Financial Literacy #4: Making Your Money Work for You (Risk vs. Return)

In our series so far, we’ve built a solid financial foundation, from creating a savings surplus to setting aside an emergency fund. That money, sitting safely in a high-yield savings account, is our safety net: reliable, accessible, and crucial for peace of mind.

But while it’s safe, it’s also idle. To grow real, long-term wealth, we need to move beyond saving and start investing.

Stable and Predictable Bonds

When you buy a bond, you’re lending money to a government or company in exchange for regular interest payments and the return of your principal at maturity. Bonds are typically less volatile than stocks and can provide a steady income stream.

The Singapore Savings Bond is a great choice under this category, which let you park savings and earn a higher interest over a period of 10 years. Although interest rates have lowered significantly from a couple years ago, these bonds can always be redeemed early and "rolled" into higher rates when given the opportunity. Do note: redemptions are processed at the end of each month, and total SSB holdings are capped at S$200,000 per person.

Financial products like money market funds (MMF), bond ETFs exist which deliver higher returns and provide better liquidity than the SSB. Many brokers now provide MMFs as a way to park liquid cash and earn a return. For example, moomoo Cash Plus is a way that users can park cash in a MMF while waiting for opportunities in the stock market.

Keep in mind that higher returns always come with higher risks. Corporate bonds with attractive yields may carry default risk. If the issuer fails to repay, you could lose your entire principal. That’s why bonds, while stable, have a capped upside and potential downside.

Ownership and Growth in Equities

When you buy a stock, you become a part-owner of a business. This business has the potential to generate huge returns through business growth and dividend payouts. Equities have no limit on their upside, but this comes with greater volatility. 

I have written about "How Do Stocks Make Us Money? The 3 Engines of Total Returns" and this discusses in greater detail how our ownership of stocks can translate into wealth compounded over time. 

The Golden Rule: Can You Afford The Risk?

Every investment involves risk — and the key is knowing what level of risk you can handle. Before investing, ask yourself:

• Can I commit this money for at least 10 years?
• Do I have emergency funds ready to tide through bad times?
• Will I lose sleep over market volatility, if my portfolio drops 20% in a day?

If the answer to the last question is “yes,” you might be overexposed. Your portfolio should serve your life and not control it. Invest only what you can afford to set aside.

Disclaimer: This blog post is for entertainment purposes only and does not constitute financial advice. Please do your own due diligence.