9 tips for young investors

The office crowd in the Central Business District.
The office crowd in the Central Business District.PHOTO: ST FILE

Starting early means you have a longer time horizon to grow your money

Retirement may be something very distant for young people, but it is never too early to start acquiring knowledge and accumulating capital in order to secure a financially stable future.

Besides, there are immense benefits in investing early, says Mr Brandon Lam, Singapore head of DBS Bank's financial planning group.

With a longer time horizon to set aside money, you will end up with far more than those who start later, and there will also be more investment options available, he explains. Here are nine tips for young investors.

1 POWER OF COMPOUNDING

The power of compounding over the years can help your cash grow significantly. This is because you will earn interest not only on your initial principal but also on the interest accumulated.

Take Mr Ian Lee, who started investing when he was 20 and regularly invests $100 per month. The same amount is invested by Mr Ben Ho, who started investing when he turned 35.

Let's assume that the annual rate of return is 10 per cent after taking inflation into account. The $100 that Mr Lee invests monthly for 45 years (principal sum is $54,000) at 10 per cent expected rate of return will grow to $1,056,986. In the case of Mr Ho, the $100 he invests for 30 years (principal sum is $36,000) at 10 per cent expected rate of return will grow to only $227,933.

"It goes to show that starting to invest early makes it easier for young people to save for the long term," notes Mr Lam.

2 INVEST IN YOURSELF

Financial experts constantly advise that the most important investment you can make is in yourself.

"We believe that the first step for young investors should be to take the time to develop their skills which can help them in their career, which in turn enables them to build their capacity to earn," says Ms Chung Shaw Bee, UOB's head of deposits and wealth management for Singapore and the region.

3 START WITH THE BASICS

Knowledge is key to making good investment decisions and a good way to start is to attend basic courses on economics and how to analyse company financial statements or read books on these subjects, suggests Mr Gregory Choy, head of wealth advisory at OCBC Bank. "Read the money and market segments of newspapers to keep updated on happenings in financial markets. Seek a mentor if possible who has experience investing in markets and get some guidance from him/her."

4 SET UP A BUDGET

Start early by working out your income and expenses. Set aside a minimum of 10 per cent of your income towards an investment plan.

"Set this up as a regular, automatic transfer to keep your goals on track. Review every six months to ensure that your investment goals are still in line, and then adjust your budget accordingly," advises Mr Lam.

5 STRETCH YOUR DOLLAR

While you need to spend on necessities, consider how to stretch the value of your dollar. Check out savings accounts such as Bank of China SmartSaver, DBS Multiplier, OCBC 360 and UOB One Account, where you can park your cash and earn interest of up to 3.55 per cent a year, subject to terms and conditions.

6 SIMULATED TRADING PORTFOLIO

If you are making your first foray into the market, it is prudent to start with a simulated portfolio before you actually start investing in the markets.

"This way, you can learn from mistakes and apply what you've learnt to your actual investments when you are ready to make them," advises Mr Choy.

7 ADOPT A LONG-TERM VIEW

Ms Chung says a UOB survey showed that millennials in Singapore tend to hold back from investing because of high upfront fees, preference for cash savings and perceived high minimum purchase amounts for unit trusts. "While younger investors may not have a large sum of money to invest, no starting amount is too small. Starting early and staying invested for the long term will help you to build your financial assets progressively," she adds.

8 BUY WHAT YOU UNDERSTAND

Have the discipline to research and buy only products that you fully understand. Mr Choy says: "Avoid investing on hearsay and don't buy into products you don't understand. A good way to ensure that you are fully aware of what you are buying is to write a one-page investment proposal to yourself.

"The proposal should be on the investment rationale and address the downside risks as well. This forces you to explain the product to yourself, and if you cannot do so, it probably means you do not understand what you are planning to buy."

9 INVESTING VERSUS TRADING

It is prudent to realise that investing is not trading. Mr Choy says that with an investment, after you have done your research and are convinced that you are investing in a good opportunity, you may need to be patient and take a medium-term view of two to three years.

"In addition, it is advisable to set a returns target for your investments. Once you have reached the target, cash out on the profits. Often, investors fail to stop their investments and take the profits due to greed."

A version of this article appeared in the print edition of The Sunday Times on March 26, 2017, with the headline 'Tips for young investors'. Print Edition | Subscribe