This is a very popular question asked by many. Is there any standard answer to this? Actually, when we are talking about the best investment, we need to define the requirement. If you have been looking around for investments for sometimes, you will find that there is no standard best investment vehicle. Either you get higher return with more risk, or you get stable investment with very low return. Is there any investment that is stable in nature and have decent return? Let's start review in this article here.
This is quite a wide topic, so I will explain several investment vehicles over these few weeks' articles. When talk about investment, there are only 2 main types of investments – paper assets and real assets. Paper assets are stocks, unit trust funds, exchange traded funds, etc. Real assets are gold, antiques, properties, etc.
For paper assets, basically they are related to stocks. Unit trust funds and exchange traded funds are collective stock investments managed by professional fund managers. To understand more about unit trust funds, you can check out my previous article here. Stocks are company shareholding, when you invest in stocks, you are investing in businesses. If the businesses make money, you get a portion of the profits as part of the shareholders. If you select the right stocks, you are able to make quite decent return over a period of time. For example, if you invested in Mc Donald's stock for the past 30 years, the average return a year is 12%.
If you invested in Nike for the past 20 years, you get average return of about 18% a year.
Exchange Traded Funds (ETFs)? Look at the famous S&P 500 ETF, i.e. SPY.
For the past 10 years, it has grown from USD 140 per share to USD 443. This is equivalent to compounding annual return of 12% per year over the last 10 years.
How about unit trust funds?
For example, the above fund, if we have invested RM 10,000 since 2017, the expected value now will be RM 18,389 after 4-5 years. This is equivalent to nearly 13% of annualized return.
Personally, I feel the return of paper assets is great. Comparing to fixed deposit of less than 2% per year, paper assets are definitely better in return. However, is it that good? If you look closer again, the bad thing about the paper assets will be the volatility of price. Paper assets do not always go up in a straight line. There are times which the asset value will drop.
For example, for the S&P 500 index fund, SPY, the highest price of the past 52 week is USD 479.98. If you bought during the high time, you will find that the asset value depreciated to USD 443.31 as of April 2022. It is a 7.6% drop just within 3-4 months' time. Not many people can accept this. So, back to the question. Are paper assets a good investment? The answer is: paper assets can give you decent return over a long period of time but they cannot provide you stability in price. You need to learn how to tolerate with the price fluctuation to select this as one of your investment vehicles.
Next, let's go through the real asset. Let's review the property investment in this article. Is property a good investment? Personally, I feel that property can serve for 2 purposes. One is capital gain and second one is rental income. What is best about property is that, I can see what I'm buying. In addition, I can borrow money to buy this type of assets. Let's zoom in into its return.
As you can see from this chart here, property prices do increase every year. Even if they do not increase, it is unlikely to fall based on this price chart since 2000. Property prices have been quite stable over the past 20 years. But looking at the growth, is the return good? Looking at this price chart again, property prices hardly increase more than 10%, except from the year 2012 to 2014.
Hence, I shall conclude that properties can be a good investment because the price is quite stable and the return is above fixed deposit. But, if you want double digit return, it can be challenging for property investment based on the data.
What about the risk? Despite that property investment seems to be good, the disadvantages of it are the tenancy issues and the legal matters like loan agreement, Sales & Purchase agreement. Property investments are not cheap. One needs to have higher capital to start off with this type of investment because there are many miscellaneous costs involved such as property down payment, legal fees, renovation fees, stamp duty, etc. After the initial costs, every month, there will be ongoing recurring expenses such as maintenance fees, insurance costs, loan instalments, etc. Hence, the financial commitment will be a long term one. Before one decides to go into property investment, one needs to have proper planning. If you don't plan well, it can be a disaster later as you can't stop the financial commitment once started.
In conclusion, if you want a more stable investment, property investment can be a better choice. But if you need higher return investment, paper assets can be chosen. We shall talk more about other investment vehicles in the next few weeks' articles. Stay tune!
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