ZZ Financial Education Series 3 - Assets Classes

Now that you know what are assets and why you want to buy assets, it's time to learn how to use assets to grow your money.

For starters, you need to know what is "risk free interest", the 3 main factors that differentiate assets and what are the common assets.

What is Risk Free?

First, we need to understand the concept of "risk free asset".

There is technically nothing in this world that is risk free. Countries can go bankrupt, currency can become worthless, a nuclear bomb could strike your city, aliens could invade Earth and everything could go to zero.

Hence, by risk free, we mean 99.9999% risk free. In case the unimaginable happen, it would be a doomsday scenario and you would have more to worry about than your assets becoming worthless.

The most common risk free asset in Singapore context would consist of things such as Singapore government issued bonds, CPF, etc. Think about it, if these things ever become worthless, that would mean the entire SG currency would be worthless.

Three Main Factors That Differentiate Assets

They are Returns (how much rewards you get), Risk (how much and what probability you stand to lose) and Liquidity (how easy it is to access/sell your asset without penalty).

It all seems very vague, but you will get an idea once I list some common assets.

Asset	Returns	Risk	Liquidity
Cash	None	Risk-Free	Very-High
Bank Savings	Very-Low	Risk-Free	High
CPF-OA	Low	Risk-Free	Low
CPF-SA	Med	Risk-Free	Very-Low
Singapore Saving Bonds	Very-Low	Risk-Free	High
Blue Chips Bonds	Low	Low	High
Blue Chips Shares	Med	Med	High
Penny Stock Shares	High	High	High
Investment Linked Policies	Low	Low	Low

As you can see, there are always trade-offs between the 3 factors. There is no assets that gives you high returns, risk-free (capital guaranteed) and let you withdraw anytime.

Think about it this way:

Suppose your bank saving account guarantee you super high returns similar to shares. Would anyone in their right mind invest in shares then?

Suppose CPF-SA grants you the ability to withdraw anytime. Would anyone in their right mind put their savings in banks? The logical thing would be to top up everything into CPF.

The "market' always adjusts itself.

Suppose you can choose to loan money to POSB Bank, or to a hardcore gambler. Both offer you 5% interest. Would you loan your money to the gambler? I guess not.

But what if the gambler promises you 20% returns? 50%? 100%? At what point would it be enticing enough for you to make the switch?

As you can see, the market will "correct" itself until the risk-returns (and liquidity) factors are balanced. This is how all free-markets (including stock market) works.

What Are Good Assets Then?

How good an assets is would greatly depend on your risk tolerance, how important is liquidity a factor for you, etc... Generally, a good asset should score highly in 2 of the categories.

For instance:
Blue chips gives you good returns with moderate risks and are highly liquid (sell anytime).
CPF gives you reasonable returns and are risk-free, but are non-liquid (many conditions).

A typical bad asset are investment linked policies.

While risk of it going kaput is low, it gives low returns (many just average 2 to 3% returns, much worse than stocks) and are highly non-liquid (you must keep paying premiums, once you stop you lose a lot, and you can't withdraw the money as you like).