also elevated. So, too, are those for long-dated bonds, as we think interest rates for the longer durations could move higher from current levels. Investing in short-term US dollar and Singapore dollar deposits and bonds are thus better options for now.
Of course, all the above investing options do require a bit more effort than simply leaving your money in the bank, and for some people, perhaps even a little daunting. Don’t be scared off. As we said at the start, that’s why we wrote this article and why we continue writing the Malaysian Portfolio and Total Returns Portfolio, to do the research and help the average person invest better.
The clear winners for us in this exercise are the Singapore Savings Bonds and topping up your EPF account, if you are eligible and won’t suddenly be needing to draw down the entire amount. We think EPF dividends are unlikely to fall below 5% in the near to medium term. Meanwhile, the latest May issuance of Singapore Savings Bonds offered an interest rate of 3.26% per annum for the first six years, gradually rising to 3.54% in year 10. Both options carry no default risk and no risk of capital losses. A 1% difference in the compounded annual rate of return over, say, 2.6% FD rates, may seem marginal and therefore not worth that extra time and effort. But know that even this small difference will result in almost doubling of your total returns over 10 years. We bet most of you would check out prices in three supermarkets to save a few extra dollars.
The Malaysian Portfolio ended marginally lower for the week ended June 5, down by 0.1%. The two gainers were Malayan Banking (+0.8%) and UOA Development (+0.5%), while the losers were CCK Consolidated Holdings (-2.5%), Insas – Warrants C (-1.9%) and IOI Properties Group (-1.2%). Total portfolio returns now stand at 208.4% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 12.1%, by a long, long way.
The Absolute Returns Portfolio, on the other hand, traded 0.2% higher in the past one week. The top gainers were Tencent (+2.7%), Vanguard S&P 500 ETF (+1.6%) and Berkshire Hathaway (+1.4%) while the notable losers were Airbus (-1.8%), SHK Properties (-1.4%), and Microsoft (-1.2%). Last week’s gains boosted total returns to 3.4% in the two and a half months since we started this portfolio. Of note, the Absolute Returns Portfolio has an average beta of 0.62, indicating that it is less risky than the broader market.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
