You’re young, have a little money, and you’re ready to start investing. What’s more, you have years of investment time horizon ahead of you. This means that you have more time and options available to you.
Due to this, you should first decide on what your investment goal is. Are you looking to retire early? Buy your first home? Maybe you’re trying to raise money to start a business. Whatever it is, your goal will help determine the amount of time you have to grow your portfolio, also known as your investment horizon.
So, what are the pros and cons of being a young investor?
|
Advantages |
Disadvantages |
|---|---|
|
Long investment horizon |
Smaller starting capital |
|
Higher risk tolerance |
Less monthly disposable income |
The best move you can make as a young investor is to know what your advantages are and make the most out of them while at the same time taking steps to overcome any shortcomings. Here's what you can do.
You can invest for the long-term
As a young investor, you can make much longer-term plans. This means looking to cash out in 30 to 40 years, or more. This long investment horizon allows you to be more aggressive in your investment by allocating more into riskier investments in the hope of riding out any short-term uncertainties.
How does this work? In general, the stock market tends to trend upwards in value over the long-term. For example, the KLSE rose from 818.43 to 1622.89 (or 98%) between 2 January 2000 and 7 December 2020. This is despite seeing substantial dips from 2008 to 2009, and another pandemic-driven nosedive in 2020.
This basically means that the market as a whole over a long time horizon has increased in value - even if individual stocks or securities do not. So, whatever it is you do, plan for the long-term and stay diversified. More importantly, time is on your side so you should use it to your advantage.
You have higher risk tolerance
As a benefit of being a younger investor, you can potentially take on riskier investments. This is because you have more time to recover from setbacks.
How does this differ from being a potentially older investor who may have more wealth? Well, that person may be ultimately closer to their investment goal and will be looking to protect their wealth instead. For example:
You only have limited disposable income
Unfortunately, not everyone has substantial trust funds brimming with cash. Most young people entering the workforce won’t have much in terms of savings – and in their early working years, they need most of it to build an emergency fund.
According to the Household Income & Basic Amenities Survey Report 2019 by the Department of Statistics Malaysia, the gross median income for households led by those within the 25 to 29 age group is RM5,558. This might look like a decent amount, but a household will likely consist of more than one person contributing multiple income sources to support an entire family. So each individual will end up with a lot less, especially for investment.
This essentially means that certain investments are just out of reach for the young investor. You may not be able to immediately jump into the property market or have much cash to invest directly in blue chip stocks.
This will limit your choices when you start out so you should plan your portfolio accordingly. You may only have the means to access smaller investment opportunities, but you can make consistent monthly investments over a longer period of time.
What should you invest in?
Now that you know where you stand, you can start looking at investments that fit your profile. This may mean looking towards equities like stocks, unit trusts, and exchange traded funds (ETFs).
Of these, stocks are the riskiest for you. This is because you will have to do a lot of work in researching the companies that you intend to invest in, which may take a lot more effort than you may think. Not only that, doing your due diligence properly requires at least some experience in how markets move and knowing the inner workings of how industries operate.
If you’re not well-versed in financial matters, it is safer to avoid investing in individual stocks - no matter how tempting they may look.
Unit trusts and ETFs on the other hand, are extremely suitable for someone who has limited investing knowledge and money. They allow you to get a feel for investing and seeing how market movements affect your portfolio.
What are unit trusts and exchange traded funds?
|
Unit Trust |
Exchange Traded Fund (ETF) |
|---|---|
|
A collection of investments managed by a fund manager. Investors buy units of each fund as a means of investment. |
A collection of investments that are designed to track an underlying index (which could be an entire market or specific segment). |
|
Composed of cash, bonds and deposits, shares, properties, and commodities. |
Are listed and traded just like stocks. The ETF itself invests in the assets comprising the index. |
|
You do not own the investments directly. |
You do not own the investments directly. |
|
Provide access to a wide range of investments that may be out of reach of an individual investor. |
Provide access to a wide range of investments that may be out of reach of an individual investor. |
|
Good for those who do not have the time or expertise to build their own portfolio or make direct investments. |
Information about the underlying index is made available at all times so you always know how the fund is doing. |
|
Replicates the performance of the underlying index so that you do not need to buy the stocks yourself. |
Sources:
https://www.investsmartsc.my/unit-trust/
https://www.investsmartsc.my/exchange-traded-funds/
Start investing as soon as you can afford it
As a rule of thumb, you should only invest money you can afford to lose. That means building your emergency savings and being financially stable before anything else. The last thing you want to do is have all your money tied up in investments when you need it the most.
As a young investor, you might feel the need to make quick returns to reach your short-term goals. However, use the amount of time you have to make long-term plans to your advantage.
Make the effort to learn about how investing works before jumping into more complex investments, don’t panic if the markets suddenly shift, and - most importantly - start investing as soon as you can afford it.
|
Try using the Maybank Financial Goals Simulator to help you plan out longer-term goals and start growing your wealth. |