For investing newbs: a simple way to consider financial instruments

BIG DISCLAIMER: This article is sponsored by Tiger Brokers (Singapore) Pte Ltd.

Investments can be confusing, with many financial products to look out for in today’s complex and highly crowded market.

Here’s a concept that can serve as a sense-check when evaluating the different options available in the market.

We call this the magic triangle of investing.

At each end of the triangle, lies qualities that all investors will find favourable.

They are:

  • Earn a high return. Self-explanatory.
  • Be very liquid. This investment can be quickly converted into cash without affecting its value.
  • Low risk. You’re not likely to lose money on this investment.

For better or for worse, you’ll be unlikely to get all of these qualities in one investment. You’ll at most be able to pick two out of three. Why? Let’s take a look.

High returns mean high risk

“Nothing ventured, nothing gained.”

“Fortune favours the bold.”

“If you’re not willing to risk the unusual, you gotta settle for the ordinary.”

All these sayings point to one single reality: Higher returns always come with higher risk.

This is why bonds rated ‘D’ that are less likely to pay back their debts offer larger yields, and why super safe bonds – such as those rated AAA – tend to offer lower returns.

It is also why conventional financial products typically don’t ‘guarantee’ double-digit returns.

It is far more likely a product guarantees returns of between 1%-4% p.a. With rising rates, this might go even higher. Yet it is unlikely that few, if any, companies will guarantee a number as high as say, 20% p.a.

(Of course, in the Defi and crypto space, things are different, but we also know how that turned out.)

High liquidity often means lower returns

Generally, the more quickly you can convert something to cash, the lower the returns, and vice versa. In the investment world, this is known as the liquidity premium. 

This ‘premium’ is an incentive given to people who sacrifice liquidity, hence the name.

Let us explain how it works: Not having liquidity is an undesirable thing. You have money but you can’t access it. No one likes that.

So, between locking up money for 5 years and 10 years for the same % return, you’d probably opt for the former.

Therefore, to make that 10-year investment more attractive, you’d want to be paid a higher return. An incentive. A reward. And that’s why higher liquidity often means lower returns.

Further reading: The Liquidity Premium 

Now, let’s see how this concept holds up in real life.

Instruments that are liquid, typically have low risk and low returns

Cash management accounts/Money market funds:

What they are: Cash accounts where you can put your money in the short-term. Usually offered by robo-advisors, new fintech solutions and brokerages. They’re marketed as safer investment options and are highly liquid. You are able to withdraw your money in a matter of days or even hours.

The trade-off? Returns.

At the time of publication, returns range from around 1.5% to 2.8% for solutions with similar low-risk levels

High-yield savings accounts

What they are: Bank accounts with accelerated savings rates that reward you for transacting more with them. This includes salary crediting, card usage, and even investments and insurance.

High-yield savings accounts are also marketed as safe and are also highly liquid.

Their returns aren’t also super high but can be higher than a cash management account – provided you transact enough with the bank.

  • At the time of publication, a realistic return rate ranges from 1% to 3%. can even go up to 4+%, if you transact more with the bank.

Instruments that are not liquid, have low risk and higher returns

CPF Special Account (SA)

What this is: A mandatory savings account set up by the Singapore government designed to provide you payouts when you retire.

For the longest time, CPF SA’s 4% was considered a super high interest rate for an instrument that is one of the safest available to Singaporeans.

This was particularly true in a low-interest rate world (2008- 2021, RIP).

The trade-off? Liquidity. You can only withdraw your CPF monies at age 55.

  • Still 4% p.a at the time of publication.

Longer term endowments

What it is: A type of savings plan offered by insurers that have lock-in periods of 10 years or longer. Also offers insurance coverage.

These plans are considered safer and less volatile than assets such as equities, yet they also offer higher returns compared to money market funds and cash management accounts.

Generally, the longer the lock-in period, the higher the return.

  • Generally, long-term endowments return anywhere from 2-5% p.a., though a portion of the returns is not always guaranteed. (As interest rates rise, they might increase as well. They will generally always offer you higher than shorter-term options.)

Instruments that are somewhat liquid, have high risk and potentially high returns

Stocks, Unit Trusts and ETFs

Stocks are tiny pieces of public companies that you can buy online. These include popular names like Apple, Tesla, Google, and Microsoft.

Unit trusts are any type of fund that comprises of a portfolio of various investment instruments like stocks and bonds and is managed by a professional. This could be an individual or an organisation like an asset management company.

ETFs are similar to Unit Trusts, but they are traded on the market. Hence the name, Exchange Traded Fund.

Commonly known ETFs are STI-ETF and SPY, CSPX, IVV, ARKK-ETF, QQQ.

These financial instruments all have the potential to earn higher returns than everything listed here.

Case in point: The five-year return of the QQQ ETF is 77% at the time of writing, or a whopping 43.5% p.a at the time of writing.

But of course, high returns are matched by high risks. QQQ is now down 30% from its peak. There are no guaranteed results here. As they say, past performance is not indicative of future results.

  • Huge range of performance
  • A wide range of ETFs can be found on Tiger Brokers.

PS: We say these are ‘somewhat’ liquid, because even though you can sell off these instruments relatively quickly, you might make a loss due to the volatility of these assets.

Let’s go back to the definition of liquidity, especially the words in bold. This investment can be quickly converted into cash without affecting its value.

Finally, some important caveats to know 

While the triangle is a good way to understand the various investment options you have available to you, there are some things that need to be taken into account.

This triangle serves as a guide, but it is not the rule.

One example: Typically, longer-duration bonds have higher yields than shorter-duration bonds because of the liquidity premium mentioned earlier.

However, in times when investors fear recession, this relationship might be reversed. This is known as the inverse yield curve. Exceptions do happen!

There are other mechanisms in play.

Risk, return and liquidity generally apply to all investments. But there are other factors involved too that will affect how the instrument behaves.

For example: To increase returns on a high-yield savings account, you often have to transact more with the bank. ‘Transactions’ are not related to risk, return or liquidity, but are instead an incentive created by the bank, as part of their business model.

Similarly, Singapore Savings Bonds are relatively liquid, have low risk, but offer higher returns as compared to other bonds.

However, you are limited in how much of them you can buy ($200,000), and you must bid for them!

Why is understanding the magic triangle of investing important?

There are two main ways we think this can help anyone who wants to invest.

The first is to temper optimism. Last year, Singaporeans lost more than $663 million in scams, much of it to investment scams. Scammers often promise guaranteed high returns within a short span of time.

Understanding the triangle will hopefully help you view such scams with extra caution.

The second point is to appreciate how different investments all have a role to play in your portfolio, and it does not pay to be fixated on ‘max returns’ as the only goal.

While not as fashionable, liquidity and the safety of your investments are equally, if not sometimes more important.

After all, if there’s one thing more awesome than double or even triple-digit returns, it’s actually being able to use your money to lead the life you want.

Stay woke, salaryman.

If you’re looking for a safe financial instrument with high liquidity and decent returns, consider Tiger Vault


If you’re looking for a cash management account where you can park your money at while waiting for the market to present itself with opportunities, consider Tiger Vault.

With its underlying products being specially curated Money Market Funds, you’ll be able to get a decent return of up to 3.2%* on your money without sacrificing too much on liquidity.

You’ll be able to withdraw your money whenever you need to, or invest your cash on the Tiger Brokers app easily without the fuss of making money transfers.

In addition, Tiger Vault is the first multi-currency cash solution in Singapore, allowing users the flexibility to invest in funds in SGD, USD and HKD (coming soon), without incurring foreign exchange conversion fees.

For instance, investors can directly use USD to buy stocks on the New York Stock Exchange (NYSE) without having to incur additional conversion fees, and without the extra step of liquidating the money market fund, waiting for settlement, and then reinvesting that money.

Plus, there are no platform-related fees charged.

Find out more at Tiger Vault here.

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