Young investors (or any beginner investor) will often ask: “What should I invest in?”
If you are a millennial, the idea of investing your hard-earned money can come across as complex or perhaps intimidating. While it is important to secure your future, how do you go about doing it?
Unlike previous generations, millennials are comfortable with technology and the convenience emanating from their smart devices. They enjoy co-working and travelling, and value experience above others.
In other words, millennials are breaking away from the conventional mode of spending and saving, developing a pattern of higher risk-taking due to their need for instant gratification. But there is still hope!
Despite the common misconception, investing isn’t just for the financially established – you can start investing for as little as RM50 per month and begin your journey to building wealth. To brave the high seas of investing, it is important to remember the key is not just randomly betting on different investments but learning to save and making informed decisions for your future.
Smart Investor reaches out to several experts in the field for their perspective on the topic.
SURAYA ZAINUDIN, FOUNDER, RINGGIT OH RINGGIT
Based on my interactions with the Ringgit Oh Ringgit audience who are primarily within the millennial age group, many of them invest their money in a combination of unit trusts and mutual funds.
Amanah Saham Bumiputera (ASB) and Private Retirement Schemes (PRS) are popular, with many taking advantage of the PRS Youth Scheme a few years back, and collecting the RM500/RM1,000 bonus upon RM1,000 deposit.
Other popular investment options are stocks (especially dividend stocks), fintech platforms like Wahed Invest, Stashaway and MyTheo (robo-advisory platforms), gold (HelloGold), P2P lending (Funding Societies) and crypto assets (Luno).
In terms of the recommended proportion of their income to be put aside for savings and investments, I recommend anyone to save at least three to six months of living expenses as soon as possible, regardless of income level. You need the savings to protect yourself against any of life’s unexpected expense.
After you hit that amount, feel free to choose either to save as much income from salary, add more income (increase salary or do a side hustle), or both. Taking willpower out of the equation by automating investments is a great way to get rich slowly.
The stock market, generally speaking, intimidates any beginner, millennials included. However, it is great that there are personal finance content creators nowadays that share their stocks portfolios online using relatable language. It makes the whole process – from research to reallocation – easier to visualise and thus implement.
Getting help from a financial adviser, a robo-adviser or opting for a do-it-yourself (DIY) approach or investing in mutual funds or exchange-traded funds (ETFs) – these are great ways to get started. Personally, I’m an advocate for the DIY approach since it’s the most cost-efficient approach.
Investment information and advice is very easy to get for free online, via a quick Google search. I would personally save for the services of a financial adviser for estate planning instead.
STEPHEN YONG, CHIEF KNOWLEDGE OFFICER, WEALTH VANTAGE ADVISORY
The concept of ‘pay yourself first’, which is to set aside funds every time you receive an active income, is advocated by many financial advisers.
The whole idea behind paying yourself first is to consider as if you were an employee of Me Sdn Bhd, and ensure that you get paid every month. That being said, the moment you receive your pay, set aside an amount into another account that you will not touch.
Once you have accumulated three to six months’ worth of emergency funds, paying yourself first should be channelled towards investing. This is especially important for young adults to allow for early investing and compounding to build serious wealth. Here are a few practical steps to pay yourself first:
- Decide how much you will pay yourself. It can be a percentage (20% of your pay, for example), or a fixed figure (RM1,000 monthly);
- Set up an automatic transfer every month into a separate account designated for investing; and,
- Set objectives for the money in your account to be allocated into various investments.
You can also automate some investments if there is a regular savings plan option to gain the benefits of dollar cost averaging.
For those who have just started out in their career, there are an increasing variety of investment vehicles available. Rather than start investing based on recommendations from friends and family (which is something young investors are prone to do), a smarter approach to selecting your investments is to have a customised personal investment plan following your desired asset allocation.
One of the most important determinants comes from deciding on asset allocation which determines ~90% of volatility and gives ~40% of returns (Determinants of Portfolio Performance by BHB published in the Financial Analysts Journal).
What is asset allocation?
Asset allocation is to set how much of one’s investments goes into various asset categories to get the best balance between returns and reduced overall portfolio volatility. Here are some smart investment options for each asset class:
- Equities: Stocks, ETFs;
- Fixed income: Bonds, money market funds;
- Properties: Real Estate Investment Trusts (REITs), investment properties;
- Commodities: Gold, silver, precious metals; and,
- Alternate investments: P2P lending, cryptocurrency.
For risk appetite, investor risk profiles are generally categorised into the following from the highest to lowest risk:
Examples of high-risk investments include shares, commodities, cryptocurrency and alternate investments. Examples of low-risk investments include bonds and money market funds.
In terms of how much risk millennials should be willing to take to build their investment portfolio, it is important to note that every millennial investor needs to decide for themselves how much risk is suitable.
As a millennial, time and compounding are on your side, so you may be able to take on more risk than someone who is retired or near-retirement. There are various investor risk profile assessments available which help you to know your investment risk appetite.
Overall, one can reduce risk by practicing diversification and having a personal investment plan. Diversification can be done by diversifying across the following:
- Diversification into different asset classes;
- Diversification by time using dollar cost averaging;
- Diversification into different countries and regions;
- Diversification into different sectors and industries; and,
- Diversification into different companies or funds.
On the question of whether millennials are generally apprehensive about investing in the stock market, I would say millennials today have access to a wealth of information and resources.
As such, everyone has their own preferences with some feeling comfortable investing directly in the stock market while some prefer using other investment vehicles. The key thing for millennials is to get trustworthy professional advice on how to invest.
Overall, we are seeing a blended approach working out well with a combination of working with a financial planner, robo adviser, and maybe handling some areas using a DIY approach.
MARSHALL WONG, FOUNDER, planNERD
The ‘pay yourself first’ concept is a good practice, and as a financial planner myself, even I have created an automated system to make sure that I am getting paid first. The keyword here is ‘automated’.
To do this, I have two bank accounts. The first is what I call the ‘Holding Account’, which is the main account which I use to receive my income. In this particular account, I set a recurring transfer of funds to another account, which I call the ‘Parking Account’, which is set up for the sole purpose of accumulating money for my next investment.
When it comes to smart investment options that a young person can consider, as cheesy as it may sound, I believe that investing in one’s own knowledge is always the first thing a young person should do. Without proper knowledge, the line between investing and gambling can blur.
Take cryptocurrency as an example. Most people that do not understand blockchain beyond it being ‘just a system behind Bitcoin’ may think that cryptocurrency is a gamble. But for those that truly understand the potential and the value that blockchain can bring to us in the future, cryptocurrency is seen as an investment.
Don’t get me wrong, I am not saying that everyone should jump into cryptocurrency. A young person should start reading articles on business and finance to be equipped with the necessary knowledge to understand the true value of where they put their money into.
On the topic of mobile-friendly investment platforms, I have personally invested with StashAway, Wahed and MyTheo. These platforms are great for beginners as they are simple, seamless and do not require investors to do as much homework before they invest.
However, it is important to be reminded that we should diversify and not put all our eggs in the same basket.
Recently, we have seen a US$7.6 bil online brokerage firm, Robinhood experienced a massive outage due to technical problems. Nevertheless, I encourage young investors to use platforms like these but remember to consider other traditional investments.
Are millennials apprehensive towards investing in the stock market? I personally don’t think so. Whether they ought to get help from a financial adviser, a robo adviser or opt for a DIY approach, I think millennials should start by doing their own research and try out the DIY approach.
That being said, if they do not have the time or confidence, or they have tried the DIY approach with unsatisfactory results, they should consult a fee-based financial planner. A fee-based financial planner will identify and quantify their life objectives and assist them in choosing the correct investment.
Investing in mutual funds, index funds or ETFs on a piece-meal basis without knowing the bigger picture is dangerous as each investment has different levels of volatility and time horizons.
Risk-wise, there is no hard and fast rule, but then again, it all depends on the investors’ investment objective. If the objective is a short-term one, you should not take too much risks. But if the objective is a long-term one, millennials should consider taking on more risk and pay less attention to the short-term fluctuations.
All in all, as a financial planner, I encourage young investors to have multiple investment portfolios to achieve different investment objectives. As such, investors can have both portfolios with high and low risk simultaneously.