Today’s installment of [Ask FH] brings us a great question asked by a 25-year-old reader of Financial Horse. I know I’m super behind on the Ask FH series, so massive apologies on that front. Today’s question was a real gem though, so I wanted to answer it here in the hope that it might be helpful for some of you guys out there.
As always, if you have any questions on investing, you can drop us an email at [email protected] with the subject title [Ask FH].
Want to shortcut your learning and build an investment portfolio? The FH Complete Guide to Investing for Singapore Investors covers asset allocation, REITs, shares, fixed income and retirement planning. Subscribing gets you lifetime access and the course is continuously updated to remain relevant to market conditions.
Note: I’ve tweaked/omitted some of the information to protect privacy, and to avoid providing personalised advice. Accordingly, any resemblance with a person you know is purely coincidental. Please note that this article should not be construed as formal investment advice. If you are uncertain as to the steps you should take, please consult your stockbroker or a financial advisor. ?
My background and goals
- 25 year old male, single, just started work
- Barely started investing (regret being so late…) and set aside $1.5k which I put into the following through Standard Chartered: VWO, VTI, FB and 2833 (Hang Seng Index), based loosely off your advice. In a short period of time it’s profitable.
- At the risk of sounding like an ass, my goal is to be a multi-millionaire and have passive income streams in my lifetime. The idea is to provide my current and future family with comfortable lifestyles, have the capacity to invest in social good and to set up sustainable businesses that positively impact the landscape around me.
- I plan to set aside anywhere from $200 to $1000+ monthly for investments in the coming years, depending on my earning power. Based on my current plans, my income could change rapidly.
My 2 questions (realise each question might have a few parts…)
- I currently don’t have a lot of savings nor do I have an emergency fund. Is it even necessary? Should I try to hardcore save up for the em fund first or can it be done concurrently while I invest?
- I personally am a big fan of your all weather portfolio and Ray Dalio and am seriously considering adapting and implementing that for myself. However was thinking – is that the best given my goals and background? Should I take a more aggressive approach? If so, how would that look like?
This is a great question that many young adults grapple with. In essence, how do I chart my path to maximize monetary success? It’s a tricky question with no right answer nor guarantees. Nevertheless, I’ve tried my best to set out key points that you can think about.
Don’t forget, this is your life and your life alone. No one should teach you how to live it. The best we can do is to give you some guidance based on our experience and wisdom. The path you pick, is up to you.
I’m young & ambitious, now what?
Now there are small goals, and there are big goals. Some people write in to Financial Horse with the goal of financial independence and retiring early, or just to have peace of mind in their old age. For those guys, the traditional route of working hard at their day job, investing in an all weather portfolio (or a variant of that), is usually the best answer.
And then we have questions like yours. You’re 25, just started work, and want to be a multi-millionaire. Now I don’t know much about you beyond that, neither do I know whether your multi-millionare refers to $10 million or $100 million. I don’t even think it matters that much.
What I do know, is that you’re an ambitious guy, who is unlikely to be satisfied by the more “traditional” routes to success.
So here is what I would do, if I have similar goals:
Part 1 – Find a job I am passionate about, that overlaps with my skillsets, and pays well
Why? Because if I find a job that fulfils all 3 criteria, I’d be able to excel in this career, last it in long term, and make big money from the job, all without having to feel like I’m working.
Once you find such a job/industry that you like, focus relentlessly on improving yourself.
When you are young, focus on picking up skills and experience. Find jobs that can teach you quickly, and pick up skills that will come in handy down the road. If you have high-value skills, someone will pay you the big bucks.
Part 2 – Ask myself, can I leverage on my skillset / passion to turn it into a business?
If you want to make big money fast, there’s no quicker way than to start your own business.
But like I like to say on this site, if something is too good to be true, it probably is. Starting a business has huge upside potential because it comes with huge risk.
If you start a business, and you get it right, that’s probably the fastest way to be a multi-millionaire. We did a podcast with Alvin Poh a while back. This guy started a web hosting company in SMU, and sold it for $30 million 10 years later. That’s the kind of upside with starting a business.
My advice to you if you want to start a business is this: Start small, focus ruthlessly on keeping costs low, and try to target a niche market until you absolutely dominate it.
Part 3 – What if I am not able to start a business
If the business path is not appropriate, then focus on Part I (excel in your career), and then with the accrued wealth, focus on achieving superior returns with your investments.
You can either do this with passive indexing, or you can try your hand at active investing. Which one you pick, depends a lot on your emotional makeup as an investor, your risk appetite and your skillset.
Part 4 – Actually do it
There’s a story that I want to share. A pottery teacher taught two group of students. The teacher told Group A to go home and plan out the best pot they could possibly imagine, make it, and bring it to the next class. The teacher told Group B to make as many pots as possible and bring the best one to the next class.
Can you guess which group had the best pots?
Group A’s students were paralyzed from excessive planning and in the end, produced dismal results. Group B by taking real action, even though they made mistakes, produced the best results in the end.
Part 5 – What kind of investor am I and how much risk can I swallow?
Like I said above, what kind of approach depends a lot on your emotional makeup as an investor, your risk appetite and your skillset.
(i) Emotional makeup
With today’s never-ending influx of information and market ups-and-downs, will you be tempted to micro-manage your portfolio constantly? Seeing bad news, will you panic-sell in the middle of the night?
In addition, it takes time to build up the emotional muscle to invest big amounts. At this stage, you are playing with small numbers. It’s harder to keep your direction straight and stick to your fundamentals when you’re dealing with a 6, 7 figure portfolio. There’s no easy way to do this, you just have to start small, and keep going.
(ii) Risk appetite
Never guess your risk appetite, quantify it. Consider the following:
(a) Do you have dependents? (parents, children etc)
(b) Do you plan to purchase a home in the near future?
(c) How stable is your current job/income?
(d) How low can your expenses go? (If you lost everything, what is the minimum you need to support yourself)
Investing takes effort and patience. Speculating on shares with your friends during happy hour is fun, but it won’t get you anywhere.
Take real action. Improve your knowledge by reading investment books (my top recommendations here), take the time and effort to understand accounting and financial valuations. If you’re too busy to learn it all yourself, get the FH Course. These are tangible steps that will actually get you somewhere.
Part 6: Asset Allocation
The All Weather Portfolio (detailed post on this here) is designed to perform well in all economic situations. But of course, something that does well in all economic situations, doesn’t do terribly well in any. So you need to decide, do you want something that does well all the time and achieve average returns; or do you want to try your hand at something that outperforms, but with the risk of it completely tanking if you get your asset allocation wrong?
Never neglect your asset allocation because in the longer term, your asset allocation is the biggest determinant of returns (as opposed to which stocks / REITs you pick). This is something strongly emphasized in the FH Course. How you allocate your investments will be the biggest factor in whether you accumulate wealth in the long-term. Beyond equity holdings, you should also be very mindful of your allocation to property because in Singapore, property is often a large component of your net worth. In addition, do pay attention to maximizing your CPF and be smart with tax planning. See my CPF Guide here.
Emergency fund. I’m just going to state it point blank here. Yes, you should definitely have an emergency fund before you start investing. Whether you want this to be 1-2 months expenses or 6 months, once again depends on your risk appetite. As a cautious investor myself, I always recommend an emergency fund. You never know if you need some cash urgently, and the last thing you want to do is to be forced to liquidate your holdings. Of course, you don’t want your emergency fund to just be sitting there. Do keep it in a high-yield savings account like the OCBC 360 or DBS Multiplier.
Finally, the truth is that your 20s and 30s are predominantly in the wealth-accumulating stage. Investing plays a big part 10, 20 years after you start investing, and your returns really start to show then. But in the meantime, accumulating wealth is very important (See Part 1 & 2 above). Not only is income important, expenses are also important. Even if you have a 6-figure income, it doesn’t matter if you are just gambling it all frivolously away.
Getting realistic, working hard and investing smart is the best bet to accumulating wealth.
On this note, I’d like to wishing all FH readers a fantastic year ahead, and wishing all of you good health and happiness in 2020!