A:  In my opinion, your best investment is your home. In the long-run, Singapore shares will return about 15 per cent per year while a home's appreciation is about 10 per cent. But it's fun to live in your own flat, fix it up and watch its value appreciate.

After buying a home, consider putting your CPF funds into stocks and funds such as Unit Trusts and ILPs (Insurance Linked Products).

I recommend stocks and funds for long-term investments because they will out-perform bonds and fixed deposits by a huge margin.

Here's the hard part: There are hundreds of CPF-approved funds and thousands of stocks to choose from. Which is best?

THE BEST ONE

I have found one that I think is best.

It is the 'StreetTracks STI' Exchange Traded Fund. (Ticker symbol: STTI) It's an Exchange Traded Fund (ETF), which acts like a fund but trades like a stock. You buy it through a stock broker, just like buying shares.

WHY IT'S THE BEST

StreetTracks STI is the only locally developed ETF in Singapore. As an ETF, it has four advantages:

1) An ETF gives you a lot of diversification, which is the only way you can reduce risk without reducing returns.

You need only 15 stocks to get rid of 90 per cent of the risk which can be eliminated and StreetTracks STI exceeds that with 45 counters. Indirectly, it also gives international diversification since many of the Singapore companies in the STI have substantial overseas operations.

2) All ETFs are Index Funds. That means they don't have a lot of expensive managers trying to pick the best stocks. Instead, index funds are 'passively managed'. They simply replicate an index like the STI, or Nasdaq or Dow.

This allows ETFs to keep a small staff and charge very low expenses. StreetTracks STI's ratio of expenses as a per cent of the fund's value - known as the expense ratio - is just 0.3 per cent per year. That compares to 2 to 3 per cent for the other funds, which are 'actively managed'. Over time, this can make a big difference.

Take an example: George is 25 years old. If he takes $10,000 from his CPF account to invest in a fund charging 3 per cent in annual expenses, it will cost him $300 per year ($10,000 x .03).

If he had invested that $300 per year in the stock market, earning 15 per cent per year, at age 55 (in 30 years) it would have grown to $130,000.

StreetTracks STI's ETF charges just 0.3 per cent per year so it costs George only $30 per year ($10,000 x .003). Over 30 years, this would have grown to $13,000. At age 55, the savings to George from investing in an ETF is a whopping $117,000 ($130,000 - $13,000).

This is false. Studies show that average returns are nearly identical for active and passively managed funds.

This is also false. Studies show there is very little consistency in the performance of actively managed funds. The rankings change yearly so that last year's top performer could be this year's worst performer.

3) One more cost saving comes in the initial commission. This is typically 5 per cent for ILPs and 3 to 5 per cent for Unit Trusts. A 5 per cent commission on a $10,000 investment costs you $500 ($10,000 x 0.05).

For ETFs, the initial cost is the broker's commission. If you place your order over the phone, the round trip cost (buy and sell) is 1 per cent. If you trade on-line, the round trip commission is only 0.4 per cent, so an ETF investment of $10,000 costs just $40 ($10,000 x .004). ETF's cost advantage is $500 - $40 = $460.These savings add up. A $460 investment earning 15 per cent per year will grow to an incredible $30,000 in 30 years.

In our example, this brings George's total savings after 30 years from investing his $10,000 in StreetTracks STI to a whopping $147,000 ($117,000 + $30,000).

4) More than 90 per cent of the CPF-approved Unit Trusts and ILPs are foreign funds. An advantage of StreetTracks STI is that it is a Singapore fund. It doesn't have three big problems of foreign funds: i) First, foreign funds incur the risk of currency fluctuation. Even if you purchase the fund in Singapore dollars, the fund converts your Singapore dollars to the foreign currency when it buys foreign shares.

Your investment will gain and lose as the foreign currency rises and falls. ii) Foreign funds also incur currency conversion fees. The cost is charged directly to the net asset value (NAV) of the fund, so you never see it. It is a hidden expense.

StreetTracks does not charge for currency conversion since it is a Singapore fund. iii) There are often foreign taxes on dividends and capital gains. But you will never see them because they are deducted directly from the NAV of the fund, and not included in the expense ratio.

StreetTracks STI is practically tax-free because capital gains and most dividends are not taxed in Singapore.

Next week: Funds and stocks are risky. If only you could buy low, sell high and earn big returns with no risk of loss. Incredibly, there is one way to do it. I will tell you how.