Most of us have heard of the power of compound interest - Warren Buffett accredited his vast wealth to it, and Albert Einstein touted it as the eighth wonder of the world. With inflation at an all-time high, it seems only prudent to start investing as early as you can.
As a student looking to invest, the plethora of information might seem overwhelming and daunting, and you might not know where to begin. Here’s a step-by-step guide to investing for students in Singapore.
What’s the minimum age to start investing?
To students, you might be wondering what is the minimum age for investing.
The minimum age to start investing is 18 with a cash account. If you’re looking to open a margin account, most brokerages require you to be at least 21.
A cash account is an account that allows you to purchase securities with cash. While a margin account is an account that allows you to borrow cash to purchase securities.
Fret not if you’ve yet to reach the minimum age!
Remember that there are other ways apart from investing to reach your financial goals, such as learning good money habits like budgeting.
Step 1: Understand your financial situation
Before you start investing, it is important to understand your financial situation as a student. Here are some areas you need to review:
Do you have any debts? If so, you might wonder which is more advantageous - paying off your debts, or investing and growing your money. This depends on whether you can earn more on your investments than your cost of debt in terms of interest.
How much of your savings should you invest as a student? A good rule of thumb is the 50/30/20 rule - 50% of your allowance should go to needs and obligations, 30% for wants, and 20% to be saved.
As a student investing in Singapore, it is common to have no sources of income apart from your allowance.
Though there are some ways to generate passive income in Singapore.
Luckily, there are brokerages that allow you to invest with as little as $20 a month. There are also brokerages that offer USD $1 per trade, such as IBKR.
Good money practices come hand in hand with investing, and you should cultivate this as a student investor. As mentioned above, a good rule of thumb is to spend no more than 30% of your income on wants.
Having an emergency fund is encouraged before you start investing, and a general rule of thumb is to put aside at least 6 months' worth of expenses for rainy days.
It is encouraged to have some form of insurance before investing as insurance offers you protection against unexpected events.
Understanding your financial situation would help to determine your starting capital and how much you can invest per month.
The most expensive cash outlay will be your school fees,
Apart from that, as a student investor, you’re likely to have fewer obligations
Depending on your financial situation, we recommend that approximately 10-30% of your allowance should go into your investments every month.
Step 2: Understand your financial goals
Next, you have to understand your financial goals - what do you want to achieve with your investments? What is the lifestyle that you want to have?
Set goals on the investment amount you want to achieve for your different goals, such as for housing, car, weddings, and retirement.
Ultimately, investments are tools for you to achieve your desired lifestyle.
Step 3: Understand your risk profile
As there are different amounts of risks associated with different investments, knowing how much risk you can take is important when building your portfolio.
What is the amount of risk you’re comfortable taking on? Do you have enough savings to absorb the risks and cushion the losses?
Ascertaining your risk profile as a student investor might be confusing, so we have a risk profile calculator to help you determine what you should be investing in!
Our risk profile calculator seeks to understand your:
Investment time horizon
Overall Investment objective
Step 4: Find out what you can invest in
Here’s a list of different investment products and what they are:
Stocks, otherwise known as equities, are a type of security that gives shareholders a share of ownership in the company. Investing in stocks gives you the flexibility of how much you want to invest and when.
Bonds are essentially loans to corporations or government entities. The most common type of bonds are Singapore Saving Bonds (SSB), and they’re essentially risk-free and a good entry investment for students.
Mutual funds are collective investment scheme that pools assets from different investors such as yourself.
Mutual funds are managed by fund managers, so apart from portfolio diversification, there’s the added advantage of tapping into their expertise instead of picking a stock by yourself, which might be a tedious process for a student investor.
Exchange-traded funds, more commonly known as ETFs, are a type of index funds that tracks a specific list of securities. The most common index is the S&P 500, which tracks the top 500 companies in the U.S. In Singapore, we have the STI ETF, which Singaporean investors can invest in.
Cryptos are a form of digital currency, the most popular being Bitcoin. Cryptos are considered high risk as they are highly volatile, and it is not recommended as the first investment for students and novices.
Options are contracts that give you the rights but not the obligation to either buy (call) or sell (put) the underlying assets at a specific price on or before a certain date. They are typically used as a tool for speculation or to hedge risks, are considered a risky investment and are not suitable for a novice investor.
Futures are similar to options with the key difference being that futures are financial contracts that obligate parties to buy or sell an asset at a determined future date and price, regardless of the current market price. They are also highly risky, and not recommended for student investors.
Here’s a summary table of products and their risk profile. Do note that risk and the minimum amount are highly dependent on the individual product.
What product should I invest in as a beginner?
As a student planning to invest, we strongly recommend ETFs for students who are planning to do DIY investing.
ETFs would be suitable for modest or inexperienced investors, especially if you’re a student due to a variety of reasons.
Firstly, it is passive and does not require an investor to actively track and monitor his investment, allowing even novice investors to successfully invest and build wealth.
Secondly, the lower volatility of ETFs due to diversification makes them a safer alternative as compared to investing in shares.
Thirdly, the lower service fees charged by an ETF fund manager as compared to a unit trust ensures that a larger portion of funds is dedicated to investment rather than paying off fees.
All of this, coupled with the fact that ETFs are simple to use and have a low startup investment amount, makes them an excellent choice for student investors.
Step 5: Find an investment platform to use
To start investing, you’ll first need a brokerage account to buy and sell securities. When deciding which brokerage to use, you have to consider the trading fees, minimum commission fee, platform fees, and market access.
Trading fees are commission fees that are not the same thing.
Trading fees are charged as a percentage of the transaction value, while the minimum commission is a set fee, and whichever is higher will be the fees payable.
For example, you buy a stock at $1,000 from a brokerage with 0.03% trading fees and a minimum commission of $0.99. The trading fee will be $0.30 ($1,000 x 0.03%). In this case, you’ll be charged the minimum commission of $0.99.
Custodian vs CDP accounts
There are also 2 types of stock holding types - custodian and CDP.
With a custodian account, your stocks are held in the custody of the brokerage firm and are not under your name.
With a CDP account, stocks are purchased in your name, which means that you are the legal owner of the stock and a shareholder of the company, which entitles you to voting rights, an invitation to their Annual General Meetings, and annual reports, etc.
Additionally, should the brokerage you trade with go bankrupt, your funds will not be affected as they are stored in a CDP account. However, do note that CDP applies only to Singapore stocks.
Custodian accounts have much lower brokerage prices as fewer transactions is involved when your stocks are purchased through a nominee account, which saves you on brokerage fees.
Custodian type brokerages
Here are some of the more popular custodian-type brokerages and their fees:
CDP linked brokerages
If you prefer CDP stock holding, here’s a fee comparison of the different platforms:
An alternative to investing by yourself is to use Robo-advisors. Robo-advisors are a great option for student investors due to their low or no minimum amount requirement and automated investment services.
As a student investing in Singapore, Robo advisors are a popular option because it manages your investments for you, requiring minimal effort on your end.
We have written a thorough review on one of the most popular Robo-advisors in Singapore, Syfe!
Here’s a list and fees of popular Robo advisors in Singapore:
Unlike Syfe whose management fees are based on your investment bracket, StashAway charges you on a staggered basis, ranging from 0.2% to 0.8% annually.
With Syfe, the management fees are based on your investment bracket. The more you invest, the lower your fees.
Endowus management fees are based on their portfolio type and payment method. Unlike StashAway and Syfe, they have a minimum initial investment amount of $1,000.
Regular Saving Plans
Another alternative to brokerages and Robo advisors is regular saving plans (RSP), which helps you save money via regularly investing a set amount of money into a mutual fund or ETF.
Here are some RSPs from our article on Regular Savings plans that you can consider:
Step 6: Use solid Investment strategies for students & beginners
Dollar-Cost Averaging (DCA) vs Lump Sum Investing
Dollar-cost averaging is an investment strategy where you allocate a set amount of money to invest at regular intervals regardless of the price of securities.
As a student investor, DCA is a great strategy to lower your risks and spread out the cost of your investments by dividing up the total amount of your starting capital across periodic purchases.
DCA helps to average out the price fluctuation of a certain security, as opposed to lump-sum investing, where you dump your entire starting capital into a stock. By making smaller purchases over time, you are exposed to greater price volatility and risks.
In 2008, Warren Buffet issued a $1 million challenge to the entire hedge funds industries with regards to passive vs active investments - and won. He believed that passively investing in the S&P 500 index fund would outperform hedge funds of which high transaction fees and costs are not enough to justify the funds’ performances.
As a student investing with little time and money, passive investing is preferred to active investing due to lower transaction fees and less involvement.
However, there are hedge funds that do outperform the market in the long term but these funds are few and far between
For student investors, we recommend investing with a passive approach and letting the money rest in an Index ETF.
But for students who have a larger risk appetite, you might choose to be more active in your investments and do stock or ETF picking. In this case, it is important to rebalance and monitor your portfolios.
This can be a tedious process, but if done correctly, you can generate higher returns than passively investing in an index ETF.
Rebalance your Portfolio
To rebalance your portfolio is to buy and sell positions in your portfolio, and the suggested interval is every 6 months to a year.
Reviewing and rebalancing your portfolio is crucial as it helps you evaluate the performance of your assets, and perhaps sell off assets that perform poorly and buy those you think would perform better.
As with all things, you must do your own research (DYOR)!
Take the time out to understand what you’re investing in and incorporate any new market information you learn when buying new securities or when rebalancing your portfolio.
Here are some investment resources you can use:
As a student investor, you might be ready to take on more risk while you’re young, but this is highly dependent on each individual. But before you make a decision, always do your own research before investing!
If you want to do away with the tedious process of research and monitoring that usually come with investing, it would be smart then to work with an investment advisor.
Contrary to their reputation for pushy sales tactics, financial advisers help new investors cut through the noise.
According to a survey report by St James’s Place Wealth Management, a majority of Singaporeans or 81%, stated that they heavily prioritise seeking financial advice before making any major financial decision.
And 56% ranked financial advisers as their top source of financial advice.
Financial advisors can arrange your investments and build a financial plan that helps ensure you will meet your financial goals in a sustainable manner.
Techiya provides investment planning services, and we do the following:
Identify your current life stage
Identify your goals, needs and wants
Find out how much you will need for each need, wants, and goals
Plan how you can achieve these goals sustainably
Build and optimise your financial investments
Contact us now to get a free comprehensive and personal financial assessment worth over $200!