At some point in life, we will start asking if we have enough money to retire. For those who are lucky enough to ask this question early, you have less to worry about because you still have a long runway ahead. But for those who are above 40, time is ticking. And if they have never invested and have no savings to begin with, can they still build a $1 million nest egg after 15 years?
If you are in a situation where you have zero liquid savings, zero sources of future income, and have no intention of looking for a job, then you will need to look elsewhere for help. We can’t create something out of nothing. There needs to be a starting point.
Setting aside part of your regular income for investing
We will assume that you are 40 years old and still hold a job that pays you a regular income which we believe will be the case for most. And to make things less complex, let’s also discount any other mandatory savings plans that you are already committed to. For example, for Singaporeans, one of them will be your compulsory CPF contributions that build towards an annuity later in your life.
Based on the Ministry of Manpower (MOM) data, the median salary of Singaporeans for those in the early 40s excluding employer CPF contribution is $5,958 in 2022 (source: Ministry of Manpower – Labour Force In Singapore 2022). After deducting your own CPF contribution amounting to 20% of your monthly salary, what is left will be $4,766 for expenditures, cash savings, investments, etc. Expenditures, just like monthly paychecks, can be highly varied among different people depending on their situation and spending habits. But let’s assume you can set aside $2,000 for investing purposes every month and you are ready to put it to work at the start of every month without fail.
Age: 40 years old
Monthly Take Home Pay: $4,766
Monthly Investment Amount: $2,000
Time Horizon: 15 years
What is the annual rate of return rate you need?
The next step is to work out the return we need to achieve our objective of hitting $1,000,000 by the end of 15 years. Let's assume we just invest the $2,000 we set aside at the start of every month and we hold all that we invested till the end of 15 years. If you work out the numbers, you need to generate 12.4% per year or around 1% a month over 15 years. The next question to ask is whether that can be achieved and how.
Are there any assets that can meet the requirements?
If you have been investing, you will know that it is not easy to get an annual rate of return of 12.4% over 15 years. We wish a bank fixed deposit or a T-bill could fetch us that. But we know that is not going to happen. To get such returns, you need to be willing to take on some calculated risk.
If you look at the different asset classes for the most likely candidates, you are going to end up with equities. As a group, they have historically delivered the highest return. US equities, in particular, are among the top performers globally.
Let’s see if the S&P 500 and NASDAQ 100 can deliver what we want over 15 years. To do that, we can use the ETFs, SPY, and QQQ, as a proxy. Using their monthly price data starting from 1999, we can calculate their respective historical rolling 15-year annual rate of return (or CAGR - Compound Annual Growth Rate) and this is what we get.
The answer is both yes and no. If you look at the above chart, it depends on when you start investing and what happens thereafter. And these are things not within our control. If time is already running tight, you don’t have the luxury to wait and no one knows when is a good time to start.
Based on the data, NASDAQ appears to have a better chance but it is more heavily skewed towards technology stocks which tend to be volatile. S&P 500, on the other hand, falls short of our requirement most of the time. And during earlier periods, both their average rolling 15-year annualized return fell below the 12.4% we are looking for. Their range of possible rolling 15-year annualized returns is also very wide. For the S&P 500, it can go as low as 3.9% to as high as 15.6% per year. For NASDAQ, it is worse. You can end up with only 0.2% per year on the lower end and 21.1% per year on the other.
Do also take note that from 1999-2023, we have rolling 15-year periods that start with a severe downturn or go through one or two such harsh periods in between. But none end with a serious bear market. Why do I make special mention of such a scenario? Because that is the one that is likely to present the highest risk to your plans as you would already have accumulated a sizable investment. A major plunge in the stock market, when you are not far off from harvesting your returns, is a major setback and can knock you off your target significantly.
But we don't want drastic negative surprises after 15 years, can we reduce this uncertainty?
The challenge here is you don’t know which side you will end up on after 15 years. That is the uncertainty or the risk associated with investing and it gets larger with riskier assets such as equities.
We don’t mind positive surprises, but none of us like negative ones especially for something as critical as securing retirement funds after a 15-year wait. Unfortunately, you can’t always have the whole cake and eat it. There are tradeoffs we have to accept. But can the situation be made better?
The general perception is that if we want a higher return then we have to take on more risk. That is true if the portfolio is already very efficient and we are unable to reduce its risk any further. But that is not the case here because there is a lot more we can do beyond just holding a basket of equities.
Another typical notion is that if I hold anything other than high-yielding assets such as stocks in my portfolio, my return will become lower. That is also true if you are talking about the long run with passive strategies that just implement a static allocation across different assets with occasional rebalancing as is typically implemented in conventional portfolios. But if we structure the portfolio appropriately, and employ different but complementary active strategies, we can bring the risk down and also enhance the potential long-term returns at the same time. This is what we call an active multi-strategy approach.
The layman analogy to understand a multi-strategy approach is to see yourself as the Chief Investment Officer and you are hiring different investment specialists to work for you. Each of them is experienced and has delivered good returns. You made a great effort to make sure each specialist has specific expertise different from others and thrives in different types of market environments. That makes their skills complementary to one another. So that when one is down, another may be up to cushion his fall. This is a very valuable attribute to have if you want to reduce the risk of your overall portfolio.
There is no point in hiring 10 investment specialists who do the same thing unless your objective is to reduce the workload. Because as far as improving returns or risk is concerned, that will not add any value.
If you want a more technical perspective as to why a multi-strategy approach works, you can read this in an earlier post we wrote Why Multi-Strategy is the Ultimate “Free Lunch”.
AQ Multi-Strategy vs The Equity Indices
Let’s put the AQ Multi-Strategy Model portfolio to the test here. However, its model performance data only runs back to 2006 as some of the ETFs used do not have a history that long. As a proxy, I simulated the period from 2000 to 2002, which was when the dot com bubble burst, with the worst period of the Great Financial Crisis. Then for the period from 2003 to 2005 which is the early recovery period after the dot com bottoms out, we use data following the recovery of the Great Financial Crisis. No two time periods are the same so this exercise will be far from perfect but it can still serve as a general guide.
On observation, the variations of the rolling 15-year CAGR for the multi-strategy model are much smaller. Most people don't realize that is the real value when you lower the risk. It is not about making bigger or smaller swings daily, weekly or monthly. A lower risk means less uncertainty about hitting your target return at the end of 15 years. We can illustrate this in another way.
The range of rolling 15-year CAGRs for the AQ multi-strategy model which is a diversified portfolio comprising multiple strategies is much more narrow than either the S&P 500 or the NASDAQ 100. That means you are less likely to end up deviating too far from the target. While we do not know how the future will unfold, chances of the multi-strategy model suffering a severe shortfall, the case which we all fear, is less likely.
If you want more statistics about the AQ Multi-Strategy model which can be implemented through a senior investment adviser at iFAST Global Markets (Singapore), you read our earlier newsletter.
When it comes to planning, always begin with the end in mind. Be very clear about your objective. Then work out the best solution for your circumstances. All of us have limited resources so any decision we make will likely entail tradeoffs. Knowing the choices available is critical. That is why we have to keep learning by reading, listening to subject matter experts, and talking to professionals to make informed decisions. If you would like to know more, we are always happy to chat over a casual cup of coffee.
We will end the post here. All the best and Happy Lunar New Year everyone!
Note*: All performance data for the AQ Multi-Strategy Model used in this exercise are model performance. Live performance may vary due to execution price slippages, the difference in sizing precisions, etc. Past performance, whether backtested, modeled, or live is not necessarily indicative nor a guarantee of future performance.
Find out ways you can invest through a coffee session!
AllQuant brings to the table a new solution for busy professionals. We put all our 30 years of joint experience across asset management, banking, proprietary trading, and hedge funds to work. And we designed an actively managed multi-strategy model portfolio that is resilient enough to weather different market conditions.
You can now build such a portfolio through iFAST Global Markets without lifting a finger. In this collaboration, we are combining AllQuant’s expertise in hedge fund strategies and iFAST’s advisory capabilities and bringing it to your doorstep.
Ready to start your investment journey? Chat with us over a cup of coffee through a session facilitated by iFAST Senior Investment Adviser, Ou Da Wei, to find out more.
Disclaimer & Disclosure
We are not financial advisers or fund managers. The information published on this Site is provided for informational purposes only. It is not intended to be, nor shall it be construed as, financial advice, an offer, or a solicitation of an offer, to buy or sell an interest in any investment product. Nothing on this site constitutes accounting, regulatory, tax, or other advice.
Any performance shown on this Site is model performance and is not necessarily indicative nor a guarantee of future performance. You should make your own assessment of the relevance, accuracy, and adequacy of the information contained on this Site and consult your independent advisers where necessary.
AllQuant is carrying out introducing activities for iFAST Global Markets (Singapore) as an independent entity and is NOT an agent, servant, employee, representative, or in partnership with iFAST Global Markets (Singapore). AllQuant will be receiving remuneration or introducing fees from iFAST Global Markets (Singapore).