How to set up an investment portfolio before you leave school

Feeling lost in the sea of investment options? Do not fear the precipice of adulthood – we’ve got you covered.

Almost all investment advice written for fresh graduates (or those about to graduate) is not applicable. Not because they’re bad, but because they tend to assume you can afford a bunch of corporate bonds, or that you drive your own BMW. Here are some more practical alternatives:

First, how do you even start with a portfolio?

First things first, you’ll need a CDP account to be able to trade in the Singapore Securities Market.

Next, you’ll need to consider your goal for investing. “Having more money” is not a goal. Having $200,000 before 35 to buy a condo might be a goal, or having an income of $4,500 a month when you retire at 67, might be a goal. The point is, the goal has to involve:

  • A specific amount
  • A specific length of time (your “investment horizon”)

If you don’t have these clear objectives, then your investing will be like a football game with no goalposts.

A good way to plan this is to consult with a financial planner, since the approach will be different for each person. Financial goal planning for, say, a 27-year old who has a family to support is totally different from a 20-year old with a chai-latte addiction.

But for absolute simplicity, here’s something you can do right now:

Work out your how much you’ll want to receive every month, after you retire. For example, say you want $1,750 per month, after retirement.

That’s $21,000 a year. You may need this amount between the ages of 65 to 90, which comes to a total of $525,000. That can be a rough estimate on what you’ll need to accumulate, before you reach retirement. You can use a sum close to this as your goalpost.

Now that you’ve worked that out, here’s how to go about building the portfolio:

  • Work out how much you can afford to invest
  • Decide on DIY, or managed, or a mix of both
  • Determine your asset allocation
  • Understand how to rebalance the portfolio
1. Work out how much you can afford to invest

Before you start buying stocks, mutual funds, and being all Wolf of Wall Street, work out what you can afford. The reason is simple.

Say you wipe out almost all your savings to buy bonds, stocks, or whatever. Well, what are you going to do when an emergency comes along? Chances are, you’ll have to liquidate your investment, derail the plan, and probably lose money.

So before you get started, we suggest you (1) build some savings – about six months of your expenses should do it, and (2) pay off any high-interest debts you may have, such as credit card debts.

Now here comes the tricky part: you need to work out a comfortable amount that you can commit each month to investing.

As a student, at least part of your income is likely to be variable. For example, you may get an allowance of $300 a month – which is predictable and fixed – but various internships, gig economy jobs, or odd jobs may be unpredictable. Could be you’ll make an extra $500 a month this month, could be you’ll only have your allowance.

For this reason, you should avoid investing in something that requires too high of a commitment. For example, if you invest in an endowment plan that costs $450 a month, but your (guaranteed) allowance is only $300 a month, there’s a risk you might be unable to make the premium payment. This can result in getting only the surrender value of the policy, which can be a loss of thousands if you’ve been paying for a few years.

(If you do want to invest in such products, make sure your parents are on board to help. They can pitch in if you hit a rough patch, and make sure your premiums are paid. But if they’re not okay to do it, find something else).

You should aim for a more flexible approach to investing – use a blue-chip investment programme, for instance, so you can vary the amount you want to invest each month.

As an alternative, you can approach your parents for some starting capital, which you’ll pay them back in a few years. For example, you might ask them to lend you the first $1,000 to start investing in a portfolio, for which you’ll repay them after your first year of starting work.

(As they’re your parents, maybe they’ll be nice and there will be no interest involved…)

2. Decide on DIY, or managed, or a mix of both

There are three ways to build and manage the portfolio.

The first is to be purely passive – this means you’ll let someone else handle your investment for you. An example would be getting a Financial Advisor or wealth manager to handle your whole portfolio, or using some sort of Robo-Advisory service. This usually means having to pay fees, be it in the form of management fees or commissions; but you can relax and let someone else handle things for you.

To be blunt, this is the route that works for most students. Thinking about and constantly monitoring the ups and downs of the market can be distracting, especially if you need to focus your energy on school. Things like rebalancing your portfolio, reading financial statements, or keeping up with market news is time consuming.

As such, most students do opt for more passive options.

The second is to go the DIY route. This means picking your own assets, and having an active hand in how your money is managed, which you can easily do online. You might save money this way, as you’re not paying fees; but you might also make mistakes and lose money.

Beware: this method is a reversal of what happens in school. In class, you’re taught the lessons first, and then you face the test. In real financial markets, the test often comes first – the lessons follow afterward.

As you get more experience, you may get better results; but the experience often comes from mistakes that you must be prepared to accept.

You’ll also have a clearer idea of where your money goes; that can help if you’re into ethical investing (e.g. you want to make sure you don’t invest a company that carves ashtrays out of pandas or something).

The third way is to have a mix of both. For example, you might insist on picking your own stocks, but also commit a certain sum to Unit Trusts.

Whichever route you choose, you should also be aware of the common psychological traps when investing.

3. Determine your asset allocation

Now that you know how much you can invest, decide how to distribute your assets. It’s a bad idea to put the entire investment in a single asset. You want a good mix of assets with different levels of risks.

For example, for someone in their 20s, an asset allocation may look something like this:

  • 70 to 80 per cent stocks (REITs, ST Index Fund, Equities-based Unit Trust Funds)
  • 10 to 15 per cent fixed income securities (vanilla corporate bonds, Singapore Savings Bonds, voluntary CPF top-ups)
  • 5 to 10 per cent cash (savings account with good bonus tiers, years of ang-pao money stuffed in a drawer)

Note: This is a typical example only; you may want to consult a professional about an asset allocation unique to your situation

Stocks have the highest risk and the highest reward. They take up the lion’s share of the portfolio at this stage, as you’re young and have a long investment horizon. Your returns need to not only meet, but exceed the rate of inflation (annualised returns of at least 5 per cent per annum should be sufficient in Singapore).

One simple way to own equities is to go through the POSB Blue Chip Investment Programme – this can start you investing for as low as $100 per month. Alternatively, you can consider Real Estate Investment Trusts (REITs), or Unit Trust Funds. These are affordable to most young Singaporeans

Fixed income securities are the reliable, low-risk component. They don’t grow your money as much; but they generate the same returns regardless of how the market’s performing: a bond with a coupon of 2 per cent will pay 2 per cent interest; no more during good times, and no less during bad times.

Affordable options for young Singaporeans are vanilla bonds with a low buy-in (some bonds now have minimums of just $1,000). You can also consider Singapore Savings Bonds (SSBs), which have stepped-up interest every year; if held to maturity (10 years), the returns are between 2 to 3 per cent per annum. You can start buying these for as low as $500.

Cash savings are simply money that you keep in hand.

You can’t really earn much interest on this, so it’s stagnating (losing its value over time due to inflation). But you might want to keep cash on hand, to seize new investment opportunities, or mitigate the damage from a market-wide crash.

4. Understand how to rebalance the portfolio

Alright, so here’s the bad news: you can’t just build the portfolio once, and then forget about it.

You need to check in every few months. For example, say your total portfolio size is $50,000. It’s supposed to be 80 per cent stocks, 10 per cent fixed income, and 10 per cent cash.

A few years after you build it, the portfolio grows to $65,000. But now, $58,500 of the value comes from the stocks (90 per cent), $4,550 comes from fixed income (7 per cent), and $1,950 comes from cash (3 per cent).

Even though your portfolio is growing, your asset allocation is out of whack. You’ll need to sell off stocks until they shrink back to 80 per cent, buy more fixed income until they make up 10 per cent again, and so forth.

You should make it a practice to rebalance your portfolio at least every six months. In addition, note that your asset allocation will also have to change as you get older, and near retirement (but that something to think about decades from now).

Start early

The longer your investment horizon, the more wealth you can accumulate, and the lower the overall risks to your portfolio. As such, it’s best to start early. Even a few hundred dollars of your allowance is at least a start, though it may seem small; stick it in something like the blue-chip investment programme, and the payoff in a few decades could be huge.