Having S$20,000 is an incredible milestone to start investing.
However, once the money is sitting in your account, an immediate question follows: Where should I deploy it?
For Singapore investors, the choice often comes down to two main avenues: Exchange-Traded Funds (ETFs) or individual Singapore-listed stocks.
An ETF is a basket of different stocks, which gives investors relatively higher diversification of risk and lower maintenance.
On the other hand, individual stocks give investors more control over their portfolio and can have a potentially higher upside.
Diversification: ETFs have the head start
One of the biggest advantages of an ETF is that a single purchase can give exposure to an entire basket of securities.
Take an ETF tracking the Straits Times Index (SGX: ^STI), like the SPDR Straits Times Index ETF (SGX: ES3).
Instead of buying each company separately, investors gain exposure to 30 large and liquid Singapore-listed companies.
These companies span various sectors such as banking, telecommunications, real estate and industrials.
If one holding underperforms, its impact can be cushioned by the performance of the fund’s other holdings.
Building a portfolio of individual stocks works differently.
For example, an investor could divide S$20,000 among different equities from various industries from banks such as DBS Group Holdings Ltd. (SGX: D05) to consumer stocks like Sheng Siong Group Ltd. (SGX: OV8).
Doing so allows investors to avoid industries they do not understand and allocate more capital to businesses in which they have greater conviction.
However, S$20,000 can only be spread so far.
If the money is spread across 15 to 20 stocks like an ETF, investors may end up with numerous small positions, higher transaction costs and far more companies to monitor.
Therefore, ETFs have a natural advantage for investors looking for diversification from day one.
Dividends are attractive, but don’t forget about total returns
Individual Singapore stocks can be particularly appealing to income-seeking investors.
Singapore’s banks, real estate investment trusts (REITs) and mature blue-chip companies have traditionally attracted investors in search of recurring dividends.
With S$20,000 invested, even modest dividend yields can translate into meaningful annual payouts.
For instance, at a 3% yield, the portfolio could generate S$600 a year.
At 4%, that rises to S$800, while yields of 5% and 6% would translate to approximately S$1,000 and S$1,200 respectively.
However, these figures are illustrative and not guaranteed, so investors should avoid chasing high yields blindly.
This is because dividends ultimately rely on the underlying company’s earnings, cash flows and capital allocation decisions.
Additionally, an unusually high dividend yield can sometimes be the result of a sharply falling share price as investors anticipate weaker earnings or a possible dividend cut.
Hence, healthy cash flows and strong balance sheets are much stronger anchors of sustainable payouts than the headline yield alone.
Look beyond cash distributions
Dividend income is only one component of an investor’s overall return.
Capital appreciation of the stock is almost as important in determining total return.
A stock yielding 5% with little share-price growth may still underperform an ETF yielding 2% if the ETF’s underlying holdings appreciate substantially over the same period, and vice versa.
Understandably, for investors who rely more on portfolio income, receiving regular distributions may be more important than maximising capital appreciation.
Nonetheless, it is key to assess the entire return profile rather than comparing investments based on yield alone.
The hidden trade-off: Cost vs Effort
Every upside comes with its costs, although these costs arise differently for ETFs and individual stocks.
For ETFs, investors typically pay an annual expense ratio and transaction fees when units are bought or sold to the fund manager.
For individual stocks, costs mainly come in the form of brokerage commissions and other applicable trading costs such as platform fees.
Aside from fees eating into returns, there is one hidden cost that distinguishes between the investing strategies: time.
Managing an ETF portfolio is relatively straightforward.
This is because investors can buy and hold their positions without the need for deep ongoing research due to lower company-specific risk.
However, owning individual stocks requires more work.
The higher risks require investors to do deeper research into the business, such as earnings results, balance sheet developments and management decisions.
Moreover, investors would have to monitor continuously and reconsider whether their investment thesis still holds.
Why choose when you can have both?
Investors do not have to choose one approach over the other.
In fact, a core-satellite strategy combines ETFs and individual stocks selection.
In this strategy, the ETF forms the “core” of the portfolio and provides diversified market exposure.
Next, individual stocks are the “satellites”, allowing investors to increase exposure to companies they have conviction in, from seeking additional dividend income to targeting specific sectors.
An example of a S$20,000 core-satellite portfolio would be a core allocation of S$14,000 in a broad-market ETF and a satellite allocation of S$6,000 across a couple of individual Singapore blue-chips or REITs.
Furthermore, this approach reduces the portfolio’s dependence on getting every stock pick right.
If one satellite investment performs poorly, the diversified core can still support the overall portfolio.
With regard to the percentage mix, it ultimately depends on the investor’s objectives and risk appetite.
Get Smart: Pick a strategy you can stick with
For novices or those who prefer a more hands-off approach, ETFs provide a simpler gateway into gaining diversified market exposure.
For investors who enjoy researching businesses and want greater control over their portfolio composition, choosing individual stocks may be more appealing.
Lastly, for those who desire a balance of both, a core-satellite strategy provides a suitable middle ground.
With S$20,000 sitting in your account, the goal should not be to simply gun for the highest theoretical return.
Instead, the best approach should be one that fits your time, interests and risk tolerance.
This is because a solid investment strategy is one that you can remain committed to in the long term.
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Disclosure: Gabriel L. does not own shares of any companies mentioned.
