Starting your investment journey early in life can significantly impact your financial future. For young Singaporeans, understanding basic investment concepts now paves the way for financial freedom later. This article explains investment fundamentals in a way that's accessible for teenagers and young adults in Singapore.
Why Start Investing Young?
Before diving into investment types, let's understand why starting young matters:
The Power of Compound Interest
Compound interest is often called the "eighth wonder of the world" because it allows your money to grow exponentially over time. When you invest, you earn returns on both your initial investment and on the returns you've already earned.
Consider this example:
- Person A starts investing $200 monthly at age 18 and stops at age 28 (investing for 10 years)
- Person B starts investing $200 monthly at age 28 and continues until age 58 (investing for 30 years)
Assuming an average annual return of 7%, by age 58:
- Person A would have invested $24,000 but their account would be worth approximately $524,000
- Person B would have invested $72,000 but their account would be worth approximately $271,000
Despite investing triple the amount, Person B ends up with significantly less money. This powerfully illustrates why starting early matters so much.
Time to Recover from Mistakes
Starting young also means you have more time to learn from investment mistakes without severe consequences. The markets will inevitably have ups and downs, but with decades ahead of you, you have time to recover from downturns.
Understanding Risk and Return
Before choosing investments, it's crucial to understand the relationship between risk and return:
The Risk-Return Relationship
Generally, the higher the potential return of an investment, the higher the risk. Low-risk investments typically offer modest returns, while high-risk investments can offer higher potential returns but also come with the possibility of significant losses.
Your Risk Tolerance
Risk tolerance is your personal ability to handle the ups and downs of investments. It's influenced by:
- Time horizon: How long until you need the money
- Financial goals: What you're investing for
- Personal comfort: How well you sleep when your investments fluctuate
As a young investor, you generally have a longer time horizon, which typically allows for taking on more risk. However, you should never invest in something that makes you uncomfortable or that you don't understand.
Investment Options for Young Singaporeans
Singapore offers various investment options suitable for young investors:
1. Singapore Savings Bonds (SSBs)
These government-issued bonds are one of the safest investment options available:
- Minimum investment: $500
- Risk level: Very low
- Returns: Typically 2.5-3% per annum
- Liquidity: Can be redeemed early with no penalty
SSBs are an excellent way for beginners to start investing with virtually no risk of losing your principal amount. They're backed by the Singapore government and offer higher interest rates than regular savings accounts.
2. Regular Savings Plans (RSPs)
RSPs allow you to invest fixed amounts regularly (usually monthly) in stocks or ETFs:
- Minimum investment: As low as $100 per month
- Risk level: Moderate (depends on what you invest in)
- Returns: Varies based on market performance
- Benefits: Dollar-cost averaging, disciplined saving
Most local banks and brokerages offer RSPs. Popular options include DBS Invest-Saver, OCBC Blue Chip Investment Plan, and Phillip Share Builders Plan.
3. Exchange-Traded Funds (ETFs)
ETFs are baskets of securities that trade on an exchange like individual stocks:
- Minimum investment: Price of one share (can be as low as $1-3 for some ETFs)
- Risk level: Moderate
- Returns: Typically follows market performance
- Benefits: Instant diversification, lower costs
For young Singaporean investors, these ETFs are worth considering:
- Straits Times Index (STI) ETF - Tracks Singapore's top 30 companies
- SPDR S&P 500 ETF - Tracks 500 large US companies
- Vanguard Total World Stock ETF - Provides global market exposure
4. Robo-Advisors
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services:
- Minimum investment: Often as low as $1-$100
- Risk level: Varies based on selected portfolio
- Returns: Varies based on market performance and selected portfolio
- Benefits: Low fees, automated investment management, tailored to risk profile
Popular robo-advisors in Singapore include:
- StashAway
- Syfe
- Endowus
- DBS digiPortfolio
Robo-advisors are particularly suitable for beginners as they handle the investment selection and rebalancing for you.
5. Central Provident Fund (CPF)
While not a traditional investment, understanding CPF is crucial for young Singaporeans:
- Risk level: Very low
- Returns: 2.5% for Ordinary Account, 4% for Special and MediSave Accounts, 6% for first $60,000
If you've started working, your CPF is already growing. You can consider making voluntary contributions to maximize the attractive interest rates, especially for your Special Account (SA) which is designated for retirement.
Getting Started: A Step-by-Step Guide
Ready to begin your investment journey? Here's how:
Step 1: Set Clear Financial Goals
Define what you're saving and investing for:
- Education funds
- Travel experiences
- First home down payment
- Long-term wealth building
Different goals may require different investment approaches.
Step 2: Build an Emergency Fund First
Before investing, establish a financial safety net of 3-6 months of essential expenses in a high-yield savings account. This protects you from having to sell investments in case of emergencies.
Step 3: Educate Yourself
Continue learning about investments through:
- Books like "Rich by Retirement" by Joshua Giersch (Singapore-specific)
- MoneySense workshops (Singapore's national financial education program)
- Financial literacy websites like Seedly and The Fifth Person
- Investment courses offered by SGX Academy
Step 4: Open an Investment Account
If you're under 18, you'll need a parent or guardian to open a custodial account for you. If you're 18 or older, you can open an account with:
- A local bank (DBS, OCBC, UOB)
- A brokerage firm (Phillip Securities, SAXO, etc.)
- A robo-advisor platform
You'll typically need:
- Your NRIC or passport
- Proof of address
- Initial deposit amount
Step 5: Start Small and Consistent
Begin with a modest amount that you can commit to regularly. Consistency is more important than the amount when you're starting. Consider setting up automatic transfers to ensure you invest regularly.
Common Investment Mistakes to Avoid
Even seasoned investors make mistakes. Here are some common ones young investors should avoid:
1. Trying to Time the Market
Even professional investors struggle to consistently predict market movements. Instead of trying to buy at the "perfect" time, focus on consistent investing regardless of market conditions (dollar-cost averaging).
2. Following Investment "Tips"
Be wary of hot investment tips from friends, family, or social media. Do your own research or consult qualified financial advisors.
3. Investing in Things You Don't Understand
Never put money in investments you don't comprehend, no matter how enticing the promised returns are. This rule would have protected many from schemes like crypto scams and questionable ICOs.
4. Letting Emotions Drive Decisions
Fear and greed are powerful emotions that can lead to poor investment decisions. Having a clear investment plan and sticking to it helps overcome emotional reactions to market movements.
5. Neglecting Fees and Taxes
High fees can significantly erode your returns over time. Compare fees across different platforms and be aware of any tax implications of your investments.
Conclusion
As a young Singaporean, you have a remarkable advantage in the investment world: time. Starting early, even with small amounts, can set you on the path to financial security.
Remember that investing is a marathon, not a sprint. Focus on understanding fundamental principles, being consistent, and taking a long-term perspective. With discipline and patience, your early investment efforts will compound into significant wealth over time.
The financial decisions you make today, even as a teenager, can significantly impact your future. By understanding and applying these investment fundamentals, you're taking an important step toward financial independence and building a secure future for yourself.