Some people asked me why I encourage young graduates to save aggressively to saving accounts and fixed deposits. This is contrary to advice given by financial advisers that given the long time horizon, investing into a higher risk portfolio could yield better returns on a long-run.

Firstly, many financial advisers do not do financial planning and so they will just use the textbook answer that a person with long-term horizon tends to do better in investing. These are “textbook financial advisers.”

Secondly, due to vested interest, a financial adviser must get clients to buy an investment product otherwise there is no commission to earn. Investment products can be in a plain vanilla unit trust, ILPs, etc.

Thirdly, I have seen countless young people investing at an early age. What I found is that almost everyone goes through similar life cycle in the first 5-10 years of their career. Many people would get themselves attached, get married, go for honeymoon and purchase a property. These are usually done within 5-10 years after they finish school. These require very large capital outlay.

If a young person would to channel his monthly surpluses to investment, two things will happen:

a) When capital is required to finance the honeymoon, marriage or property purchase, they will look towards liquidating their investments. Therefore, their time horizon is actually very short. By “Murphy’s law”, these investments would be making a loss. It will be making a loss because almost everyone starts their first investment at the peak of the market cycle. Have you heard of anyone who starts his first investment when the economy is having a major recession? Likely the answer is no because there is no job and hence no monthly income to invest anyway.

b) If a person doesn’t want to liquidate these investments, the capital required will have to be financed through borrowing. That’s why many people would borrow the maximum loan allowed for their property. Maximizing your loan means paying a higher interest amount.

How much would a young person be expected to spend on marriage, honeymoon and property purchase for the next few years? Here are some figures to consider:

Marriage dinner: $20,000
Less “ang-paos”: ($10,000)
Add honeymoon: $5,000
Down payment for property: $80,000 (based on 20% of $400,000)
Renovation: $10,000
Pregnancy & delivery: $4,000 (assuming two children and no complication)
Total: $109,000

(Relating to honeymoon, never assume you just need a “simple” honeymoon just to save cost. For guys, you will regret for many decades if you did not provide a “proper” honeymoon.)

However, I do think that young people can start investing at a “token” amount every month to self-educate himself on investments. What better way to learn about investment other than to have some hands-on experience.

Nevertheless, I advise that it will perhaps be more appropriate to start investing for retirement around mid-thirties. The time horizon is still very long. Assuming the life expectancy of a person is 80 years old, the time horizon is 80 -35 = 45 years. To me, that’s good enough.

This blog first appeared on the IM$avvy Blog Corner: http://www.cpf.gov.sg

Comments

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Garrett  - Young Graduates should invest or lose compounding   |202.156.10.253 |2009-11-29 01:44:42 Hi Wilfred, While your article does have some logic to it, I think perhaps you should reconsider a few facts. 1) If one only starts real investment at 35 years old, you lose out a full 10 YEARS of compounding effect as opposed to if you have started at 25 years old. As most people will only have "stable" employment for 30 years (e.g. 25-55yrs), you are effectively cutting out 1/3 of your employment life. I'm sure you can calculate how much damage this will do to one's retirement planning. 2) You assume a time horizon from 35-80. Given the current job employment prospects in Singapore, it is very likely than an individual will be retrenched by 50 and the salary as one ages may be only sufficient to make ends meet. Thus, by starting late you have effectively only 15 years of working power (35-50), which is about a 50% cut compared to one who starts at 25. 3) Most people would want to be able to retire by 60. Why did you take 80 as the cut of point? Starting late also means you cannot afford to be too aggressive in constructing your investment portfolio. 4) Marriage expenses can be cut. It's a waste to squander $20k on marriage. Assuming one marries at 30 yrs old, assuming a 6% annualized return that $20k can turn into $110+k by 60 yrs old. At the worst case, I would advise young people to invest at least half of their money and put the rest in a liquid sinking fund for such large expenses.

Wilfred   |SAdministrator |2009-11-29 03:22:12 Garrett, I used time horizon up to age 80 because one should continue to be invested after retirement. You have just raise a valid point that there are many multiple needs demanding for limited resources. That's why I advocate comprehensive financial planning which addresses this issue.

Lion Investor   |220.255.7.156 |2009-11-30 07:01:42 I think $20k for wedding dinner is not enough. Each table is easily $1200-1500 on weekends. We should probably also need to include the COV.

Lau  - Just to add...   |220.255.7.191 |2009-12-06 09:52:38 There are some more items you missed out and it is already $109k. - Wedding planner package (~$2k) - Housing COV (if resale) unless one can strike TOTO in the BTO/Ballot draws (~$20k) - Allowance to parents (~$3k/year) - Repayment of study loan (~$10k) - Renovation has not included furnishings or appliances (~$10k)

mikeksk  - Realistic   |126.112.54.170 |2009-12-17 23:31:58 I think Wilfred is being realistic. I only managed to start saving after 35. I am only an average guy earning an average salary. I guess I have to work until 70 even if it means being a sweeper at the roadside if I am retrenched at 50.

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