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
1 ping
Andrew Hallam says:
November 23, 2011 at 11:13 am (UTC 8 )
Hey Dx,
I don’t think it matters which brokerage you choose, as long as the commissions are reasonable, and you have access to the Singapore exchange and the New York exchange (which you likely would with any of those brokerages)
The ETF ticker symbols would be the same, regardless of the brokerage you choose.
I don’t think I have a Singaporean reviewer for my book on Amazon. Do you have an Amazon account? And if so, would you mind reviewing my book? I would really appreciate that! Here’s the link, in case you can: http://www.amazon.ca/Millionaire-Teacher-Wealth-Should-Learned/dp/0470830069/ref=sr_1_1?s=books&ie=UTF8&qid=1320029392&sr=1-1
Thanks Dx!
Andrew
dx says:
November 24, 2011 at 11:11 pm (UTC 8 )
Thanks for sharing.
No prob, I will have to register for an account first though i guess
Edwin says:
November 27, 2011 at 2:39 pm (UTC 8 )
Hi Andrew,
Just a quick question. Will I be able to purchase Vanguard ETFs through a local brokerage such as DBS Vickers? I am a Singaporean residing here, shouldn’t be a problem right?
Andrew Hallam says:
February 21, 2012 at 5:21 pm (UTC 8 )
Hi Edwin,
I own some Vanguard ETFs myself through DBS Vickers. They’re easy to buy from here.
I’m sorry I didn’t respond earlier. I missed your question!
Cheers,
Andrew
Edwin says:
February 21, 2012 at 6:54 pm (UTC 8 )
Just to double-check… These Vanguard ETFs you own through DBS Vickers are from the US stock exchange right?
Andrew Hallam says:
February 21, 2012 at 7:31 pm (UTC 8 )
That’s right Edwin.
If they make 10% in a given year, roughly 8% would come from capital gains and 2% from dividends.
You’d make roughly 8% capital gains free, and pay roughly 30% witholding tax on the dividend. After taxes, you would clear about 9.4% if the ETF made 10%.
Edwin says:
February 21, 2012 at 8:22 pm (UTC 8 )
Thanks alot Andrew! That was helpful.
I am turning 21 soon and plan to put my money which I have accumulated over the past two years into good use. ETFs are definitely on my list, will do some homework on the local and Vanguard ETFs before I make any purchase.
Haven’t read your book but gonna get it real soon!
Thanks once again!
Wouter says:
February 20, 2012 at 9:26 am (UTC 8 )
Hi Andrew,
I’m an expat from Europe, and been in Singapore a couple of years. As most europeans loyal to their banks, I have always been keeping my money hidden away in a savings account.
I came across your website two weeks ago, and read lots of the articles. In the past two weeks, I’ve ordered read your book Millionaire Teacher and one other that you recommended “The smartest Investment book you’ll ever read”. I got them by post over the weekend and read straight through them. Even my wife, who hates finance and numbers, got excited and she’s reading them now. Both in your book, and the other book, the concepts are explained in a very down to earth fashion (like the “dog on the leash”) so begginers like me can understand and even feel confident in what to do next. So I gotta thank you for that!
I’ve already opened my Vickers account and I’m looking forward to picking the right index funds.
Besides your books, I’ve also been reading about the Permanent Portfolio (a concept pretty similar). I see that there are even US traded stocks, such as PRPFX, which track the permanent portfolio with relatively low fees. I’d love to hear your opinion about these.
Andrew Hallam says:
February 21, 2012 at 5:06 pm (UTC 8 )
Hi Wouter,
I’m glad you liked my book. And I like the fact that you’re reading beyond it and checking other ideas out.
As for the Permanent Portfolio you gave me the ticker for, it has a higher expense ratio than I am used to (roughly 77 basis points, I believe) and it seems to have a high percentage of gold and silver.
If gold and silver were your thing, it would be a lot cheaper to buy a gold or silver ETF.
As for the indexing article you linked to, thanks for sending it. The article seems to suggest that it’s easy to front run the components of an index fund if you’re an astute investor. The trouble is that most professional investors are very astute. And yet, they still lose to the indexes despite all their formulas.
If you’re really taken by the argument in the article, you could buy a large cap index, mid cap index and small cap index, as well as two different sized international ETFs and a bond ETF. Rebalance those, and you have even further diversification…without a large cap bias. Will it beat a simple portfolio of a total international, total domestic and a bond index? I don’t know. In the recent past (ten years) it would have, but there’s no guarantee going forward.
I like knowing that I have a really simple account costing me about 12 basis points a year (expense ratio 0.12%) which will beat most professional investors, regardless of what they do.
Ironically, most professional investors don’t have the guts to buy what’s out of favor. Like most individual stock buyers, they too like buying recent winners. The human mind really isn’t wired to invest very well. That’s another great argument for rebalancing a bunch of indexes annually, and letting the profits bring you far further ahead of most professional investors, decade after decade.
Cheers,
Andrew
Wouter says:
February 22, 2012 at 11:29 am (UTC 8 )
Andrew,
Thanks for the message. I always value your wise words.
I’m still in my research period and my total investing knowledge is about 2 weeks old now! But we all know that age doesn’t matter, what matters is what you do with your time…
I agree that the PRPFX has a higher expense ratio, still it seems to be performing pretty well, even during the down cycle. That’s probably where the gold and silver played their parts.
I agree on your view on the article. It takes some effort to overcome our desires to try to invest in something which is doing very good! I understand the yearly (or twice per year) rebalancing and how it plays out on the long run. Both books I mentioned above really helped me to understand this.
So with my main chunk in my savings in the bank in Europe, and a nice salary (part in Singapore part in Europe, and I am flexible to change the ratio), this is what I was planning to do with it.
I’ve set up a traders account in Singapore with DBS Vickers and in Europe one which is linked to my European account (through the same bank). I checked the fees for this bank and they are comparable, even slightly better than DBS Vickers. I do not want to loose too many transaction fees or exchange rate fees to move this chunk over to my Singapore account, especially now the Euro is pretty low.
This would be my strategy:
I’d put 25% on PRPFX (let’s say I like competing with myself) from the European account (EUR -> USD)
Put 50% in a balanced portfolio with 30% bonds, 70% index/ETF funds, bonds focusing on Singapore and the more stable European ones, and index/ETF mixed European/World/U.S./Singapore.
Our experience with for example Ex-Yugoslavia, is that when a country does collapse or large scale wars break out, Gold is really the only thing to keep you safe. Though not a good investment as you mentioned in your book, I do believe I would work on having 25% in physical gold/silver.
The money I receive per month through salary would go towards rebalancing, and I have maximized my Singapore withdrawal, to be used through DBS.
I’m not much of a gambler, but I am competitive, that’s probably why I split those 25% from the 50% and test out the PRPFX versus my main chunk.
I’d appreciate any feedback or advice you might have
Andrew Hallam says:
February 22, 2012 at 2:23 pm (UTC 8 )
Hi Wouter,
Putting 25% in the PRPFX fund doesn’t make a lot of sense. If you want gold in your portfolio, or precious metals, ensure that it’s just a small part of your portfolio. Twenty five percent is HUGE, and you are chasing a rising asset class. This is exactly the mistake many new (and old) investors make. Remember, never select a fund or stock or asset class based on how well it has recently performed, unless you want a very expensive education.
Cheers,
Andrew
Andrew Hallam says:
February 22, 2012 at 2:27 pm (UTC 8 )
Don’t forget that if you want to invest well, you have to check your competitiveness at the door. Competitiveness works well in almost any other endeavor, but not this one.
I recommend that you buy a copy of Larry Swedroe’s latest book about mistakes investors make. It would be an awesome investment.
As a man, you are genetically predisposed towards NOT being a good investor, based on ego and the desire to compete (two weaknesses women share less of). But if you can invest like a Buddha, using evidence based techniques to increase your success, you’ll do very well. But that’s easier said than done, for most males.
Wouter says:
February 27, 2012 at 1:50 pm (UTC 8 )
Thanks for the tip on the Larry Swedroe book. It sounds like even though I’ve read about these common mistakes, it’s still not that easy to actually avoid them consciously. I’ll kick that competitive side whenever it’s popping up again!
I agree with you on the PRPFX thing. It might sound good to have this part in gold to help you through inflation periods, but if I’m going to have separate physical gold, there’s no need to burden a long term portfolio with more of the same, giving much less returns over the longer period.
I’m rebalancing and simplifying my plans, and this is what I’m thinking about:
30% bonds (I’m 30), split between Singapore (A35 through Vickers) and Europe. I’m still trying to find a suitable European bond index to invest in, in the Euronext market. Any tips on what to look for?
70% index / ETF, split between Europe, S&P500, VT and Singapore (ES3 through Vickers). For some reason I couldn’t find “VT” in my drop-down list through my European account, but I was able to find “VTI”, which is a “U.S. only” version of the VT. I’d say with a Singaporean/European/S&P500 part, I might not need the VT/VTI and I can simplify it even further.
I’m being charged only 0.2% for all orders on Euronext, so I guess it makes sense to look for the best index funds / ETF within Euronext. All other orders outside Euronext cost me 0.6%. I was thinking to foxus my Europe section on Euro Stoxx 50, but seem to face difficulties finding it in my dropdown list through my bank in europe, for the Euronext market. Also for the S&P500 I see that there’s quite a large selection. I’ll need some time to understand the differences between them so I don’t pick a wrong one. It looks like code “IVV” is what I’m looking for.
Now I got familiar with my Singapore account, it’s again a learning curve to get used to European accounts.
Through my bank in Europe, I can’t always search the list of stocks based on stock code, many times they are left blank and instead they use something called “ISIN-code”. I still need to figure out how to find what I need with this system. Europe often tries to do things differently, and it almost always adds complexity
Joy says:
April 30, 2012 at 4:05 pm (UTC 8 )
Hi Andrew,
Are you into trading yourself?
Regards,
Joy
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Singaporeans Investing Cheaply with Exchange Traded Index Funds » Andrew Hallam says:
November 22, 2011 at 9:58 am (UTC 8 )
[...] Read Part 1 [...]