With inflation nibbling away at our pockets, gone are the days when savings alone were enough. Whether it's investment “gurus” boasting about their “Get Rich Quick” schemes in YouTube ads, or the proliferation of financial adviser friends preaching the value of investing on their Instagram stories, the importance of investing has been drilled incessantly into our minds.
So much so that half of the Gen Zs polled in the Franklin Templeton Next-Gen Investor Survey in 2021 believe they should start doing so early.
Yet, overcoming inertia at this age feels like an impossible feat, especially with competing demands vying for attention – internships, school work, and personal hobbies. To add, the torpedo of financial jargon and cryptic acronyms that were never taught in school may be daunting for beginners — think dollar-cost averaging (DCA), compounding, or trailer fees.
But here’s the good news: while investing can be complicated, it doesn't have to be.
To begin, let’s familiarise ourselves with the common investment vehicles available in the market:
With that established, let’s move on to the bulk of this article — debunking four common investing myths — so that you, as a Gen Z, can embark on your journey with confidence.
Myth 1: There's no point starting now
With little capital, you might think it's pointless to start investing. After all, how much can a small amount really accrue to… right? However, while this is a common mindset, it is important to remember that wealth building is a steady process that occurs over a long-term horizon.
Even with a small amount of money, you still have the best asset that any investor can have: time. With a long runway ahead of you, the small sums you invest will eventually accrue to significant outcomes in the long run due to compound interest.
Let’s put this in perspective:
- Scenario A: At age 20, you invest $100 into an index fund every month for the next 30 years. Receiving an average return of 8% per annum (p.a.), and thanks to the power of compound interest, you will accumulate about $141,000 by the time you turn 50.
- Scenario B: Assume the same amount is invested monthly into an index fund, but this time, you delay the process and start investing only at 30 years old. You will have just around $57,000 when you turn 50.
This 10-year delay would have greatly reduced your returns.
Therefore, even if you start with small amounts, your returns can be significant. Just like a snowball rolling down a mountain, a longer pathway means a higher chance of accumulating more snow over time. The sooner you start investing, the more compound interest will earn you across your lifespan.
Furthermore, your returns are not limited to monetary gains. There are also intangible benefits in investing early. When you put in small sums, whether you get positive or negative returns, you still get the chance to dip your toes in investing and learn to manage your emotions and make more comprehensive evaluations of future investment opportunities.
What then can I invest in, as a beginner with little money?
Singaporean youths have said that a limited budget is the biggest challenge they face when thinking about investments.
However, this idea that you have to be rich to start investing couldn't be further from the truth. Even with a modest amount of money in your pocket, there are ways to begin investing effectively.
A good starting point for budding investors with limited capital would likely be index funds. While such funds may not sound exciting at first mention, historical data has shown that buying such funds is actually one of the most successful investment approaches. The father of passive investing, Jack Bogle, would agree. Even investment titan Warren Buffett has personally endorsed index funds for wealth building.
"By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals."
– Warren Buffett
Index funds are particularly attractive if you do not have large amounts of money as they are a low-cost route to diversification.
Look for index funds that consist of a wide range of securities, so that your overall risk is automatically lowered through broad diversification.
Importantly, by picking funds that broadly track the market in a passive way, you are picking funds that do not have fund managers actively stock picking and timing the market. This in turn generally translates to lower fees and lower expense ratios, which means higher returns for you.
In fact, Endowus launched in 2022 the lowest-cost passive index fund series in Singapore. These unit trusts are cheaper than SGX-listed exchange-traded funds (ETFs) as well as many ETFs from other jurisdictions. In 2022, Endowus also lowered the minimum age to open an account with us to 18 years old.
Myth 2: I should invest all my savings
Here’s a reality check: all investments carry risk. While it may be tempting to pour all your savings into the financial markets to accelerate the process of wealth building, there is the inherent risk of losing everything.
So then how much of your savings should you really invest?
The specific answer to this question depends on many factors: your income level, the current amount of savings, and whether you have built an emergency fund. Experts generally recommend investing about 10% to 20% of your income.
As a Gen Z, this percentage might not be applicable if you have not entered the workforce. If that's the case, remember this: investments should only start after you have set up an emergency fund. Having a reservoir of savings — generally equal to about three to six months of your expenses — serves as a safety net to fall back on in the event of job loss, financial distress, or any unforeseen expenses.
Building a secure foundation with your emergency fund is thus the top priority. Only then can you consider investing the remaining monetary inflows. This can be in the form of your monthly pay from internships and part-time jobs, or even a fraction of your pocket money.
Myth 3: I should invest solely by picking stocks
A recent Franklin Templeton survey showed that equities are the most popular asset class among Singaporean Gen Zs, with over a third of respondents owning stocks in their portfolio. It may be tempting to follow the crowd and dive straight into buying individual stocks.
However, with a lack of capital and investment knowledge, stock picking is unlikely to be the wisest start for many young investors. Here are two reasons why:
It is likely impossible for you to achieve a diversified portfolio
Benjamin Graham, known as the father of financial analysis, suggests owning 10 to 30 stocks to achieve adequate diversification, while some experts even recommend owning up to 100 stocks! Achieving this, however, is harder when you do not have large sums of money to buy many shares.
The most likely scenario? You’ll end up with insufficient capital to achieve a diversified selection and eventually settle for perhaps two or three stocks. Unfortunately, this puts all your eggs in one basket, which subjects you to higher levels of risk.
Your lack of investment expertise will be a hurdle
Stock picking requires significant time and effort — analysing each company's financial statements, tracking its development and plans, in-depth research into its industry peers, and monitoring stock prices closely, are just some of the things you’d need to do to start.
If you are new to investing, you will probably be unfamiliar with the various methods to examine stocks, such as fundamental analysis and technical analysis.
You might thus end up selecting stocks based on speculation or fads. But, historically, doing so has been an unreliable path to reaping strong returns, can often lead to huge losses especially for highly risky investments, and will make it impossible for you to consistently beat the market.
Sure, it might be sexy to talk about these trades at parties. But keep in mind that the sharks who lure you into the sea with thrilling stories of windfalls and promises of fast gains may also be the same sharks that could eat you alive. Be also wary of pump-and-dump schemes — these involve scammers artificially creating a buying frenzy for an asset, usually shares, before they sell at the inflated prices, leaving the victims with substantial losses.
If you lack the time and interest for deep analyses, there’s absolutely nothing wrong with adopting a more passive approach towards investing.
Read more: Why passive investing beats trading
Myth 4: I’ll learn faster with DIY investing
It is a widespread belief — and misconception — that novice investors will learn the ropes of investing faster if they start investing in stocks directly at a young age.
However, as a Morningstar report put it: “Surely there are better ways to learn that fires burn, than to put one's hand into a flame. Besides opportunity cost, the young investor who starts with stocks courts the danger of performing so badly as to become disillusioned, thereby abandoning equities.”
Moreover, we are rarely hands-on when it comes to most other parts of our lives. Think about it: we understand the value of hiring a professional plumber, even though we've never installed the plumbing system ourselves. Similarly, why can't beginner investors start with a professional solution first, too?
While DIY investing gives you full control of your investments, it might not work in your favour as a new investor with little knowledge. Getting the help of professionals might be more beneficial as it slowly eases you into the fast-paced investment landscape.
With the responsibility of tracking your investments and keeping up with the dynamic financial markets lifted off your shoulders, more time can be spent on equipping yourself with investment knowledge.
Where should I get started?
With the advent of low-cost robo-advisors, professional financial management is now easily accessible to the layperson. This is a boon for individuals with a smaller net worth and those who have less time on their hands but still wish to start their investing journey.
Here are some robo-advisors in Singapore and their corresponding fees:
The bottom line: Start investing now
Investing can look daunting at times, but starting off on the right foot can greatly simplify the process.
Education is essential — as is avoiding investments that you don’t fully understand. If in doubt, take the first step by engaging the help of professionals, after which you can gradually learn along the way.
Ultimately, remember that personal finance is, in essence, personal. Don’t let other people’s stories of their investment conquests easily influence what you choose to do. Because for every success story, there are many tragic ones.
Educate yourself with the wide-range of resources available, and strive to make well-informed decisions. With Endowus now accessible to anyone from the age of 18 and above, we've ensured that you can have more have more time on your side to kickstart your investment journey.
To get started, click here.
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