Young Investor Series - Why Should you invest in the stockmarket (Part 3)

One likely pitfall that many thinking of starting young will face will be their limited capital. With a minimum charges of around $30 ($25 for commission and another $5 for GST and clearing fee) per trade, a trade of $3000 will cost $60 of brokerage fees to buy and sell, equating to a 2% loss. However, a smaller capital outlay at the start can prove to be a better investment in the long run.

First of all, let's face the fact that it is highly unlikely for one to be generating high returns continuously in the long run when one just started out even if one may have read tons of investment books. Knowledge is just a tiny portion of investing as compared to experience, emotional stability and patience.

Personally, I have make all kinds of mistakes right at the start which has allowed me to learn in a much less painful way. Think about those who started in a hot bull market, where everything they buy just rises spectacularly and they can double their capital in weeks as they believed they have the "Midas touch". They will continue pouring all their savings into their so called investment, trade with margin and when the bull cycle ended, many faced a near total wipe-out of their capital.

My point is not whether one should start in a bull or bear market, but the younger one is, the lesser capital one will have and thus the lesser the mistakes will cost. Be it a 10% or a 90% loss, one will lose lesser in the absolute term and it will be likely that one can earn those money back by saving and working harder. And of course, unlikely that one will have to support his family. Imagine a 40 years old who losses his lifelong savings and has about 20 years more before he retires.

Another way to look at this will be that the earlier one learned from his mistakes, the longer a period that he has to compound his win. Assuming a super bull cycle of 10 years, a 20 years old will only be 30 years old when he learned his lessons, gained experiences and maintain emotional stability.

Last but not least, investing in stocks will be beneficial to students studying economics, accounting and business, or exploring career path in these area. While I have the habits of reading The Straits Times before I started investing, I will always skip the Money section as I think that it is just too complicated. Now, I read Bloomberg and CNBC even before I have my breakfast. Understanding what's happening in the financial sector will definitely put one at an advantage over his peers when it comes to finding a job.

Thus, starting young is beneficial in many ways and there's not much reason why not to other than maybe the younger one is the more rash and impatient one will be. Even if one is afraid of capital loss, there is no harm in playing around with paper trading though one need to be careful when one decided to switch to real stock investing.

Young Investor Series - Why Should you invest in the stockmarket (Part 2)

Earlier in part 1, we have discussed about how inflation has been eroding our wealth, while the stockmarket has proven to generate a much higher return in the long run. Some may say that with the current macroeconomic environment, inflation is not that high and it might be safer to put in fixed deposit with the bank. They will want to wait till they got much older and with more capital before they start investing. While there's nothing wrong with that, the younger one starts, the better one can enjoy the effect of compounding interest. Warren Buffet who started an age of 11 in fact thought that he should have started even earlier.

Using a 6% rate of return (considering historical 9% return for stock index) and 55 years old as the end year with an initial starting capital of $10,000, here are the differences in return:

At 55 years old,

Start at 20 -> 76,860

Start at 25 -> 57,435

Start at 30 -> 42,918

Start at 35 -> 32,071

Start at 40 -> 23,966

Start at 45 -> 17,908

For every 5 years younger that one start, it can equate to a lesser return of $10,000, which is your initial starting capital.

Here's another scenario: Assuming the same condition previously but that one add an additional sum of $1000 every year (Saving up $3 per day).

At 55 years old,

Start at 20 -> Total Sum Invested = $45000 Total Return= $194,981

Return Earned= $149,981

Start at 25 -> Total Sum Invested = $40000 Total Return= $141,237

Return Earned= $101,237

Start at 30 -> Total Sum Invested = $35000 Total Return= $101,075

Return Earned= $66,075

Start at 35 -> Total Sum Invested = $30000 Total Return= $71,064

Return Earned= $41,064

Start at 40 -> Total Sum Invested = $25000 Total Return= $48,638

Return Earned= $23,638

Start at 45 -> Total Sum Invested = $20000 Total Return= $31,880

Return Earned= $11,880

Therefore, the earlier that one starts, the higher the absolute return that one can get.

Young Investor Series - Why Should you invest in the stockmarket (Part 1)

I have decided to start the Young Investor Series to encourage and educate more young students and adults to invest in stock because I have believed in the merits of starting young. While I am obviously way too inexperienced, it has been a very meaningful journey for me thus far especially since I started my journey at this time of uncertainty and turbulence. In fact, I believed that I have learned much more than I will have from having started in this current mild bear market. From getting very excited at how the price tick when I first began, I will only get as excited now when I discover a company of great fundamental.

The first reason why you should invest in the stockmarket is that while cash is king, it is never wise to have 100% of your wealth in cash (other than possibly waiting for the next huge financial crisis) because cash has proven to be a depreciating asset due to inflation. Inflation results in the erosion of wealth as the price of goods increases but your cash remain the same. Your 50 dollars note will only provide you with $50 of value next year even if your chicken rice costs you an additional 50 cents. Average inflation has been around 3.5% for the last 100 years, this may seemed little but in fact it is very scary if you will to compound the 3.5%. Using the rule of 72, your wealth will be depleted by 10% every 3 years and half every 20 years. The total amount of inflation from 1913 to 2006 is at a staggering 1929%. Neither should you expect the inflation trend to discontinue as it was only during the Great Depression of the 1930s that you have a long period of deflation.

On the other hand, stockmarket has generated an average of 9% return over 100 years. The key is 100 years, which means such a return is likely only if one invest with a long term outlook. Thus, it is wise to have some of your wealth invested in stockmarket be it directly or indirectly through some form of stock mutual fund or ETF. The stockmarket has over the long term be able to deliver a return that way exceed the inflation rate. One need not put all its wealth into it in order to combat inflation as putting 30% of it in stockmarket will be sufficient to avoid erosion of wealth. This is especially true in Singapore where our bank pays a meagre amount of 0.125% interest on deposits. For every $1000 that you have, the bank will pay you $1.25 yearly.

While many might have heard stories of people going bankrupt from PLAYING with the stockmarket, one can choose to be a passive and defensive investor which does not requires much of your time and effort to be.

In conclusion, one's wealth will be drop by an average of 3.5% yearly if one does not take any action to protect it. Part 2 will be on the magic of compounding interest and why the younger you are the better a magician you are.