Investment Ideas for Millennials
It’s easy to understand that you need to allocate a certain percentage of your income every month towards your investments. What’s more difficult, is to decide upon a strategy that maximises your gains over an extended period of time.
How should millennials allocate their savings? What is the best way to meet your long-term investment targets?
According to a recent survey by Manulife, a leading investment and insurance services company, 49% of millennials are behind schedule in meeting their financial goals. About 74% say that they will continue working in their post-retirement years as their savings will be insufficient to meet their needs.
However, millennials have one great advantage. They have plenty of time before they reach retirement age. A sound investment strategy, followed consistently for decades, can provide spectacular returns.
The power of compounding
Albert Einstein famously said, “Compound interest is the eighth wonder of the world.”
If you save consistently for many years, the total returns that you earn can grow at an exponential rate. How does this work? Assume that you set aside S$500 every month for 40 years in an investment that gives you a return of 5% per year with interest accruing on a monthly basis. At the end of the 40-year period, you will have S$766,000.
A quick calculation will tell you that you contributed only S$240,000 (S$500 X 12 X 40). The rest is interest, and more importantly, the money that you earned on the accumulated interest that your savings generated.
Total amount after 40 years at various rates of interest
|Interest rate per year||Amount set aside every month||Number of years||Amount at the end of 40 years|
Of course, this is a simplistic calculation. It is practically impossible to predict interest rate over several decades. Additionally, inflation will eat away some part of your earnings.
But the table does serve to illustrate one point very clearly. It is that, given a long time period, it is possible to generate a large sum of money by saving a modest amount every month.
You can do your own calculation for different rates of interest and time periods on the MoneySense website.
Take advantage of dollar-cost averaging
With a long investing runway, you can also take advantage of dollar cost averaging, where you invest a fixed amount of money at fixed regular intervals into a stock or a fund. This helps in reducing the average cost of the investment since the fixed amount of money means more shares or units are purchased when prices are lower, and fewer are purchased when prices are higher. This also reduces the errors in market timing.
Consider investing in funds like the Lionglobal Disruptive Innovation Fund through a regular savings plan. This is a passively managed fund that invests in disruptive companies that have successfully disrupted the incumbents in industries such as the e-commerce, social media and artificial intelligence industries, among others.
RSPs like the LGDIF offering are ideal for individuals who have some risk-taking ability, but do not have the time and inclination to research individual stocks. While it is true that such funds can see a drop in value temporarily, their long-term prospects can be reasonably good. You can start investing in the Lionglobal Disruptive Innovation Fund for amounts as low as $100 per month.
You can use an automated platform
Robo-advisors can provide low-cost investment plans that are devised specifically for your individual requirements. Smartly, a Singapore-based company allows you to start investing with as little as S$50 every month.
The company will devise an investment strategy for you by understanding your financial goals and risk appetite. It does this by asking you to provide some information about your targeted savings amount and the time period in which you want to achieve this. Smartly’s algorithms then recommend a portfolio of Exchange Traded Funds that you can buy into.
The company charges 0.7% to 1% of the amount you invest as its fees.
This option could be useful for those millennials who want professional advice but who will be investing a relatively small amount. The company plans to start operations from June 1.
Investing in Singapore’s property market
Buying real estate is one of the best ways to grow your long-term wealth. An investment property offers several distinct advantages. You can raise finance from a bank for a large portion of the purchase price of the residential or commercial property that you plan to buy. The rent that you earn will help to pay the monthly loan instalments.
When the tenure of the loan is completed, you will be the owner of a property that could be worth a far greater sum than when it was purchased.
In fact, it is possibly a good time to invest in a residential property in Singapore now. Prices have been in decline for over three years. According to data issued by the Urban Redevelopment Authority, the private residential property index fell to 136.5 at the end of the first quarter of 2017 from 137.2, its level at the end of 2016. The index had peaked in 2013 when it achieved a level of 153.2.
Real estate remains a favourite with millennials. The Manulife survey mentioned above found that 68% of millennials have plans to buy property. About 40% say that they will make the purchase as an investment.
Although the Singapore property market could be approaching a turning point, it is very difficult to predict when it will start improving. An individual who buys property should view it as a long-term investment that may take many years to provide a return.
The importance of reviewing your investments
It’s a good idea to periodically examine how your investments are faring. How often should you do this? For most individuals, once a quarter should be enough.
During this review, you should see how your stock investments are doing. You also need to take a close look at the performance of your mutual funds. However, be careful about making knee-jerk reactions. If a particular mutual fund has not performed well in a quarter, it is probably not a reason to sell it.
You can’t expect your investments to give you a consistently high return. But if a certain investment is proving to be a drag on your portfolio, month after month, it’s probably time to sell. Remember that you will have to incur transaction costs on the sale.
Get some advice
A financial adviser can prove to be of great help when you are planning to make an investment. The fees that these advisers charge may seem to be an unnecessary expense, but if you are unfamiliar with the various investment options, it could be money well spent.
Financial advisers are licensed and regulated by the government. You may want to verify your adviser’s credentials before you start the relationship. You may also want to ask whether the adviser is paid a commission based on the investments you buy. This could be a reason for the adviser to recommend certain investments.
Millennials have another source of information that they can tap. Your parents or an older relative could provide you with sound investment advice. Which investments succeeded in their case? Do they wish they had done something differently? There is a lot that you can learn from the previous generation.