An investment solution is never a one-time creation; you can’t make a plan to invest right now, and expect it to be set in stone forever. Changing market situations, or changing personal goals, mean that your investment plans have be tweaked periodically. And while it’s impossible to predict and plan for everything, you can use four different life stages as a guideline:
Stage 1: Teens to late 20’s
This is the point at which most people join the working world. A handful will get married early; but for most of them, the main concerns will be unpaid education loans, and the first initial contributions to the household budget. At this stage in life, there are three important things to focus on financially.
Even before investing, focus on building an emergency fund.
This could be six month’s of your expenses. The main purpose of the emergency fund is to minimise reliance on loans; you won’t be saddled with high interest debts, should an emergency befall you.
The emergency fund should be kept easily accessible. One good option is to use Singapore Savings Bonds (SSBs), which can be bought for as low as $500. SSBs have a coupon (interest rate) that is stepped up every year - if you manage to avoid cashing in the SSBs for 10 years, the interest would come to around 2.6 per cent per annum.
This is only slightly under the core inflation rate of three per cent per annum, and is much higher than you’d get from most bank deposits.
As for emergencies, SSBs can be liquidated at the end of any month, without losing the accrued interest (with products like fixed deposits, you lose the accrued interest if you withdraw the money before maturity).
Savings should not be considered part of your investment portfolio. They are to provide for emergencies, not your retirement or life goals.
Ensure that you get whole life insurance, while you’re still young and healthy.
If you fail to insure yourself now, you’ll pay much higher premiums when medical complications develop.
It is difficult to invest properly, if you don’t have insurance or emergency savings. There’s no point buying a well-balanced portfolio of stocks and bonds, only to sell it at a loss because you need to pay for surgery. If you don’t get your basic financial needs covered, don’t expect your investment plans to go smoothly.
Focus on long-term growth.
At this stage in your life, you can afford to ride out any losses. You can also take advantage of the fact that, over long periods such as 20 to 30 years, higher-risk assets such as equities can outperform conservative counterparts, such as bonds.
You can consider a portfolio of equities - either by picking them yourself, or by buying unit trust funds. You can also consider investing a small amount, perhaps five to 10 per cent of your portfolio, in higher risk alternatives like CFDs and forex. If you are keen on trading, there are value-for-money brokerages like IG that offer access to thousands of financial markets. Speak to a qualified financial adviser or wealth manager, on how to balance the mix of higher risk assets in your portfolio.
Don’t be too risk averse at this stage. Aggressively build a retirement fund, and target returns that beat inflation by at least two per cent (that means returns of five per cent per annum, at the time of writing).
Stage 2: Late 20’s to mid 40’s
This is the stage at which you make most critical financial decisions. At this point, houses, cars, marriage, and raising children all come into the picture. As you have monthly debt obligations (from the house if nothing else), and probably dependents (don’t forget aging parents), you need to moderate the level of risks you take.
As a rule of thumb, most people at this life stage should consider a traditional asset allocation, with a high emphasis on equities, medium weight on bonds, and low on cash. This helps to carry on building the retirement fund, but takes on less risk as your investment horizon (i.e. the time you will stay invested) begins to shrink.
As your career is often peaking at your 40’s, you will have to rely more on passive investment methods. You may no longer have the time to read prospectuses, trade, or handle elaborate investments like a side-business (unless, of course, these have become your main income streams).
You may want to step back and switch to low cost Exchange Traded Funds (ETFs), such as the Straits Times Index Fund. These are automatically diversified, thus saving you the trouble of having to pick the stocks yourself. Or if you trust fund managers to perform, you can always turn to unit trust funds sold by insurers.
As mentioned above, it can be beneficial to include bonds in your portfolio; these are now more accessible to the public, in the form of vanilla corporate bonds that can be had for as low as $1,000.
As always, consult a financial adviser or wealth manager if uncertain.
Stage 3: Mid 40’s to retirement (65 years old)
At this point, your emphasis is likely to change from growing your wealth, to preserving what you’ve accumulated.
You might want to avoid taking risks at this point: your income is declining, you have limited access to loan facilities, and your medical bills are mounting. You cannot afford to take a big loss at this stage. Bear this in mind, because it will be surprisingly tempting to make big investments.
If you’ve been saving and investing diligently, you’ll be sitting on a sizable pile of cash and assets; especially if you draw down a massive sum from your CPF, at age 55.
Focus on bonds, bond funds, and alternatives such as gold. You may also want to consider perpetual income bonds. If an economic crisis looms just as you near retirement, don’t hesitate to liquidate your assets and just hold cash if you have to.
Your main focus should be making your money last as long as you do. Growth comes second.
Stage 4: Late 70’s to 90’s
If you still have a lot of money left over at this point, you can still consider investing to leave a legacy. At this stage, you’re probably more interested in benefitting someone besides yourself - it could be your grandchildren, your religious organisation, or a charitable cause.
Speak to a wealth manager about setting up a trust fund, to ensure your monies are distributed according to your wishes after you’re gone. If it’s to be an ongoing trust fund (e.g. for underprivileged students), you can also set terms and conditions as to how the money is invested to sustain the fund (e.g. no investment in tobacco companies).
If you’re looking to benefit your children or grandchildren, consider buying endowment plans that will pay for their university fees later in life, or trust funds that will provide for their ambitions.
In all, make sure you do thorough research and understand what your needs and wants from investment are before allocating your funds.
This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views, opinions and recommendations expressed in the article are the independent opinion of Go Bear and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.