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Should I Invest The Money Intended to Purchase My Home In Stocks While Waiting For a Market Correction?

02.23.2012 · Posted in Budgeting & Portfolio, Real Estate

I was reading my emails and I came across one of my emails to a question posted to me by one of my readers. I thought it would be good to share this as many of you would have come across this at some point of time in your life.

Basically the reader has been investing in stocks for some time and is learning from the mistakes made earlier. He now focuses on investing in fundamentals and may have enough savings to buy a house in a year’s time. He thinks that property market will probably soften over the next 1-2 years.

His question is should he park his cash in the bank while waiting for the property market to come down before investing in my first property or should he put some of money in equities first?

Here’s my reply

Well everybody starts learning about investing through trial and error and we all make mistakes. It’s good though that you have a taken an active interest in your investments. If you have read my website extensively, you will see a common theme throughout which is I advocate only investing in dividend paying stocks. High dividend paying stocks tend to be more stable in terms of price and performance.

With regards to your questions, it really depends on what your goals are. Are you getting married soon? What kind of house do you intend to buy for your first house? If you are getting married soon, its not just the house you have to save for, but also the wedding which can cost $10k – $30k depending on what you intend to do. If you want to buy a HDB, then you can safely determine 20+% of the purchase price as your down payment. I.e. if the target is $400k, then minimum you would need $80k. Your CPF OA can be used for your initial house purchase. If you want to buy EC, then it’s probably 20% of $600k-$700k. If condo, its probably 20% of $800k – $1.2mil.

In my opinion, its best not to invest the money which you want to spend on your first home in stocks. The reason being, if you need the money to buy a house, you will be very emotionally attached to the money. You may not be able to withstand downturns psychologically since you know you need the money. As most people say, if you can’t stay invested for 5 years minimum, don’t invest as stocks become risky. I know this as I have experienced it first hand. Set aside the sum of money for the down payment, set aside an emergency fund of 6 months, then feel free to invest the rest.

If you must invest your down payment fund, its best to invest in money market or rolling fixed deposits. Another alternative is to invest in short term government bonds or corporate bonds which mature about the time when you intend to buy your house. That way, you will receive your money in full by the time you need it and will not be affected by fluctuations in interest rates.

While the interest rates may be very low, remember that property prices often fall 3-6 months after stock market fall. So you may end up selling your stocks at a loss to buy your property. For now, if you want to invest in stocks, I recommend investing only in defensive high yield stocks such as retail REITs and telcos. The market is still very uncertain.

 

For further reading, you may be interested in:

Stock Investment Strategy – Contrarian Investing vs Momentum Investing

Stock Investment Strategies

My Asset Allocation as of January 2012

Why Your Portfolio Should Only Consist of Dividend Stocks

How to Pick a Top Dividend Company for Dividend Income Part 1

How to Manage Your Portfolio During Uncertain Times

12 Responses to “Should I Invest The Money Intended to Purchase My Home In Stocks While Waiting For a Market Correction?”

  1. Hi calvin, I thought govt bonds are sold in big denominations? Unless u buy them thru banks who will charge mgt fees which erode the returns. So end of the day is govt bond good idea?

    Any idea if corporate bonds are sold in big denominators as well?

    • Hi Ray,

      No government bonds are sold in minimum $1000 and sold in multiples of $1000. There are 2 ways to buy SGS on the secondary market, 1) Through SGX using a stock broker 2) UOB, OCBC, DBS – they charge only a nominal transaction fee, which is cheaper than what most brokerages charge.
      There are no management fees of sorts as these are direct bond investments, not funds.

      Singapore Government Securities (SGS) are typically for the very risk adverse as SGS is AAA. However, the current interest rates are very low and probably not enough to beat inflation at this point. If you want to, invest in short term SGS so you don’t get locked in on the current low interest.

      Standard Corporate bonds are sold in standard $150k-$250k denominations. However, there are retail corporate bonds and stat board bonds like the recent CapitaMall Asia retail bond, LTA, JTC bonds which are sold in $1000 denominations.

      For more details, see
      CapitaMalls Asia Public Offering of 10 Year Retail Bonds at 3.8% pa

      Buying Singapore Government Securities Bonds (SGS) and Retail Corporate Bonds on SGX Part 1

  2. If the other half has a say, the conversation will be something like the $$ placed should be in some “bao tan / sure win” investment, capital protected scams (schemes) etc.

    If it works, everybody happy but the other half will say – why didn’t we investment more, than can buy bigger apartment. If it doesn’t work, then it will be “all your fault” plus all the relationship yak yak.

    So to this reader, consider the risk and nag factors carefully. Even the high yield REITs dividends can be up and down, depending on entry and exit.

    • Hi Snoopy, well its a risk/reward proposition. But yes, one will have to be realistic about the results. Not all investments are sure win, in fact many of the capital protected schemes like land banking in some country halfway round the world are scams.

      For close to 100% sure win investments like SGS bonds, fixed deposits, money market, real capital guaranteed unit trusts, the returns are very low, probably not even enough to beat inflation. However, in his case of wanting to buy a house, I think its ok as there are chances of housing prices stagnating or correcting downward slightly.

      In my opinion, defensive stocks present a good balance of risk/reward. However, one should not invest all your money and especially not the down payment required to buy the house.

    • One should carefully choose a spouse as the two persons will be in the same boat. Agreement should be made in advance before embarking on joint investment. Else, each person should maintain own investment and chip-in if need to buy things together e.g. matrimonial home. It is always easier to blame the other person when things go wrong. =)

      • Hi Berrie, you are right. The spouse should always be onboard when major investment decisions are made so that through good times and bad times, they will know that the decision was made jointly. That way, the family relationship will be better maintained :)

  3. Investment in properties, stocks or gold etc come with risks and rewards. I’m more on advocating continuous learning despite getting burnt. Lessons learnt from the hard way will keep us alert at all times. Stock trading is no doubt one of the fastest way to grow money with small capital. Bank interest can’t even keep up with the inflation. A rm200k may get u a double story house today but may only get you a flat tomorrow.
    Perhaps investment time frame of 6-12 mths may suit your appetite in doubling your money. Just a humble personal opinion. :)

    • Hi Berrie, yes investments are important to keep ahead of inflation at the very least. However, one must be realistic about expected returns so that you don’t chase after investments which carry too high a risk.

  4. Hi Calvin,
    What is your take on ETF(sectors/ indices)? Will you recommend to buy ETF(either in SGX or HKEX) during financial crashed, as high ROI or secured investment?

    • Hi Derrick,

      ETFs are a good choice for investors with limited funds who seek diversification. You can buy for e.g. STI ETF, S&P ETF etc. to have Singapore and US blue chip stocks. Also, it allows you to invest in certain sectors or market which you may not have the knowhow or access, for e.g. BRICS ETF and Emerging Economies ETF.

      Buying an ETF is quite similar to timing a stock. You should buy it when value presents itself, when it is cheap based on valuations which may certainly be an economic crisis. You can also practice dollar cost averaging on ETFs or shares based averaging to avoid timing the market. Take note though bond ETFs normally outperform stock ETFs during a crisis. So make sure you understand what assets the ETF track before investing.

  5. Calvin,

    I myself have only started my investing journey around a year ago, getting familiar with the jargons and understanding the various investment vehicles out there. I suppose it happens that everyone naturally gets excited by the get-rich prospects etc.
    With regards to this post, I would have to say that I’ve come across similar views as yours quite a number of times (owning a property to call home is the most important and first investment anybody should make). Personally, I can’t argue much since I ahve first hand experience of being on the side of a tenant.

    My question is, for someone who is still an undergraduate, what advice could you give considering that whatever savings that a student has could be considered insignificant (<$10K) and far from being able to purchase properties. It is said that one should tap on the power of compounding and maximize it as time while time is on our side. How do we go about with the dilemma between saving for a safety net first (and only invest in stocks with any excess), saving to invest in property, and starting to invest as early as possible?

    • Hi Will,

      Yes, if you do not have sufficient savings, the best way is to invest in a combination of high dividend yield stocks and income growth stocks and compound the returns. Once you reach enough capital, which is about 20% of the property price, then you may want to put cash aside while looking for a good opportunity to invest in properties. That being said, you should always get your first home, which would probably be a HDB when you do get married. For HDB, you only need 10% of the purchase price which may be fully financed by your CPF.

      However, it depends on your personal life, when you get married and so on. So not everybody will go through the same journey.

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