There’s investing, and then there’s trading. The latter’s fine if you’re in a rush, and have wadfuls of cash to burn. But if you’re young and still growing your income, the ole’ “slow and steady” approach might be best. In this article, guest poster Lionel Yeo explains why:
Being a young person in Singapore sucks. Zouk has stopped its Mambo Nights, Orchard Road is way too crowded on the weekends, and we probably have to sell our firstborn children in order to afford a HDB flat.
Also, everyone is constantly nagging at us to start investing early. They’ll say, “Start investing early so your money has time to grow!” and we’ll say, “Dang it, who has time to research 20 different stocks? I’ve got other more important things to do, like queuing for eight hours for my McDonald’s minions.”
I know, I know. Most of us hate thinking about investing. Whenever I try to talk to my young friends about investing, they’ll quietly whisper to each other and back away re-e-a-ll-y slowly. To make myself feel better, I tell myself that they’re just marveling at my profound wisdom.
But in all seriousness, investing doesn’t have to involve staring at a bunch of squiggly stock charts for 2 hours a day. That’s the lifestyle of an active investor. But if you’re lazy, like I am, you can totally get by fine by spending just 15 minutes a month on passive investing.
Passive investing. Essentially, we passive investors tell ourselves, “Hey, so many investors have failed trying to beat the stock market (which has historically averaged around 8-9% a year). Instead of trying to beat it, why don’t I just buy the whole market, sit back, and earn the market return?”
(If you’re interested in finding out more about passive investing, you can check out this video. Also Ryan recently wrote a great MoneySmart article on how to use ETFs to invest passively in the Straits Times Index here.)
There’s a lot of debate on whether active or passive investing is better, but I’ll argue that passive investing really rocks for young people like us, because:
1. It Benefits People Who Can Afford to Wait
What’s the one advantage that we young people have over the other old fogeys out there? It’s Time. We’ve got 20-40 years of working and earning money ahead of us, which means that we can afford to wait for our investments to pay off.
Wall Street managers are expected to deliver a great performance within a year. But young passive investors don’t play in that sandbox. We’re not worried if our portfolio goes down in a month, a quarter, or a year, because we know that over the very long run (think 20-30 years), the stock market has historically always come out on top.
2. It Doesn’t Take Up a Lot of Time
Take any movie, like The Silver Linings Playbook or Looper. The young people on screen are all busy doing awesome things, like falling in love or shooting people from the future.
You know what they aren’t doing? Spending a lot of time on their investments.
That’s right. If you’re young, you’re probably just starting out in your job, taking on a few exciting projects, and trying to impress your boss. After work, you’ve got to meet your friends, have a couple of beers, and watch Game of Thrones. In other words, you should be enjoying life, not spending hours obsessing over stock charts and annual reports (unless you’re a financial analyst or an accountant).
The good news is, passive investing doesn’t have to take up a lot of time. For example, I spend no more than 15 minutes a month on my portfolio. I don’t bother checking it every day, because the day-to-day fluctuations of the stock market don’t matter to me.
3. It Doesn’t Cost a Lot of Money
Let’s face it – we young people don’t have a lot of money to throw around. Until HDB flats are priced reasonably (like, maybe in the year 4202), a huge chunk of our salary has to go towards saving for a house. But that shouldn’t deter us from investing early either.
The great thing about passive investing is that it’s extremely low-cost. Unlike actively managed unit trusts which have to pay their hotshot money managers, passive ETFs are much cheaper to run. Since the ETF is only trying to mimic a stock market index (like the STI or the S&P500), it’s much cheaper to do so and the savings are passed on to investors.
That’s good news for investors like us with limited budgets. A typical passive, index-based ETF could cost as little as 0.20-0.5% per annum, which is often 4-10 times less than what normal unit trusts charge.
Investing is important. Duh. You should totally be doing it, but don’t kill yourself in the process. I’d recommend checking out passive investing, especially if you’re young and can afford to think long-term. You’d have more time to yourself, be less stressed, and a whole lot richer in the long run.
Lionel Yeo is a ramen slurper, bathroom dancer, and financial hacker behind cheerfulegg.com – a personal finance blog for college graduates and young professionals.
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See you on the other side 🙂