In this new, occasional series titled Just Ask, we invite readers to send in questions on stock investing, and personal finance. We will ask an expert to provide answers. Below is a question from a reader and a response from Leong Sze Hian, the President of the Society of Financial Service Professionals. We had a follow-up question for Sze Hian, who has a remarkable string of credentials (please see bottom of the article).
Q: I like to know how much should I allocate to ETF if i only have a small sum of money for investment. Should i put the money into many different stocks or is it recommended to put in just 1 stock like ETF?
Leong Sze Hian: Since you have a small sum (what is small to you, may be large to me, Ha Ha), from the perspective of transaction costs, it may not be cost effective to invest in stocks.
One would need about $5,000 per stock, to keep the transaction cost low. To achieve diversification of at least 10 stocks in each country/region, one would need quite a bit of money to invest.
Whilst ETFs provide diversification within a market, like STI, S & P, etc, just a single ETF would not meet the requirements of a globally diversified portfolio of different asset classes.
The same $5,000 per ETF holds true to keep transaction costs low. To build a diversified portfolio, one would need several ETFs in different equity markets, natural resources, real estate, bonds, etc.
NextInsight: Does that mean one should not invest until one has a 'meaningful' amount of savings? If yes, how much?
Leong Sze Hian: Even if one has just $1,000, it is possible to start investing - such as in one global
balanced investment fund.
But to have a globally diversified portfolio, one would need at least $5,000 or $10,000.
If one is using ETFs, the amount may have to be much more, say about $50,000.
Recent article: JUST ASK: How to earn 5% a year, more or less assured?
Leong Sze Hian has been a Wharton Fellow and alumnus of Harvard University, authored 4 books, quoted over 1,000 times in the media, and invited to speak more than 100 times in about 20 countries on 5 continents.
He has served as Honorary Consul of Jamaica, Chairman of the Institute of Administrative Management, the UNESCO Leadership Chair Council and founding Advisor to the Financial Planning Association of Brunei and Indonesia.
He has 3 Masters degrees in Financial Planning & Financial Services, 2 Bachelor degrees in Economics & Insurance, and 13 professional qualifications.