IF YOU are like me, a play-it-safe investor who saves more than he borrows, the recent macroeconomic environment is rather unsettling.

I'm referring to the twin whammy of rising prices and falling interest rates.

In such a scenario, the paltry interest that my money earns in a savings or time deposit account with a bank cannot keep up with the erosion of its value over time.

By way of illustration, let's say I put $2 in a bank earning 2 per cent in interest a year ago. Today, it's worth $2.04. But a bowl of fishball noodles that used to cost $2 a year ago is now selling for $2.50.

Fortunately, we don't spend our lives consuming fishball noodles and nothing else (or rice, to paraphrase labour chief Lim Swee Say).

If we did, we'd be in deep trouble because that would imply inflation is running at 25 per cent ($2.50/$2).

In reality, it's a great deal lower. Monthly year-on-year inflation for a broad basket of goods and services that we usually consume is running at 6.5-6.7 per cent. For the full year, the Government is projecting inflation to come in at the upper half of the 4.5-5.5 per cent range.

Still, the figure is significantly higher than what we have been used to for the past 40 years, during which inflation averaged a benign 1.5 per cent.

For savers, interest rates have been falling mainly because the Government's policy of keeping the Singapore dollar strong has resulted in a large amount of money sloshing around in the banking system.

A 12-month deposit with a bank these days draws a meagre interest of 1.2 per cent a year. And savings rates, at about 0.3 per cent, are even more measly.

Under the circumstances, there is no getting away from the fact that leaving your money in an interest-bearing account is a losing proposition if you want to grow it into your retirement nest egg.

To work your money, you need to keep just enough in the bank to meet immediate cash outflow such as household expenses and servicing the loan on your car or home, and invest the rest.

• Working out a strategy

That brings us to the next question: Where to put this money? Economists will tell you that in times of low interest and high inflation, investing in physical assets such as properties and commodities is a good strategy.

I don't have much appetite for either type of investment. As I said, I am a conservative investor. I hate losing money more than I enjoy making it. Commodity investment is too volatile for my liking.

As for property investment, almost everyone in Singapore has an opinion on it, ranging from diehard bulls who think prices are taking a breather before heading higher, to perennial bears who reckon a sharp fall from current levels is on the cards. I won't add any clarity to the debate by joining in. Suffice to say, I consider property a high-risk, high-return investment because it often involves leveraging.

Take, for example, a $1 million house bought with 10 per cent cash and 90 per cent borrowing. If the price subsequently rises by 10 per cent, the home will be worth $1.1 million and you would have doubled your initial capital. But if it were to fall by an equal amount, your capital would have been wiped out. You also have to factor in the additional difficulty of selling a home during a downturn.

There are two viable options for a conservative investor who wants to beat inflation: Buy shares directly, or indirectly through unit trusts, which are pooled investments managed professionally for a fee.

They are not risk-free. But the risks are manageable and the outcome can be rewarding.

Unit trusts are best for investors who do not have the time or the aptitude to track individual stocks.

Before ploughing in your savings, you should speak to an investment adviser, who is required by law to conduct a financial health check on you to determine your risk level and the type of investments appropriate for you.

Personally, I prefer to invest directly in the stock market. My one and only experience in a unit trust was - to use a favourite Simon Cowell phrase - 'an utter and complete disaster'.

I went to the branch opening of a foreign bank a decade ago with the intention of placing a fixed deposit.

Before I could do so, I was waylaid by the branch manager who sold me a three-year, 90 per cent capital protection fund that promised to lock in half the gains each time it made a new high.

Unfortunately, the fund ran into trouble from Day One.

To protect the remaining capital, it liquidated all its equity holdings and placed the proceeds in low-yielding bonds.

At the end of three years, I got nothing back except the 'guaranteed' 90 per cent of my investment, minus a 5 per cent sales charge. It was an unplanned investment that epitomised the 'sell first, you can ask your questions later' culture that was prevalent among banks back then.

They have since cleaned up their act, but having learnt my lesson the hard way, I now swear by a personal dictum: If I have to pay 'professionals' to lose money for me, I might as well do it myself.

This is not an indictment of the fund management industry lest this column comes across as such. I am certain there are numerous unit trusts that have performed impressively over a sustained period of time.

• Defining your criteria

But having travelled down the DIY route, I have found that it is not difficult picking the right stocks as long as one sets a reasonable target.

For me, that would be a 5-8 per cent return annually.

There are those who treat the stock market like a casino. This is wrong and having this mindset can often lead one to make calamitous investment decisions.

The advantage of setting a reasonable expectation on returns is that I don't need to take on big risks to realise it.

This means I can have a bigger margin for error in my stock picks and timing.

How I pick my stocks is based on five questions:

• Does the company have the necessary know-how that is institutionalised throughout the organisation?
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• Does it have a strong competitive advantage?
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• Does it have good cash flow?
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• Is it conservative in its accounting?
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• Is it generous with dividends?

A stock that answers yes to all five questions is considered a blue chip.

Blue chips tend to be less volatile than the broader market and, more importantly, are the least likely to go belly up during a severe economic downturn or from internal fraud.

Unlike fund managers who are able to spread out the risk associated with individual stocks, individual investors have limited resources.

Sometimes, it could mean putting all the eggs in one basket. This is not as risky as it seems if one exercises sound judgment by investing in blue chips.

Except for dividends, the criteria are hard to quantify. But when I name companies that have these attributes, they are instantly recognisable as blue-chip counters.

Some examples are SingTel, Keppel Corporation, DBS Group Holdings, Singapore Airlines, Singapore Press Holdings (SPH), OCBC Bank and City Developments. The list is by no means exhaustive and I'm sure you can think of other household names that also meet these criteria.

They are also sometimes termed pillow stocks because their shareholders can sleep soundly at night and not worry about losing their investments.

However, all things being equal, how does one pick one blue chip over another?

This is where one has to look at dividend yield, which is the amount of dividends paid to shareholders in a year divided by the share price.

It is akin to the interest earned for saving in a bank.

A colleague approached me one day asking if it was the right time to sell her SPH shares after the price had gone up. I said I could not predict where the shares were headed. Instead, I asked what she was going to do with the sales proceeds if she sold and her reply was: 'Put it in savings.'

That being the case, wouldn't it be better doing nothing as her SPH shares were giving her an annual yield of almost 6 per cent?

'Oh, yes!' she replied, happily.

Of course, in the case of a bank deposit, you don't gain or lose the principal sum, while a share's price is highly variable.

Don't focus only on yields

While yield is important, it cannot be the sole benchmark for stock picks. A stock with a lower dividend yield than another may be compensating its holder with a sharper share price appreciation.

After all, the total return of a stock is equal to its dividend payout plus share price appreciation.

As a general rule of thumb, I will consider investing in any stock if it has a sustainable yield of at least 3 per cent.

While I won't go into specific stock recommendations, I will recount a personal example of how a yield play turned into a multi-bagger - giving returns several times higher than the initial investment.

In 1998, I invested $8,500 in Sembcorp Marine shares. The stock was yielding 3.2 per cent at the time. Today, the yield has fallen to 2.2 per cent but that's only half the story.

The company entered a purple patch in 2004 - riding on the oil and gas boom - and its earnings and dividends soared as a result.

When I divested the stock last year - after I lost sleep for the first time on this investment following news that the company had suffered unexpected foreign exchange losses - that $8,500 investment had turned into a $67,000 nest egg. On top of that, I had also received net dividends amounting to about $6,000 over the years.

To be sure, very few yield plays produce such spectacular returns. But as long as one sticks to the fundamentals, one should be able to beat inflation in the long run.

Happy investing!

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What's a fair gain?

A stock with a lower dividend yield than another may be compensating its holder with a sharper share price appreciation...As a general rule of thumb, I will consider investing in any stock if it has a sustainable yield of at least 3 per cent.