Friday, October 3, 2014

Starting investment when you are too young - Is it a good thing?

We often hear that starting your investment when you are at a young age is a good thing as it allows more time for compounding to take effect. But this is on the premise that everything else remains constant and time is only the variable factor that is considered.

I've come across stories of many young readers recently who wanted to start their investment journey as early as possible, some are as young as 15 while another at the tender age of 18. The intern in our department is another one whom I've come across. We had lunch today and I get to find out more things about him and his "dreams". He is currently at his 2nd year at Ngee Ann Polytechnic, 18 years of age and has started investing in the stock market. When I asked him how he gets his capital, he told me that he dislikes studying and would prefer to go outside and earn side income, save and then invest, all of these at the expense of his studies.


While I do applaud his motive for investing at such a young age, I really question the need to do so for two reasons. 

First, a lot of the knowledge and skills that you can learn in school are under-estimated by students. The fact remains that school and libraries are the two places where you can find a lot of information and resources where you can pick up valuable skills. At the young age of 18 or 15, I question whether the young investor has the necessary knowledge in investing.

Second, size is key in investing. At the early stage, most people would use their savings earned from their active income to build up their investment portfolio. So the amount that is earned from one's daily job played a key role in determining the size of your investment over time. The thing is by sacrificing his studies and probably therefore his diplomas/degrees, he would probably not get a job that pays a decent amount that is sustainable. We know that Talent is underrated while paper degrees are overrated, but that's the fact you experience in today's society. You can be the most productive and capable person in the company but if you lose out in terms of degrees and qualifications, you would still be bypass in the promotion list to a management position = FACT IN LIFE, GET THIS STRAIGHT.

So out of curiosity, I went to test out the two scenarios using Wealth Builder by investmentmoats. Let's call them Jon and Max.

Jon
  • Decides to forgo his paper qualifications.
  • Invested at the age of 18 through part-time jobs and income.
  • Time to Maturity: 47 years (until the age of 65)
  • Monthly salary: SGD 1,800
  • Percentage of amount invested = 70%
  • Income Growth Rate = 3%
  • Wealth CAGR = 3%



Max
  • Degree paper qualifications
  • Invested at the age of 25
  • Time to Maturity: 40 years (until the age of 65)
  • Monthly salary: SGD 3,000
  • Percentage of amount invested = 70%
  • Income Growth Rate = 5%
  • Wealth CAGR = 3%


Based on the two scenarios, we can see that Jon ends up with $2.7 and Max ends up with $4.7m by 65 years old. One of the few critical assumptions used is of course the starting pay and income growth rate which makes a whole lot of difference. There are many assumptions left out in this simple example but think you can see what I was trying to say here.

So investing at a young age is good, but too young?? 

20 comments:

  1. Hi B,

    Good post. Never forget your human capital :) nothing still comes close to building your human capital in the first half of our journey for Wealth building. Just have to take note that it's depreciating and so we need assets capital for the second half of our journey. Both plays a part ;)

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    1. Hi LP

      Thats the point. With increasing popularity in our finance community, there is this sense of misunderstanding where if you start as early as possible the better it is, at all expenses. I think it is important that financial bloggers make this clear to young readers as we do not want to transmit the wrong idea to them.

      Delete
  2. Hi 3Fs,
    I really agree with this. Thank you for a blogpost that provided insight

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    Replies
    1. Hi TI

      Thanks for visiting. And glad that it helps.

      You are young investor yourself so maybe you would like to share your views on this on your peers or yourself? I would love to hear them.

      Delete
  3. Hi B,

    Good thing you wrote about this. I also notice that young people are increasingly eager to invest as they feel that Singapore's cost of living is too high and want to earn money through investments. However, as we all know, savings is very important and without that substantial capital, it is not easy to build a decent portfolio. It is good to start young but not too young too. Probably after one year of working and saving up then start will be good.

    ReplyDelete
    Replies
    1. Hi SGYI

      The sense is there are more young readers these days and financial bloggers like you and me become an increasing part of the community to explain things right to them.

      There is the sense that financial freedom is easily attained but the hard work that substantiate all the human capital at the beginning is largely ignored. At least for myself, I spent a lot of effort in getting to where I am today at my career even if I am just an average academia mentality.

      Delete
  4. Perhaps young investors should start with the basic tenet of personal finance: Spend less than what you earn, or earn more than what you spend.

    Unless you have a successful enterprise that is raking in good money every month, chances are you'd be an employee. A good paper qualification can make all the difference in the first step of the journey.

    ReplyDelete
    Replies
    1. Hi Sreit investor

      Agree. Young students should start with cultivating the habits of savings because thats generally a universal practice no matter how young or old you are.

      Investing is a little tricky so one needs to get acquinted with knowledge first before investing their hard saved money.

      Delete
  5. Hi B,

    Let's just say that 90% of the time, "better to start young" holds since most people don't care about their finances until they approach their 40s or even later.

    And even if you start at 16, it might not be a bad thing. A person who passively invests in the STI ETF probably wouldn't be spending alot of time monitoring the market.

    Actually my view is that a person rarely neglects his studies because of investing.

    We can never prove this but how likely would he still neglect his studies even if he wasn't into investing? =)

    ReplyDelete
    Replies
    1. Hi 15hww

      I hear what you're saying.

      There are always people who ignored studying but at the same time are not saving or investing the money. In fact, the majority of the young students are probably falling under that circumstances.

      You mentioned that it is rare that a person neglects his studies because he is trying to work part-time, get income early and invest the money, hoping to emulate financial bloggers to retire early in life. You will be surprised by the number of young people who has increasingly harbor that thought. It is not necessarily a super bad thing (like what drugs or ectasy can do to them) but it would be good if they focus on the right things in life at the beginning of the stage.

      Delete
    2. I don't think a lot of these young people want to retire early. They just want lots of money to live a luxurious life. Its the chase of money world.

      Delete
    3. Hi SGYI

      Yea, they have not even started working so why would they want to retire early. It's probably the glamorous life they've seen on TV and Ads that drive them there.

      Delete
  6. "Better to start young" is true 99% of the time. Passive investing does not need much time monitoring. And most often people neglect studying because of playing.

    It is also good that early exposure through "crest and trough" of investing could prepare for prudent investing in the future.

    Probably your son could tell people that he starts investing when he is a baby.

    Cheers,
    Farmer.

    ReplyDelete
    Replies
    1. Hi PIF

      I think when you are young, it is hardly ever that passive investing will become a major part of their strategy. If ever it is, the strategy will died off very soon enough. Young people are usually filled with passion and aggressiveness to go beyond passive investing - whether or not they earn greater returns is another matter altogether.

      When I teach my son, it is definitely not the amount or compounding that matters. I hope he gets the idea because that will be much more valuable than the money itself. One day I will leave the earth, so I would want him to become independent and knows what to do with the money himself. The money I invested for him is his money anyway, I am just helping him to do so since he is probably young enough not to be able to do that right now.

      Delete
  7. I think working provide invaluable experience, either as a employee of employer later on in life.

    How to face your boss or customers.

    Lose all that, I am not sure how we can develop the right temperament to be successful investors. Which mean the growth rate is in qn...

    ReplyDelete
    Replies
    1. Hi Sillyinvestor

      Indeed working life has provided me with valuable experience that has shaped me to what I am today. It's definitely a good workout whether they are beneficial to you at the end of the day. I think one grows when they take on more experience.

      Delete
  8. If u ask me, studying is so much easier than working... At Least for me, if the youngster dun like studying, not sure if he will actually enjoy working

    ReplyDelete
    Replies
    1. Hmm, I prefer working than studying to be honest, but maybe that's just me. I'm not that academia savy.

      Delete
  9. Many young Singaporeans got seduced by the thoughts of making quick money through investments. They don't realize the importance of having qualifications, good career and approach of growing active income. They just want short cuts. How to educate them the way of life in this society?

    Regards,
    SG Wealth Builder

    ReplyDelete
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    ReplyDelete

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