Financial Advice For My 25 Year Old Self

Assuming that my 23 year old self had followed a disciplined approach to balance my income and expenses, at 25 years old I should be well into building my emergency savings.

Once I have accumulated an emergency savings worth 6 months of expenses, my savings should now go into riskier investments. There will be things that I’ll be thinking off, buying a home instead of renting, upgrading to a better car, etc. Those goals will require substantial more savings and this is how you and my 25 year old self can achieve it.

Time To Step Up Your Savings Through Investments

The amount that you are saving from your salary each month should have increased from 10%. It’s probably in the range of 15%. If the salary has increased as well, it means that the amount you are saving each month has gone up quite a bit.

If your company offers an employee share purchase plan, now is a good time to put some of that 15% into the plan. Usually these plans will provide an employee discount when buying company shares so the risk is lower than buying stocks the normal way. The price discount provides a buffer in case the company share price drops. (don’t overload however on employee shares – more on that in later posts)

When you subscribe to an employee purchase plan, you will need to set up a stock trading account. It is advantageous to pick a brokerage that allows you to trade both local and foreign shares. It’s important to be able to diversify internationally both in stocks and in currencies. Pay attention to the brokerage rates as you do not want to erode your investment by paying a high brokerage fee.

Stocks are one of the most volatile and therefore riskiest form of investments. But the returns are generally better than other forms of investments. At a young age, you can withstand short term losses if you adopt a long term view of the returns.

Having a long term view means you are not buying and selling stocks all the time. Long term means buying into quality stocks and holding them for years so that you are able to reap the benefits of compounding gains. Constant buying and selling is like trying to guess which traffic lane is the fastest during a traffic jam. Changing lanes all the time will simply result in you being slower in the long run.

Before you go and buy any stocks there are a few things you need to know.

• You are not a maverick stock analyst working full time analysing stock prices. And even if you are, statistically stock analysts are usually more often wrong than right.
• It is impossible to predict when a stock price is at its lowest point. The same is true about when a stock price is at its highest point.
• The stock price is generally determined by 3 things: the dividends that it pays out, future earnings growth expectations and human herd emotions. The last factor is the strongest one that moves stock prices.
• When you buy a stock, someone else has to be selling it. This means that for you to believe that it’s a good time to buy the stock someone else must believe that it’s a good time to sell the stock. The question is who is the bigger fool.

What I am trying to say is that, buying individual stocks should be avoided when you are just starting to build up your investment portfolio. You can do it when you are in a better financial position but for now, you should try to buy a good yielding diversified index fund. Let that be the foundation of your investment portfolio.

If your brokerage allows you to buy US stocks, a good place to start looking are the Vanguard funds, specifically the S&P 500 ETF. When you buy into that ETF (an exchange traded fund), your money will be spread out to the top 500 companies listed in the US S&P index according to their index weightage. So instantly you have reduced your stocks investing risks by averaging them over the 500 companies. Additionally ETFs typically charge very low management fees, which is crucial when US ETF long term returns are in the range of 7% or 8% annually. For instance, the S&P 500 ETF charges only 0.04% of management fees each year. Low fees means you keep most of the gains to yourself.

For Malaysians, there are also apps like StashAway if you do not know how to buy or choose between these types of ETFs. StashAway takes your regular investment in MYR, converts them into USD and then buys selected types of ETFs based on how much risks you are willing to take. It automatically diversifies your MYR cash into shares of many companies in USD.

By taking the additional risk of investing in shares you accelerate the growth of your investments as hard as you can while spreading out the risks through diversification. In a few years’ time, you should have gained enough to meet one of your goals, like buying a home.