A few weeks ago, I started asking readers to submit their money questions in case they wanted a second opinion on their dilemma. If you have a question you would like answered, you can just contact me.
My name is Ken and I am turning 23, single. This year, I felt that I had to diversify my investments. I plan (and have already started) to diversify my finances to many types of savings/investments such as savings, time deposits, stocks, mutual funds, UITF, forex, etc., as well as a personal savings and emergency fund. Although I’m not planning to retire yet, I plan to invest in long-term, 1-5 years investment products. Do you think this is a good idea, considering that I’m completely debt free? Or do you think I have gone overboard in my investment strategy?
Investing is always a good idea, especially for someone with no debt. From the terms you use to describe your investments (time deposits instead of CDs, and UITF, a mutual fund like investment available in the Philippines), I assume you are foreign. The good news is that investment strategies are more to do with you instead of where you are currently living.
Diversification
First off, I believe your investments are spread out too thin. I say that not because I think you are over diversified, but because I believe most non-professionals don’t have the time to track so many investments. Most people buy different mutual funds, only to find that the funds they own are invested in similar stocks. With your own stocks, mutual funds and UITF in the same portfolio, it’s unnecessarily time consuming to dissect everything to see if you are diversified properly. Diversification comes from buying different asset classes to smooth out volatility, not necessarily where you bought the assets from.
Emergency Fund
You are 23, and your whole life is ahead of you. Since you have no debt, I would be more aggressive with your investments, as well as having a less than usual emergency fund. Most people recommend 6 months worth of living expenses, and that is good advice. But for someone like you, I would put less in liquid savings (3 months ought to do it) as long as you have a stable job because someone young like you can probably cut down your expenses drastically and live like a college student if you are forced to down the road.
With less liquid savings, there’s more to invest for the long run. You can cash out your investments if you have to as well. Some people may frown on this advice, because having to withdrawal in a down market is really bad, but at your young age, I believe it is a risk worth taking.
Investment Mix
There’s no standard answer to this. With your age, you can even be extremely aggressive and invest in a 95% / 5%, equity / liquid savings portfolio to start with because you have time to make your money back if the stock markets were to tank. Also, while the ratio is a good place to start, you need to be adjusting this as you age during the next decade of your life as you will:
- age
- have different priorities (ex. want to purchase a home).
- have increased obligations (ex. perhaps a family to take care of).
Forex
Though I know many people who own foreign currencies, I’m not a big fan because most of those people just own them and have the cash in a savings account earning no interest at all. Over here in the US, we can invest in foreign investments like the Brazilian stock market index through an ETF such as the iShares MSCI Brazil Index (symbol: EWZ). Doing this is better because you are not just getting exposure to the Brazil real, but also to have it invested in the Brazilian economy. In my opinion, it’s a much better long term play. So, instead of buying the currency, why not buy its stock market index instead?
If you own forex because you trade currencies frequently, then it’s a different ball game all together. Be aware of the leverage that these investment accounts give you, because you can loose quite a bit of money VERY quickly.
Investment Horizon
You mentioned investing for the long term, but you followed that statement with a 1-5 year period. When we are young, it’s easy to think of 5 years as a very long time, but know that you might be living for the next 80 years, which is the time frame you need to plan for. Look to win battles, but don’t forget the war too.
Lastly, Don’t Forget that Everything Changes with Time
Though I said a 95% equity investment may be for you, whether it’s the right approach to take will depend on at least your job, your tolerance, your net worth and your spending habits. As your situation changes, your ideal investment mix should move with it. Don’t make the mistake of setting and forgetting. If you don’t have time to constantly look after your investments, a financial advisor is still worth the money.
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{ 9 comments… read them below or add one }
Glad you brought that up about the 1-5 year horizon. That’s not “long-term” at all! I’m pretty darned aggressive in my own investing, but I wouldn’t go outside of CDs and FDIC insured savings/money market accounts for something that you’re going to spend in the next few years.
Don’t underestimate the priority changes as you grow older! Starting a family changes your whole financial picture instantly!
Completely agree! I’m sure you may have experienced this. Anyways, at least we could learn financial lessons as early as possible.=)
I’m all for investing aggressively when you are young, so why not just go 100% equity? What’s with sticking 5% somewhere else since he’s so young?
I just mean to invest everything remaining after the emergency fund in equities or more aggressive investments. Whatever the numeric percentage happens to be will depend on how much assets Ken has.
Jason- you have a point, since being young means you have less worries to whatever will happen to your or to your money as opposed to being a responsible head of the family. While I do have above-average risk aversion, I think it’s not advisable to just gamble your hard-earned money away like water=)
@Mike – Agreed. I wonder was wondering if I read this right. Personally, if I have a financial goal that’s less then 3 years away, that money is in a money market fund. I don’t care if it is earning nothing, I would rather sleep at night.
@Ken – Before you begin investing always have a reason to why you’re investing. Just like David said, do you plan to buy a house, start a family, etc…? As soon as you know these answers, you can begin to work backwards.
Well it seems that ordinary savings earn very little interest so I thought of putting my money elsewhere. I don’t actually have a clear picture as of yet whether I plan to buy a house, get married, etc. Probably my main motivation is to save as much as possible, be frugal, prepare for life’s emergencies and major events as I work and save and
reap for returns when the time is ripe. So of course, there is risk involved in any investment so what I thought is to diversify my basket (or portfolio). I currently do have a fat paycheck although I thought David’s previous article on percentages seem to suggest our investment mix doesn’t depend on how much we have but how we view our money.=)
I think I should clarify… The 95% / 5% is for long term investments. If you need the funds soon, you should put them in an online savings account so you have immediate access to it, or in the case that you have an exact date of when you will need money, you can put it into a time deposit, or CD.