Investment Start Age, Compound Interest and Personal Investment Strategy

Investment start age plays an important role in final return. Let us assume annual return of an investment is consistent. The investment vehicles in this discussion are fixed deposits - 2.5% p.a, EPF - 6% p.a., government unit trust - 8% p.a., unit trust - 10% p.a., stock - 12% p.a. and optimized portfolio - 15% p.a.
Every year, investors invest RM12,000 in the individual vehicle. 

Scenario#1: Investment start age in different time frame
Mr.J - Start his investment during 15 years old
Mr.K - Start his investment during 25 years old
Mr.L - Start his investment during 35 years old
Mr.M - Start his investment during 45 years old
Mr.N - Start his investment during 55 years old
Mr.O - Start his investment during 65 years old

a) Fixed deposits - 2.5% p.a.

b) EPF - 6% p.a.

c) Government unit trust - 8% p.a.

d) Unit trust - 10% p.a.

e) Stock - 12% p.a.

f) Optimized portfolio - 15% p.a.

 If you want to know your investment's compounding effect, you may use the Excel formula as below (0 for end mode while 1 for begin mode):

Observation:
1. compounding effects works perfectly for those who starts his investment earlier.
 


Scenario#2: effect of the investment return 

Observation:
1. higher return has higher compounding effect. It has a huge different between 2.5% p.a. and 15% p.a.

Here is the compounding effect of the individual investment vehicle. This is the template for calculating the expected return, provided annual return is consistent.

Discussion:
we shall start our investment earlier and invest in low standard deviation portfolio rather timing the right time in the market. Bull and bear are just two animals in the jungle.

Of course, higher return rate resulted higher expected return. However, the suitable desire rate of return shall be calculated from your needs - it could be children education fund, retirement fund, personal objective or others. The desire rate of return shall match with your risk level. An investment which only offer high return without considering the risk level endangers the particular investment, especially in the bull run - traders or retailer is blind with the high rate of return from an investment.


Personal Strategies:
Expected return, standard deviation and sharpe ratio are used to determine the quality of an investment while portfolio optimization is used to decide the asset allocation of a portfolio. Dollar cost averaging is the most effective method to secure your portfolio.

Asset allocation plays important role in a successful investment.

For an optimized portfolio - Standard deviation is lower than the expected return

For my current portfolio - Standard deviation is higher than the expected return

Expected return between my optimized and current portfolio is almost the same, but the risk level is different. That is why it results lower sharpe as I compare to optimized.

For the effective allocation accordingly to the optimization from Excel solver, my current portfolio's risk is in the reducing trend. Thus, it produces an improving sharpe ratio (However, the Sharpe ratio after September is eroded with the increment of risk free rate recently).