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