As we grow older, our needs as well as aspirations change. It’s nice that every now and then, you find a 50-year-old who still aims to own the country’s biggest skate park, or a 20-year-old who’s already picking out a part of Italy to retire in; but those are rarities, and everything from shifting income to medical needs can turn things upside down. Considering that, here’s how to tweak your investment practices over the years:
A general principle throughout the ages
Specifics aside, a general trend is that, as we get older, investments should become more defensive. The goal is to gradually shift from wealth accumulation, to wealth preservation.
This is because a longer time horizon (when we’re young) provides greater opportunities for recovery, thus allowing us to take bigger risks for bigger gains. Conversely, a shorter time horizon (when we’re older) means we have fewer chances to recover from big losses; and we don’t need to worry as much about inflation as – to be blunt – we don’t have as many years to go. As such, the emphasis switches to protecting what we have accrued.
Here are how life stages tend should impact investing:
Just joining the workforce (18 to 21 years old)
At this stage, the first goal isn’t so much investing as it is saving. At this stage, the focus is on building up a savings fund, of six to 12 months of their expenses. This will allow for other forms of investment later (as sudden losses will not force them to liquidate assets).
Developing financial discipline is also important at this stage: its crucial to avoid any sort of high-interest debt (e.g., credit card debt), as the compounding effect has many years to worsen. People at this age also tend to have access to credit for the first time, so it’s vital to maintain self-control.
People at this life stage also tend to be subject to peer pressure, or other negative influences. This can cultivate dangerous habits that will become expensive later on, such as developing a habit for smoking, drinking, etc.
This is an optimal age to purchase insurance policies, such as whole life insurance, because premiums will be at their lowest. If you wait till later, pre-existing conditions or age-related health issues will drive up the premium rates.
A note for single-digit millionaires:
If you inherit a significant sum at this stage, it’s advisable that you have a qualified wealth manager assist you. It’s best to avoid any big decisions until you’ve had more experience in both investing, and in the working world.
For older single-digit millionaires, do consider granting a full inheritance at a later age (e.g., past 25), even if 18- to 21-year-olds are often considered adults. A bit of extra maturity can make a significant difference, for your beneficiaries.
Young adults (22 to 30 years old)
A general formula at this age is to keep essential expenses to no more than 50% of monthly income. 30% of pay can be used for various wants, and the remaining 20% can be saved or – if the emergency fund has been met – invested.
At this stage, asset allocation tends to be aggressive and focused on long term capital gains. This is because there’s a long investment horizon (up to 35 years if the retirement age of 65 is used), which provides ample opportunities for recovery – this allows for higher-risk, higher return assets.
Besides this, there is the issue of inflation rate risks: younger investors are susceptible to this, because they have over 30 years of rising cost of living to deal with. It’s vital that any investment portfolio not only beats, but exceeds, the core inflation rate.
(E.g., with a core inflation rate of 3%, common to developed countries like Singapore, an investment portfolio should target returns of at least 5% per annum).
It’s not uncommon for financial advisors to suggest 100% equities in a portfolio, to optimise returns at this stage.
For those who have a strong head start (e.g., you’re already a single-digit millionaire at this stage, due to inheritance or other reasons), you could consider investing 5% of your portfolio in higher risk alternatives, such as high-yield bonds. However, this may require you to be an accredited investor, and you shouldn’t proceed without qualified help.
Early family stages (31 to 35 years old)
This is one of the most critical life stages, as most major financial decisions are made for the first time here. Some examples of this are:
- Purchasing the first home
- Buying a car
- Paying for a wedding
- Raising the first child
This is also the stage at which investors must consider other people in their financial planning. For example, investors at this stage start to also plan for their spouse or children; and some may also have to begin looking after ageing parents.
Recurring expenses tend to rise significantly at this age, such as the ongoing cost of a mortgage.
For single-digit millionaires, a key concern is whether to use loans for assets like the home.
If you’re already a single-digit millionaire at this point, for example, it may be tempting to pay off the full cost of a flat or small condo unit, without the use of a home loan. However, this is not always financially prudent, as it may lock up too much capital in a single asset (the home).
The same can apply to paying for your children’s education, or weddings and renovations. At this life stage, it may be prudent to use a bit of leveraging, rather than paying off large costs all at once.
Asset allocation tends to be come more defensive at this stage: most financial advisors will now add fixed-income products, endowments, or even simple cash holdings to the portfolio.
A typical allocation may be along the lines of 70% equities, 20% bonds, and 10% cash; but this may vary according to individual needs.
Midlife stages (36 to 50)
Many, though not all, investors may reach the peak of their earning capacity somewhere at this age. The higher income, however, is balanced out by increasing costs.
Most Singaporeans are also looking after their parents at this stage. Children may also move on to tertiary education, and costs such as university fees become a factor. It’s also plausible that the first major health conditions begin to appear, toward the age of 50.
At this stage, financial advisors may suggest a review of existing insurance policies. Single-digit millionaires may be in a good position to afford enhanced policies, such as Universal Life policies; and may even want to ensure life insurance policies on their children are fully paid off (e.g., with proper planning, it’s possible to ensure your children are covered for life, by the time you retire – this may mitigate the need for them to buy their own policies later).
Asset allocation varies greatly at this point, but a higher percentage of fixed income products and cash holdings are common. Some investors begin laddering bonds, or considering products such as perpetual income bonds.
Nearing retirement (51 to 65)
At this age, the emphasis is on paying down any existing debts, and on wealth protection. For single digit millionaires, the goal may be to optimise cash flow from the portfolio (e.g., dividend payouts, coupon payments, or other forms of cashflow).
The aim is sometimes to “spend the interest, not the principle.” For example, for a portfolio worth $3 million, with returns of 2% per annum, an investor might be able to spend $60,000 per year without diminishing the portfolio.
Legacy planning may also be a deeper concern at this point, and investors need to ensure their will and CPF nomination are in place. Asset allocation at this point tends to be highly defensive, and is focused on preserving the retirement fund for as long as possible.
This does mean that financial planning is an ongoing process
There’s no one-time-and-done strategy, which will last throughout your life. It’s best to find a qualified financial advisor, willing to work with you over the long term, to deliver the best results. Either that, or spend the time to develop the financial literacy needed to manage your own portfolio.
For more help or questions, reach out to us on Single Digit Millionaire, and we’ll get you the assistance you need.
