The Best Time To Plan For Retirement Is Now

When I first stepped into the working world, I had encountered billboards and advertisements emblazoned with slogans sounding like the blog post title and showing a picture of a man/woman in a graduation gown and/or a young-looking office executive. Back then, being young (and foolhardy), retirement was the last thing on my mind. Come on, there is still at least another 30-plus years to go for me before reaching that stage, and I will think about it “when the time comes”.

Yes, that “time” came just about seven to eight years ago for me, at where I was nearing the halfway point of my working life. Suddenly, that slogan made some sense. The very essence of those messages was hiding in plain sight all along, and it took me that long to realise it. That essence is the power of compounding.

 

Power Of Compounding

 

Most of us had learnt the formula of compounding during our math lessons, which is:

 

Final Amount = Principal x (1 + Interest Rate) ^ Number of years 

(Assuming annual compound)

 

In school, this formula was used typically for calculating bank interest or final bank deposit amount after a certain number of years, but it works well in knowing how much one is getting after a certain period with a definitive rate of return. Hence, the formula can be modified to:

 

Final Amount = Principal x (1 + Return Rate) ^ Number of years

 

The ^ sign is the “power of”, which itself is a very powerful (pun intended) arithmetic function. Adding one to the “power of” would bring a huge jump in the overall result, as shown:

 

2² = 4, 2³ = 8, 2⁴ = 16…

 

Naturally, if the number of years is larger, the final amount would be larger, too. Coupled with pictures of young people in the mentioned billboards and advertisements, it all made sense now: when one is young, the number of years to retirement is a lot, and factoring in compounding, you are likely to end up with a larger final amount than those who started off much later.

 

A Race Between Two Individuals

 

Taking the concept of compounding up a notch, let us have two individuals who are of the same age, X and Y, and a financial product P that generates 5% returns a year. X started investing in P when he was 21 with an initial amount of $10,000 and contributed $5,000 per year for the next 10 years. Y started investing at age 40 with the same initial amount of $10,000 and contributed $5,000 per year for the next 20 years. By age 60, X ended up with $338,852 while Y finished with $200,129, despite the latter contributing more than the former¹. The result showed that compounding works best with a longer time horizon, which works well for X, so it pays off when one invests at a younger age.

 

Clearly for my case, I am Y in the story above. But fret not, for I am giving you this advice:

 

The best time to plan for retirement was 20 years ago. The second-best time is now.

 

Go for it.

 

1 – The Bedokian Portfolio (2^nd Edition), p68-70

Thematic Investing

We all know about investing in asset classes, regions and countries, sectors and industries, and of course, individual companies. However, there is a rising trend of investing along the lines of themes. While thematic investing has been around for quite a while, there is a build-up of interest around it in recent times.

So, what is thematic investing? Pulling out from the CNBC news site, thematic investing is “…buying stocks or other investments that may benefit from a particular trend”¹.

Traditionally, investments are usually based along the lines of asset classes and so on as described in the first paragraph. For thematic investing, however, it tends to straddle across these traditional lines and it can be very focused on the theme in particular. For example, investing on the theme of fintech involves not only the technology and financial services sectors, but also across different countries where there are companies in this field. Fortunately, we have exchange traded funds (ETFs) to cater to such investments. There are many thematic ETFs to select from, and most follow an index, though there are actively managed ones that do not, e.g., some of the ARK ETFs.

 

There are many themes that you can invest in, such as the aforementioned fintech, green energy, cybersecurity, biotech, etc.

 

The Bedokian’s Take

 

Thematic investing forms part of an active Bedokian Portfolio strategy, which I had named it as “the next big thing”. I had shared in my eBook on how to go about it², and had identified three fields to go into back in 2017: cybersecurity, payment solutions and alternative energy.

 

It is an interesting area to venture into, but if you are a beginner investor and/or have a limited capital, it is preferred that you start off with the asset classes first, rather than jump straight into thematic. It is important to start off a portfolio consisted of the different asset classes to capture the benefits of diversification. Once you got your feet wet enough and build up enough investible capital, you can then consider allocating part of your portfolio to thematic.

1 – O’Brien, Sarah. ‘Thematic investing’ has skyrocketed. Here’s how to capitalize on trends that could shape the future. CNBC. 29 Jun 2021. https://www.cnbc.com/2021/06/29/thematic-investing-has-taken-off-how-to-capitalize-on-trends-.html (accessed 10 Oct 2021) 

 

2 – The Bedokian Portfolio (2^nd Edition), p153-154

Keep Calm And Stay Invested

Recently we had been inundated by a lot of goings-on in the financial markets and economy, and most of them were not-so-good stuff. If you had paid attention to the recent news, we have a global energy crisis, the Evergrande debt crisis, the ongoing COVID-19 crisis, the United States debt crisis, etc. After knowing these, does it feel like the whole world is falling around you?

 

Well, short of a big catastrophe which involves a large meteorite, a massive alien invasion or extreme weather changes that you see in the movies, life still goes on. In fact, it is at such down times that opportunities come a-knocking in other places. Other asset classes, regions/countries, sectors/industries, and companies may be enjoying some uptime during this period.

 

And if you are diversified well enough, you may be enjoying some slight gains, or experiencing some slight losses. Diversification is meant to protect against such times, so the heartache is not as bad as a concentrated investment portfolio on the affected areas.

 

If you had noticed, this would be my n^th blog post on staying calm / cool / composed / "ohmmmmmm” in trying moments. Though I may sound like a nag, being human however we have the “fight or flight” instinct built in us, and this behaviour extends to our investment decisions, which may likely result in bad ones. So before selling off everything in panic and run for the hills, we should take a step back and take stock of the situations and scenarios.

 

Stay calm and stay invested.