Over the past 3 years, I’ve spent thousands of dollars of my own money distributing books to teachers at Singapore American School, on the merits of indexed investing.
The books were comprised of 15 different titles. Call it a mission of a driven man, but I’ve been very surprised at the investment fees paid by local Singaporeans and expatriates—which is the only reason I’ve emptied my pockets to distribute free books on inexpensive, common sense investing.
When I first moved to Singapore, I searched for index investing alternatives for my expatriate and Singaporean friends. I came across an article, ‘Buy Low Cost Index Funds‘, by Mr. Tan Kin Liam (The Former Chief Executive at NTUC Income) but the indexed options he gave were still surprisingly pricey.
It’s well known that investors stand the greatest statistical chance of stock market success when they buy index funds. But a lack of financial education keeps many people buying their far more expensive cousins: actively managed mutual funds, also known as Unit Trusts. What’s worse, is that many investment companies charge additional wrap fees on top of the excessive fees charged by unit trusts.
When actively managed funds charge more than 1.5% annually, and then the investment service company takes a further 1.75% annually in advisor’s fees (See the Raymond James Freedom Account) investors are giving away more than 3% annually. If the stock market compounds at 9% annually, going forward, then investors are giving away 33% of their profits, when paying 3% in fees. It shouldn’t be legal, but it is.
If the markets make 6% going forward (a rate of return many people would have been very happy with over the past decade) then investors paying 3% in fees are giving away 50% of their profits to fee-hungry firms.
What does this mean?
Investors giving away 3% annually in fees are likely to make less than 1/3 of what they deserve over an investment lifetime, as you can see by the example below:
$10,000 at 6% annually = $102,858.18
$10,000 at 9% annually = $314,094.20
Seemingly small fees make HUGE differences.
How about track records of indexed accounts?
In the U.S., more than 50% of pension funds are indexed. Of the pension funds that aren’t indexed, nearly 90% have underperformed a combination of stock and bond indexes.
Investing with low cost, diversified indexes is a powerful strategy. Most unit trusts/mutual funds are expensive.
And you don’t get what you pay for in the investment service industry.
It’s so bad in the U.S. that some companies are doing their best to educate their employees—trying to save them from paying excessive investment fees. Read More
While other people, like Yale University’s endowment fund manager, David Swenson, suggests that the systemic exploitation of individual investors (via unit trust/mutual fund fees) requires U.S. government action. In his superb book, Unconventional Success: A Fundamental Approach to Personal Investment, he shows the industry for what it is: a giant fleecing machine.
If he saw what went on with offshore investment companies like Zurich, he’d rewrite the whole darn thing. Massive early withdraw penalties with companies like Zurich ensure that you won’t move your money, even after you wise up to the drenching.
How about a comparison?
Over a short period of time, anything can happen with investments. You might even have a high cost advisor who does well with your account over a short period of five years or so. But over a lengthier period of time, an actively managed unit trust (mutual fund) account is like a swimmer wearing boots, while dragging a chunk of carpet through the water. Eventually, the indexes are going to show him who’s boss.
Looking long term, if you had simply split $100 equally into 3 indexes (Canadian stock index, U.S. stock index, Canadian bond index) in 1976, it would be worth more than $3000 today, with no money added. Check it out here: to see how this balanced portfolio of indexes would have weathered the 1987 market crash, the 2000-2003 crash and the 2008/2009 crash.
For Brits, Australians, New Zealanders and Singaporeans, you could create your own “home country bias”. For example, instead of a Canadian bias (as with the indexed sample account above) you could have a home country bias with Singaporean, British, Australian or Kiwi indexes.
Historically, returns would have been similar to the Canadian example.
But how do you open an account and get started?
Those based in Singapore can open a brokerage account with DBS Vickers. Instead of paying 3%+ as an annual investment fee, you could end up paying less than 0.3% while purchasing indexed products called exchange traded funds (ETFs)
The savings go to your bottom line.
In part II of this series, I’ll show you how to construct an account of inexpensive, diversified indexed ETFs through DBS Vickers.
Donating to charity is great—but donating to the financial service industry is foolish.
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43 comments
The Biz of Life says:
August 27, 2010 at 2:03 am (UTC 8 )
Do you do your investing in Canadian dollars? Singapore dollars? Or do you split your assets between the currencies? When you buys indexes are they through Canadian based firms?
Kevin@InvestItWisely says:
August 27, 2010 at 2:07 am (UTC 8 )
Nice post, Andrew. I am currently looking into how Canadians can save money by purchasing Vanguard ETFs through a low-cost broker instead of sticking with their bank mutual funds. It will be an interesting comparison.
Andrew Hallam says:
August 27, 2010 at 6:26 am (UTC 8 )
@The Biz of Life
Great questions Biz,
Personally, I get paid in Singapore dollars. But my brokerage at DBS Vickers (in Singapore)allows me to buy off the New York, Tokyo, Toronto or Singapore exchange. It’s a bit like a Canadian at home buying, say, Coca Cola. Canadian money would get converted to U.S. to make the purchase off the New York Stock Exchange.
My wife and I don’t know where we’ll end up eventually so our bonds are in U.S. short term government bond indexes and Canadian short term bond indexes. Our equities are somewhat diversified based on global capitalization: with a slight lean to the U.S. side. We own plenty of the first world international index (VEA) and my U.S. exposure is in common stocks only. My Canadian equity exposure is small, but growing. I own the high dividend yielding exchange traded index fund (XDV.TO) off the Toronto stock exchange.
Andrew Hallam says:
August 27, 2010 at 6:30 am (UTC 8 )
@Kevin@InvestItWisely
Hey Kevin,
I ran some number on that years ago. There’s an account size threshold for Canadians (in Canada) where it makes sense to go with ETFs, and pay a commission on each purchase, versus paying relatively high expense ratios for bank offered indexes. But I forgot what it was! I look forward to your findings!
Andrew
Financial Cents says:
August 28, 2010 at 12:06 am (UTC 8 )
@Kevin – I look forward to your findings as well. Put some dancing ants around that post and make it stand out
@Andrew – great article and great generosity!
BTW – speaking of books, did you start reading The Investment Zoo yet?
Andrew Hallam says:
August 28, 2010 at 5:13 am (UTC 8 )
@Financial Cents
Hey Mark,
I’m glad you mentioned that title again. I haven’t started reading it, but I’ve written it down and pasted it on my computer.
I’ve been working on a time consuming book project and haven’t read anything other than what I’ve specifically needed for work and writing. Last night Wiley Publishing sent me my book contract. It’s weird to think of Wiley’s finance authors along with my own name: There’s John Bogle, John Neff, Lawrence Cunningham (who wrote the Essays of Warren Buffett), Robert Hagstrom, Kenneth Fisher, Charles Ellis and…lil old me.
In about 6 weeks, I’ll be finished this madness of writing like a nut….and I’ll look forward to enjoying The Investment Zoo.
Thanks again for mentioning it Mark.
Financial Cents says:
August 28, 2010 at 9:21 pm (UTC 8 )
Hey Andrew,
Congrats on the book contract! I wish you continued success in your writing journey. Sounds like another milestone. Keep your readers (including me) posted.
Cheers,
Mark
Barb Friedberg says:
September 22, 2010 at 3:31 am (UTC 8 )
What a wonderful endeavor. Kudos-Now that’s charity that is cutting edge!!!
Andrew Hallam says:
September 24, 2010 at 9:32 pm (UTC 8 )
@Barb Friedberg
Thanks Barb,
And I enjoyed reading your blog about your family’s finances. Your portfolio is really solid and the fact that you’re also educating people about it is superb.
larry swedroe says:
February 4, 2011 at 10:17 am (UTC 8 )
Andrew
Just wanted to let you know that I received copy of your book. Unfortunately you did not provide any contact information. Luckily found this in google search.
Will try to get to it in near future.
I hope you enjoy my new book, The Quest for Alpha and would appreciate anything you can do to help promote it.
Best wishes
Larry
Wynblock says:
August 22, 2011 at 3:08 pm (UTC 8 )
Hi Andrew,
I don’t know if you can help me. I am totally new and ignorant with mutual funds and ETFs. I have read some article about mutual fund in the Philippines(i’m a Filipino) and i wanted to try as my first investment for the money i’ve earned in Singapore while working (small amount only). Is it possible to do it in Singapore (mutual fund as expat)?
I would be glad to hear your advice thank you.
Andrew Hallam says:
August 22, 2011 at 9:14 pm (UTC 8 )
Hey Wynblock,
You might be interested in picking up a copy of my book. You should be able to find it in Kinokunia in about one week’s time. It should give you a good foundation, and then you can buy exchange traded index funds through Singapore’s DBS Vickers brokerage. This is the route I recommend.
Andrew
PY says:
August 23, 2011 at 11:45 pm (UTC 8 )
Hi Andrew,
I am in my early 20s and just got into the working life as well as investing. With regards to the Singapore market, are ETFs such as the Lyxor S&P500 ETF a good index fund with low expense ratio? I’m trying to keep my investments within SGX to minimize dealing with other currencies.
My investment is approximately:
25% STI ETF
25% S&P500 (or another US index fund)
25% Emerging countries
25% Bonds
Any comments would be greatly appreciated.
Andrew Hallam says:
August 24, 2011 at 8:59 am (UTC 8 )
PY,
That looks like a fabulous, low cost account. I’m not familiar with the expense ratio on the S&P 500 index you mentioned, but just make sure it’s lower than half a percentage point, and you’ll be OK.
Also, keep in mind that you take currency risk no matter who you buy your S&P 500 index through: whether through DBS Vickers, using the ticker symbol “SPY” (where you would pay roughly 0.09% as an expense ratio) or with the S&P 500 index you mentioned.
Great job on constructing a really solid looking account PY!
Babayan says:
September 25, 2011 at 10:41 pm (UTC 8 )
Hi Andrew,
Do you recommend investing in Vanguard’s range of index funds?
Babayan
Andrew Hallam says:
September 26, 2011 at 7:21 am (UTC 8 )
Hey Babayan,
If you live in the U.S., I definitely recommend Vanguard.
But if you live in Singapore, I don’t recommend buying Vanguard indexes through an intermediary. I know that a company in Singapore offers a S&P 500 Vanguard index fund, but they nail their prospective investors with a fee that make the fund cost nearly 1% per year–and they also charge roughly a 2% sales fee on all purchases.
Are you based in the U.S. or Singapore?
Babayan says:
September 26, 2011 at 11:20 am (UTC 8 )
Hi Andrew,
Thanks for replying. I am based in Singapore – I moved here earlier this year. It is unfortunate that Vanguard’s establishment here in Singapore serves only institutional clients and not personal investors. You’re right about not going through any Singaporean intermediary to purchase Vanguard funds. I think it should be possible to open an account directly with Vanguard in the US. After all, I see many of my colleagues here, invest in US markets through US based brokers like TD Ameritrade.
Babayan
Andrew Hallam says:
September 26, 2011 at 12:48 pm (UTC 8 )
Babayan,
You can certainly buy the Vanguard ETFs, but not the standard Vanguard indexes without actually residing in the U.S. But don’t forget the Singapore market index that you can buy straight off the Singapore exchange. Considering that you’re Singaporean, this should be a core of your portfolio.
AnneG says:
October 25, 2011 at 12:35 pm (UTC 8 )
Hi Andrew,
If we have ameritrade account, can we buy the Vanguard ETFs although we are residing in Singapore.
Andrew Hallam says:
October 26, 2011 at 9:28 am (UTC 8 )
Hi Anne,
Yes you can.
Ben says:
November 4, 2011 at 12:22 am (UTC 8 )
Hi Andrew,
I’m a Singaporean, and I’m very new to stocks. But after reading, I think Index Fund is a very good place to put my very first dollar to. Do you think it is? And if so, what are the funds which you’ll recommend? I’m going to open a DBS Vickers acct soon. And yes, I’m buying your book this weekend!
Paulmcc says:
November 19, 2011 at 9:52 pm (UTC 8 )
Andrew,
My wife, a Canadian and myself, an American, live in Kuala Lumpur. Are we eligible to open DBS Vickers accounts? If we are both eligible, which one of us should hold the account based on tax considerations?
Paul
Andrew Hallam says:
November 20, 2011 at 1:10 pm (UTC 8 )
Hi Paul,
As a Canadian, your wife could open the account in her name. As an American, you wouldn’t be able to.
Cheers,
Andrew
PaulMcC says:
November 21, 2011 at 8:48 pm (UTC 8 )
Thanks, Andrew.
Aaron says:
November 20, 2011 at 9:59 pm (UTC 8 )
Hi Andrew:
I have currently purchased your book and looking to buy into Index Funds. I have a Citibank Brokerage account from Singapore that allows me to trade in the US and Singapore markets. I am a Canadian expat that used to work in Singapore but now lives and works in Malaysia. A couple of questions: Should I buy into Vanguard index funds through Citibank? Or just buy into the Singapore market?
https://www.citibank.com.sg/gcb/investments/citi_brokerage.htm
Here are the fees on Citibank’s website.
Thanks
Aaron
Andrew Hallam says:
November 21, 2011 at 1:36 am (UTC 8 )
Hi Aaron,
Unfortunately, if you use Citibank, you won’t be able to buy a Canadian bond index, and the Canadian stock index that you would buy (off the New York stock exchange, using Citi as your brokerage) has a very high expense ratio (for an ETF)
Open an account with DBS Vickers and build a portfolio that will give you more of a home country bias. With it, you can buy everything that I recommended in my book. But with Citi, you can’t. Citi won’t give you access to the Toronto Stock Exchange. But DBS will.
Cheers,
Andrew
dx says:
November 21, 2011 at 7:16 pm (UTC 8 )
hi Andrew,
is there a part 2 to this series as mentioned in the post?
Andrew Hallam says:
November 22, 2011 at 9:47 am (UTC 8 )
Hey dx,
Sorry for not making this easier. Here it is! http://andrewhallam.com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/
dx says:
November 23, 2011 at 10:23 am (UTC 8 )
Hi Andrew,
Thanks for the link. It is actually my first time trying to start an investment portfolio after reading your book, however I am still confused over which brokerage firms to choose from. You recommended DBS Vickers as it is the brokerage that you use. However in my case, I actually do have a an existing trading account with my mom who works in UOB Kay Hian as a remisier(she earns 40% comm), and recently I have read about Stanchart’s new online trading system which charges no minimum commission and seems to have better rates(which may change in the future), but it seems that our shares will be kept with SCB instead of CDP which makes it complicated.
Would be interested to know what is your take on this. Should I go for DBS Vickers, UOB Kay Hian or Standard chartered, and would there be any difference if I want to purchase ETFs and Bonds as taught in your book? Thanks:)
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