Spending the monthly allowance wisely: a guide for the National Serviceman

Following the revision in NSF allowance in December last year, a recruit's allowance is now $560 instead of $480 previously. Instead of simply wasting your money over the weekends, you could put your money to better use and start your investing journey.

I have previously blogged about how should anyhow invest. You can read the blog post: here. In short, it is more about determining your asset allocation between stocks and bonds, and thereafter rebalancing it yearly. For stocks, put it equally into the Vanguard Total World Stock Index (VT) and the Straits Time Index (STI); for bonds, put it into the ABF Singapore Bond Index Fund.

How much to invest?

$560 for about 8 days of civilian life is about $70 a day. Come to think of it, in one weekend, you could watch 1 movie, have 2 good meals, and perhaps a game of Futsal, and it would cost you $50 a weekend? In other words, by enjoying your book out, you could still save around $260 a month. Let's just assume a savings of $200 a month.

Where and how to invest?

If you are a NSF, probably you would be below the age of 25. In my opinion, you should go for a 80/20 allocation between stocks and bonds. Of course, feel free to use the investment questionnaire here to determine your risk profile too: here. In other words, you would have $160 to put into equities and $40 for bonds monthly.

Let's look at the equities portion first. The current price of the VT is US$51.47 or S$71.66, using an exchange rate of 1.39. We will put $80 to purchase one stock of the VT every month. The current price of the STI is S$2.58, but we must purchase in 100 shares, making the minimum investment $258. Since we are unable to purchase one lot using our $80, we will save this $80 till it equals or exceeds the minimum of one lot of STI. (For information on how to buy a US fund, you can use a Standard Chartered account, Kevin at Turtle Investor has written a extensive post on it: here)

This will be the logic used from now on. Whenever your savings do not meet the minimum investment, you should save and accumulate till it does and then purchase the minimum required. Do not hold in order to time the market.

For the bonds portion, the Bond ETF currently cause $1.16, which means that one lot cost $116. Similarly, our $40 a month is unable to purchase the minimum required. So, we will do the same thing. Accumulate till it reaches or exceeds the minimum amount required, and purchase it.

Then I just wait?

Yes, wait for 1 year, and then take action again. In one years' time, you should have 12 stocks of VT, 3 lots of STI, and 4 lots of the Bond ETF, assuming current market prices. Your actual allocation will differ, but it is okay.

What you have to do, is to count the total value of your stock portfolio and bond portfolio. Do a simple analysis to check if the VT still holds 40% of your total portfolio value, STI holds 40%, and the Bond ETF holds 20%.

Your actual percentage will be a ugly number and you have to check if you need to do a rebalancing. A simple rule is 5% from the deviation from the desired allocation of 25% if the desired allocation is less than 20%. In this case, you will rebalance if VT holds less than 35% or more than 45% of total portfolio, or STI holds less than 35% or more than 45% of total portfolio, and the Bond ETF holds less than 15% or more than 25% of total portfolio.

To rebalance, you simply sell the fund which has outperformed, and buy more of the one which has underperformed. You can use a rebalancing calculator: here.

What is my expected return?

As index investor, we do not predict the return. We simply take what the market gives us. However, stocks have returned 7% in the long run, and bonds around 5%. Using the portfolio mix of 80/20 should give a historical return of 6.6%. Take note this is past data and not expected to continue in the future.

If it really returns around 6.6%, you should be able to hold around $5,100 in your portfolio. Of course, this is assuming the stock market moves in a straight line, which almost always doesn't happen, not least in the short run of 2 years.

After NS

You can continue to put in $200 a month or increase it if you can, which is the best case, but it is okay not to do so. Having a $5,000 initial capital at the age of 20 (for most) is good enough. Holding it for another 10 years can give can give you $9,000 (assuming the same 6.6% return). If you hold till retirement age of 65, which is perhaps another 40 years later, this $5,000 becomes $66,000 instead.

Not bad for $200 a month for 2 years.
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