Salary earners can grow rich in their lifetime, saving 29 million baht by the time they turn 60.
A woman walks into a bank in Bangkok recently. By starting early, compound interest can work wonders for your retirement fun, according to Somjin Sornpaisarn, the managing director of TMB Asset Management and the author of the book ‘10 years, 10 million’. PATIPAT JANTHONG
You may think this is just a dream, but it is reachable for those with good saving and discipline who follow a special financial model.
To achieve this goal, you must start early. If people start saving 5,000 baht per month when they are 26 and increase the amount by 5% every year until they are 60, they could have a big amount if they invest in stocks and allow a professional fund manager to manage the portfolio.
You can invest in equity funds, and assuming they give an average return of 10% per year, your money could rise to 29 million baht when you retire.
"Your dream can come true, but you need to follow the investment model strictly," said Somjin Sornpaisarn, the managing director of TMB Asset Management and the author of the book 10 years, 10 million.
He explained that if you start saving at 26, then you will save 60,000 baht in the first year, plus a return of 10% or 6,000 baht, making a total of 66,000 baht.
The second year, you increase your monthly amount by 5% to 5,250 baht, saving 63,000 baht in the year. With your savings of 66,000 baht from the first year, you will have 129,000 baht. A 10% return will take that figure to 141,900 baht.
When you are 59, you may have to save 26,267 baht per month or 315,204 baht for 12 months.
Your total savings and returns for 33 years will be 27,103,706 baht, while the return on this amount by the end of the 33rd year will be 2,710,371 baht. So you will have 29,814,076 baht when you are 60 or when you retire.
Mr Somjin said saving only with a provident fund is not enough to cover spending after retirement. Inflation is rising and could reduce the real return from a provident fund.
He said salaried people can increase their savings through long-term investment funds or retirement mutual funds, as both have tax privileges for those paying personal income tax. Investment choices should fit with the risk appetite of each person.
"Many people say they really don't understand investments apart from bank savings. But there are many asset management firms specialising in investments that can advise and plan your long-term investments to suit your needs," said Mr Somjin.
Generally, investors can choose from three investment portfolios according to their risk appetite.
The low-risk portfolio is appropriate for conservative investors. It invests 30% in stocks, 40% in debt and 30% in the money market.
The medium-risk portfolio invests 20% in the money market, 50% in stocks and 30% in bonds.
The aggressive portfolio invests 70% in stocks, 20% in debt and 10% in the money market.
Young people, who have a long period to even out risks and returns, are recommended to build an aggressive portfolio that can invest in high-risk assets.
The average return of stocks over the long term is higher than other assets. Statistics for average returns for the period 1999-2011 showed that investment in cash had a return of 2.61%, short-term bonds yielded 4.03%, bonds 5.96% and stocks 11.78%.
The highest returns of each asset over the same period were 6% (cash), 7.84% (short-term bonds), 18.78% (bonds) and 120.68% (stocks).
The lowest returns of each asset over the same period were 0.68% (cash), 0.42% (short-term bonds), -4.18% (bonds) and -44.12% (stocks).
The average annual returns of each portfolio were also different. The low-risk portfolio had a return of 7.99%, the medium-risk portfolio 9.86% and the aggressive portfolio 11.125%.
The highest returns were 38.01% (low-risk), 61.63% (medium-risk) and 85.25% (aggressive), while the lowest returns were -7.75% (low-risk), -18.14% (medium-risk) and -28.53% (aggressive).
However, bonds and stocks returned vastly differing returns in some years. In 2008, bonds returned 18.78% but stocks had a negative return of 44.12%. In 2009, bonds had a negative return of 4.18%, but stocks returned 69.2%.
"Good investment is a good diversification of asset allocations and risks," said Mr Somjin.
Investment strategy is similar to football in that there will be an attacking player, a midfield player and a defensive player. The attacking player is an asset such as stocks that has a duty to make wealth. Midfield players are debt instruments that try to maintain returns and cash, while defensive players are short-term bonds and deposits with a duty to protect risks and provide liquidity.
In summary, stocks have a good average return compared with other assets, but they can be subject to high volatility.
The "high-risk, high-return" approach can beat rising inflation and bring high returns, so the aggressive portfolio is recommended for long-term investment of at least three years.
About the author
- Writer: Nuntawun Polkuamdee
Position: Business Reporter