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Oct 01 2010

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Singaporeans Investing Cheaply with Exchange Traded Index Funds


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Singaporeans Investing Cheaply with Exchange Traded Index Funds

Today I was told a heart-breaking story by a Singaporean woman I work with.  After showing me her investment account, I noticed that her broker had invested her $1.1 million U.S. portfolio in a messy combination of mostly Chinese stocks.

The account is currently worth slightly more than $400,000.

She saved well, and she got burned by a broker who cost her half a million U.S. dollars.  Let’s hope karma laces his underwear with Tiger Balm.

Less hazardous than buying individual stocks (like this broker did) is buying unit trusts instead.  But in this series,  I’ve described how index fund investing provides the highest likelihood of success, compared to investing with unit trusts.  And you’ll likely do far better building a simple, diversified portfolio of index funds, than by using the resources of a “Cowboy Broker” who could make you feel as if you’ve been tossed from a horse.

 Index funds are a lot cheaper than unit trusts.  Sure, you can find unit trusts that have done really well in the past, but unfortunately, these products get promoted by salespeople as great, future investments, and they usually go on to disappoint new investors from that point forward.

Even investors working without a broker get seduced by strong, historical returns.  But the only long term certainty is this:

If you build a responsible portfolio blending low cost stock indexes with bond indexes, you’ll beat more than 90% of the professionals over the long haul.  That’s a proven fact.  Gamble if you want.  But the academic data on the statistical superiority of index funds is irrefutable.  And it’s what brokers and advisors (and others in the industry) don’t want you knowing.

It’s easier  for investors to build responsible portfolios of indexes with DBS Vickers.

What will you be buying?

As you get older, you’re going to want to take fewer risks.  Your account will require more stability because you’ll soon be drawing from that money during retirement.

As such, it’s important to have a healthy bond component.  My friend’s broker didn’t buy any investment grade bonds for her account, so when her stocks went south, her account got hammered.  Tiger Balm would go well, mixed with this broker’s laundry detergent, don’t you think?

Many people suggest a bond allocation that’s equivalent to your age.  If you want to be slightly riskier, you could have a bond element representing your age minus 10.

For example, if you’re 50 years old, you might want a bond allocation of 40% to 50% of your total portfolio.

Singaporeans might be interested in the total Singapore bond index.  The stock code for this product is A35. 

For their local stock market exposure, they could buy the Straits Times Stock index.  The stock code for this product is ES3.

Here’s what a balanced portfolio could look like for a 50 year old:

  • 40% in the Singapore Bond index (A35)
  • 30% in the Singapore stock index (ES3)
  • 30% in the world stock index (VT)

The first two indexes above trade on the Singaporean stock market, and the world stock market index trades on the New York Stock exchange.  But you can purchase them all, online, using DBS Vickers—taking a grand total of about 10 minutes.

Then you rebalance with new purchases.  For example, let’s assume that you have allocated your money based on the above model.  Then assume that if the Singapore index hasn’t done as well as the others, after a month or a quarter, then it will represent less than 30% of your account.   So when you add fresh money to your account, you’d add fresh money to that index.  If both the world stock index and the Singapore stock index have increased, leaving this hypothetical investor with less than 40% in the bond index, then they’d add fresh money to the bond index when they want to invest.

This ensures a couple of things:

  1. You’d be rebalancing your portfolio to increase its overall safety
  2. You’d be buying the laggards, which over a long period of time, will also ensure higher returns

This isn’t the same thing as buying individual stocks that are underperforming.  Indexes include many stocks, and indexes will always recover after drops.  You might need patience, but they’ll eventually bounce back.  Indexes, after all, represent the entire market.  They don’t go bankrupt.

Below you can see how to initiate a purchase order for the Singaporean stock index.

  1. First, you select Singapore as the market, as you can see on the first line
  2. Then you place an order to “buy” (see the second line)
  3. Then you order the quantity of shares that you want.  To figure this out, you’ll need to know how much you want to spend.  If you want to spend just over $3000 (Because of the minimal commission involved, I don’t recommend spending less than $3000 at a time) you’ll need to figure out how many units you can buy with $3000. Currently, the price is $3.15 per share, so 1000 shares would cost $3,150. 
  4. Then type in the symbol.  In this case it’s ES3
  5. Then you’ll need to select “Limit Order” and put the most recent price in the “Limit Price” box below it. 
  6. Then you’ll be set to enter your trading password and make your purchase. 

Buying your world index fund

You may want to purchase a world stock market index to cover China, India, the U.S., Europe, Australia, and the remaining first world and emerging market stock indexes.

I listed China and India first, just to get your attention.  They’re growing, of course, but studies show that growing countries (in terms of GDP growth) don’t produce the best long term stock market returns.  Surprised?  You shouldn’t be.  I’m always baffled at the lip service paid to the fallacy that fast growing economies equate to fast growing stock markets.

The world stock market index I listed above (which you can buy from DBS Vickers) has an emerging market component, but it’s a small component.  After reading these studies yourself, you might decide that a small amount of emerging market exposure is more than enough for you.

Fast growing economies generally equate to poorer long term stock returns.  You can read about it here:

Few people know this.  And I’ve always wondered why.

When buying that world market index from DBS Vickers, you’ll find that the commissions are even lower than they are with the Singaporean indexes.  You could buy about $40,000 worth and still pay just $30 U.S. for the purchase.  Fundsupermart would charge about $400 to purchase a world stock market unit trust with $40,000.  And again, it would very likely underperform the world index—because of its fees management fees.  Never mind the sales fee, which would just add another puncture to the bottom of your boat.

To purchase the world stock market index (VT) your market would be “U.S”, you’d place an order to buy just the same as you would with the Singapore index, but you can just go with the “market order” instead of the “limit order” and there’s no need to put in a share price.  You’d just pay the market price of the units on the very next New York stock exchange trading day.  Of course, you’d have to figure out how many shares/units you could buy with the money you’re investing, and you could check that out here:  http://finance.yahoo.com/q?s=vt

Your order entry will look like this:

Commission costs

When buying Singapore exchange traded funds through DBS Vickers, you’ll notice that commission costs increase with the size of the purchase or sale.

For example, if you buy $15,750 worth of the Singapore stock index, you’ll pay commissions totalling $55.19—as you can see below.

Commissions for unit trusts purchased through Singapore’s Fundsupermart charge roughly three times that amount  and because of heavy unit trust management fees the Singaporean unit trusts dealing with Singaporean stocks tend to underperform the Singapore stock market index—despite some tricky marketing to the contrary, which you can read about

That’s to be expected, of course.  In the financial service industry, you generally make more money if your fees are lower.  The financial service industry makes more money if your fees are higher.

Regardless of what kind of stock market investing you’re looking at, regardless of what international market you’re dealing with, the odds tend to favour indexed investments over a long period of time….because they’re so inexpensive.   To learn why, and to understand the poor odds of beating a portfolio of indexes, you might want to read Princeton University professor Burton Malkiel’s academic paper

Don’t you wish you learned this stuff in school?

About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/

395 comments

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  1. avatar
    DIY Investor

    Great information. It is not that hard to beat the pros when you minimize expenses! To bad that lady came to you too late.

  2. avatar
    Andrew Hallam

    @DIY Investor

    Thanks Robert.

    I guess, on the bright side, there's still plenty of time for her. She might not make up the loss quickly, but as long as she doesn't get hooked into another poorly allocated portfolio, the sun can shine again.

  3. avatar
    Kevin@InvestItWisely

    Sorry to hear about the lady's story. Any chances of going after the broker for violation of fiduciary duty?

    Maybe you're right, though. She did have the good luck to come to you and turn the ship around.

  4. avatar
    Andrew Hallam

    @Kevin@InvestItWisely

    Interestingly, she tried that Kevin.

    Then, after I posted this, I got an email from a Singaporean newspaper, interested in profiling the woman in a story about her misfortune with the brokerage. She's intensely private though, and didn't want to have anything written about her. I can understand that.

  5. avatar
    Kevin@InvestItWisely

    @Andrew Hallam

    Definitely understandable. On the other hand a bit of pressure might bring redress (or it might not). I do hope things work out for her going forward.

  6. avatar
    Nataliee

    Hi Andrew,

    Thks for all that you've shared. Breathe deep… here's the questions I have:

    Q1) When choosing international index…. The code for international index is VT for Sporeans (sample used above), but the code for Canadian is VEA (which you own) or XIN (represented by .TO after it) as per your blog entry titled "Expatriate Canadians investing in Spore…" What are the reasons as to why the international index differs?

    I do realize these though:

    VT Region Allocation- 15.1% Emerging Markets, 25.7% Europe, 13.4% Pcific, 45.8% North American (total net assets 1.2 billion)

    VEA Region Allocation – 64.7% Europe, 34.5% Pacific, 0.8% Emerging Markets (total net assets 7.4 billion)

    2) A responsible portfolio is to own 3 index funds. Below is the portfolio for a 40yr old Canadian investor – extracted from "Expatriate Canadians investing in Spore…" :

    XIC = Canadian index (20%)

    XSP = U.S. Index (20%)

    XIN = International Index (20%)

    XSB = Canadian bond index (40%)

    I'd like to know what is the advantage of the portfolio above of having an additional index fund which is the US index. That makes it a total 4 index funds in the portfolio instead of 3.

    Thanks in advance… Need to acquire as much knowledge so as to be more finacially literate by the time I ''market the 2nd holy book".

    Nataliee :)

    1. avatar
      Andrew Hallam

      Hi Nataliee,

      Thanks for your questions.

      The international exchange traded fund index (VT) contains a representation of the entire world's markets, including the U.S.

      The exchange traded fund index (VEA) constitutes stocks from the first world international markets, not including emerging markets and not including the United States. Emerging markets include stocks from countries like China, Thailand, Brazil etc.

      I own the exchange traded fund index (VEA), but I also own the U.S. exchange traded fund index (VTI) If you want to be a "one stop shopper" you could simply own (VT) comprising of a combination of the other two. Is there an advantage to owning VT vs VEA + VTI? Not really. It's entirely up to you. I don't own VT myself because I don't want any exposure to emerging markets. My policy is a bit odd, but here it is: personally, I don't like to invest money in countries where I can't drink the water out of the tap.

      Some people suggest that the emerging markets could have higher returns over time, than developed markets. But I'm not so sure. The world's biggest emerging market over the past 150 years was the United States. But its market returns haven't really beaten Britain's market returns (they've been similar) despite the fact that the U.S. easily outstripped the UK, in terms of GDP growth. But I have to admit that I am very rare, for not having an emerging market component. It certainly wouldn't hurt to have a bit of exposure to it, over the long term. And VT handles the job of "owning the planet's stocks" very nicely, while not having especially large exposure to the emerging markets.

      As for XIN, it's exactly the same as VEA. But it trades on the Toronto stock exchange instead of the New York Stock Exchange. And its internal fees are slightly higher than the fees of VEA. That said, it's still extraordinarily cheap, compared to an actively managed international mutual fund. And we know that if the internal costs are low, the returns will generally beat higher cost (actively managed) funds.

      That Canadian investor example doesn't have exposure to the emerging markets either. But again, it certainly wouldn't hurt if it did. I just have a funny prejudice, I suppose!

  7. avatar
    Nataliee

    Wow Andrew….. that's a lot of info…thank you for sharing your knowledge!

    I feel very addicted. The more I read, the more engrossed and addicted I get. I keep wanting to discover and learn more! What do you think of 22% Spore bond, 26% STI index, 26% VTI & 26% VEA? Besides having less than 1% emerging markets which is a ''pro'', what are the pros and cons for this portfolio? Is there any kind of higher risks which I should be able to stomach if I opt for this portfolio or would you recommend splitting the 78% into VT and STI equally? thanks a million!

    cheers,

    Nataliee :)

    (the aspiring frugal candidate)

  8. avatar
    Andrew Hallam

    Thanks for the questions Nataliee!

    If you are between the ages of 22 and 30, I'd say that having 22% of your money in a Singapore bond index is a great idea. There's a general rule of thumb (especially for people without pensions) that they should have a bond equivalency that's close to their age. For example, I'm 40 years old, so 40% of my invested money is in government bond indexes. If I was a riskier investor, perhaps I'd shoot for 30% in a government bond index (as a 40 year old).

    If you are suggesting 22% in a government bond index, then it would be a suitable amount if you are in your mid to late 20s.

    As for your equity (stock market) exposure, if you plan to live in Singapore your whole life, you might want to keep a higher bias leaning towards the Singaporean markets than the one you suggested above. For example, I'd suggest something like this, using the exchange traded funds you mentioned above:

    22% Singapore bond market index

    38% Singapore stock market index

    20% U.S. stock market index (VTI)

    20% First world international stock market index (VEA)

    Of course, the stock markets will fluctuate daily. But keeping somewhat close to these allocations would be a great idea. For the first year of saving/investing, you might do something like this:

    You might save $5000 in a quarter. With it, you could buy the Singapore bond index. The following quarter, you might save another $5000. With it, you could buy the Singapore stock market index. The following quarter, you might save another $5000. With it, you could buy the U.S. stock market index. As you first build the account, your percentages wouldn't be aligned with the plan above. But that wouldn't matter. You'd eventually start working your way into it, getting closer and closer to your desired allocation as you make deposits.

    Those are all great questions Nataliee. Keep them coming. And remember that the best way to learn this stuff is to teach what you learn along the way!

  9. avatar
    Newbie

    I am a newbie to ETFs and investments and am 40 years old, planning for my retirement .thanks for your very wonderful blog of which I learnt alot. May I ask for your advice, cause I understand that currently very few people own bonds due to the interest rates, and the Singapore ETF is also very high priced (due to STI index being high) at the moment. Do I still start off buying in the same proportion, ie 40% bonds, 30% Singapore ETF and 30% World Stock Index, or do I buy the World Stock Index first this quarter and "watch and see" to enter the A35 and ES3 market in this coming year or perhaps even next year – thereby just acquiring VTI since they are relatively better value?

    Is it a good strategy to invest quarterly or monthly?

    How do you know which ETFs to pick from the myriad of choices for each category? What are good resources to research on?

    Thanks in advance for your patience but I am most interested to be financially literate.

  10. avatar
    Andrew Hallam

    Hey Newbie,

    Your instinct to start with the world index is probably a good one. But I wouldn't get too worried about overpaying for the STI index. In 20 years, you'll probably look back at today's price and realize what a bargain it was. You might want to start with the world index, add some of the STI index, and cap it off with a bond index. True, interest rates are low, but if the stock markets fall, you will find yourself in an enviable position to sell some of those bonds, and buy into the lower priced equities. You could think of your bonds as "dry powder" that safely waits to be rebalanced into stocks when markets fall.

  11. avatar
    Janet

    Hi Andrew,

    This is a great blog you have. I am a 22 year old Singaporean and am

    interested in starting my own investment portfolio. In fact, I have

    just started a $600 quarterly RSP on the Navigator platform with Aviva

    and wasn't charged a wrap fee. Should I continue putting money into

    Navigator or should I start ETFs or do both concurrently? If ETFs,

    should I stick to Singapore ETFs or have some global or U.S ones? I

    was thinking of a more aggressive mix since I have a longer time

    horizon but what kind of funds would be good for me? I am really new

    into this and would like some advice. Thank you for your time!

  12. avatar
    Andrew Hallam

    Hi Janet,

    You'll save a lot more money if you take the ETF route, rather than the route with Aviva. The costs that you aren't seeing, with Aviva, are the actively managed fund costs. The funds within this program are actively managed, and they cost you hidden expense ratio fees that won't make that route as efficient as the one I outlined above. Over a lifetime of investing, the higher cost Aviva directed products will likely cost you more than half of your investment returns. For example, if you built an account of $3 million with low cost ETFs over 30 years, you'd likely end up with only half that, taking the Aviva route. I'm really glad that you found this blog. And when my book is available in Singapore, in late July, it explains much more. I look forward to hearing what you think about it Janet.

    Considering your age, you could go with just 15% to 20% in the Singapore bond index, while giving you exposure to the world stock market index and the Singaporean stock market index with the remainder. This allows for greater risk (potentially higher returns) than my portfolio (I'm 41 years old).

    Unfortunately, with Aviva, if you sell the funds you have before a five year period, the company will nail you with fees.

    Please let me know if you have other specific questions, and I'll do my best to answer them.

  13. avatar
    Jerry

    Andrew, this is great–very practical and easy to follow.

    When you speak of returns of the various indexes, one question that comes up is how you think about the fact that the index returns are coming in their own respective currencies? I wonder if you have any thoughts on exchange rate exposure? Do you think about the impact the various ETFs will have based on exchange rate movements? Or do you just feel like exchange rate movements have less of an impact over time so you don't bother trying to optimize for them?

    Best,

    Jerry

  14. avatar
    Andrew Hallam

    Thanks for the comment Jerry.

    As a long term investor, this is what I think sounds practical:

    First, most professional exchange rate forecasters have dismal historical records of success, when trying to guess currency fluctuations. For the most part, it's an industry that benefits brokers and financial institutions, via commissions and bid/ask spreads. When people trade currencies, the house always wins…even though trading currencies is a zero sum game, as an aggregate.

    But this is how I think you could deal with it. If you rebalance your account regularly (by purchasing the lagging broad based index) you could end up value averaging into your indexes, based on currency and valuation fluctuations over time.

    This is what I mean:

    Assume that you have a Singapore stock index, a world equity index, and a Singapore bond index. You set an allocation for each (much like my post indicates) and if your base currency is Singapore dollars (assuming you're Singaporean) you could convert each of your holdings (on paper) into Singapore dollars, and see what your allocation percentages are.

    For example, if the world index is quoted in U.S. dollars, and if it drops in value, relative to the Sing dollar (but its price in U.S. dollars stays the same) then this could be the index that you add fresh money to at the end of the month (considering that your other two indexes have not dropped). Of the three indexes, in Singapore dollar terms, it would be that month's underperforming index (considering that the other two Singapore indexes didn't move in price).

    With each month's deposit, if you deposit money into the worst performing index (of the 3 listed above) then over a lifetime you will be rebalancing, and likely profitting, from establishing a benchmark allocation, in Sing dollars, that you would maintain. You would essentially be value averaging.

    I think it makes a lot of sense. What do you think?

    1. avatar
      Jerry

      Thanks, Andrew.

      I guess the obvious questions would then be:

      In the hypothetical situation you described, the investor is rebalancing by increasing weighting in their world index because the USD dropped in value vs. the Sing dollar. But then does that go against the idea that you are rebalancing to the laggard–because the world index wasn't necessarily a laggard inherently, it just turned out that way because of the exchange rates?

      Or should I interpret that the implied view here is that because the Sing dollar appreciated, you expect it to not sustain that level of outperformance over the long run, so the rebalancing you are doing is also an inherent expectation that the USD will come back? I.e. that you are assuming no long-term trend of one currency being stronger than the other?

      Just a couple of other (not really related) questions if you don't mind helping with them:

      1) I read somewhere that David Swensen's "benchmark allocation" for personal investors includes a pretty decent component in REITS. Do you have any view on this and why or why not to include an element in REITS?

      2) If I'm not wrong, the Singapore bond index is all government and quasi-government bonds. Are you in the camp that thinks government bonds are a much better option than corporate bonds to fill that part of the portfolio (also heard about David Swensen that he doesn't like corp bonds)

      3) Any compelling reason other than the fact that the index is in Sing dollars to use the Singapore bond index (even for Singaporeans) as the bond component of the portfolio? Do you think it makes any sense at all to invest in other countries' government bonds instead? I'm just curious seeing as the Singapore government bond yields seem to be pretty low.

      Thanks a LOT for your ideas!

      1. avatar
        Andrew Hallam

        Hey Jerry,

        If you owned a world index denominated in U.S. dollars, and if it dropped in value, it could actually mean that the U.S. dollar rose, instead of dropped…considering that a world index has a global capitalized weighting with much of it allocated to non U.S. companies.

        I could be wrong, but I think that whatever rebalancing strategy we use, if we're consistent with it, we'll do well. Short term, currencies could cause some swings, but over an investment lifetime, I think it's a zero sum issue.

        As for your question related to REITs, I think there's a strong argument for their place in a diversified portfolio. In Table 1.1, in Swensen's book, Unconventional Success, he recommends the following breakdown as a sample for a diversified portfolio:

        30% domestic equity

        15% foreign developed equity

        5% emerging market equity

        20% real estate

        30% bonds

        I don't personally have REITs in my portfolio. Over the course of many years, they aren't likely to add or subtract gains (relative to a portfolio without them) but they could surely smooth the volatility.

        As far as bond yields are concerned, I don't get too concerned about them. Over the long term, there will be high and low yields for respective government bonds. If I expect to be paying future bills in Canadian currency (assuming that's where I'll retire) then Canadian government bonds will make up my bond component, because that's the currency that I'll be paying my future bills in. If I was Singaporean, and expecting to retire here, I would do likewise here.

  15. avatar
    Jerry

    Thanks, Andrew.

    If I have a CPF account, I would plan to net the value in that account against my allocation of government bonds. After all, CPF savings interest rates are supposed to be between 2.5 and 4% now, and I would put them on the same level as government bonds in terms of lack of risk.

    Would you disagree with that logic by any chance? Just want to make sure I'm not missing something big here….

    Jerry

  16. avatar
    Andrew Hallam

    That actually makes perfect sense Jerry. The money you have in your CPF, making the guaranteed rate of return, should definitely count towards your fixed income (bond) allocation.

  17. avatar
    Sigil

    Hi Andrew, many thanks for your detailed and very informative post!

    The advantages of low-cost passive investing have really hit home for me: as a Singaporean living/working in the US for a while now, I've had my Sing$ savings invested for me in an actively managed account, while I've taken my US$ money and dollar-cost averaged myself in a range of low-cost ETFs (80% equities:20% bonds). As such, I have a personal experiment going on in the comparative advantages of active vs passive investing.

    I was rather unlucky to start my investments in both in 2007, a poor time to begin in my opinion because of the Great Recession that hit just then. I basically bought at the peak and rode the markets all the way down. Both portfolios have been through the rollercoaster bear and bull runs by the markets of the past four years. However, at this point of time, my passively-invested US portfolio has actually outperformed my actively-managed account by a significant margin – my basket of index funds is down 4% (because of recent fear-driven events…it was actually up 10% a couple of weeks ago), while my actively-managed fund is down 20-25%.

    Upon reviewing the transactions of the actively-managed fund, I'm of the opinion that many of the losses were locked in as a result of attempts by the fund manager to basically time the market, and sell counters that they thought would underperform. On my trips home, I've met the fund manager each year for a couple of years now, and each time he confidently forecasts that I'll recoup my initial investment within the year. I've grown increasingly pessimistic about that.

    I'm going to move home in a year and am planning to raise my family in Singapore, hence I'll be here at least for the medium term. I'm considering whether or not to liquidate my US portfolio and bring funds home to invest, or to keep my account active here. I am also considering closing my actively-managed Sing$ account and investing the money in ETFs from Singapore instead.

    I've read many of the same books and resources as you have, and am now much more of a believer in passive investing. However, as you know, much of the information out there is US-centric. I have a couple of somewhat basic questions that I would like to ask, because I want to make sure I have my fundamentals right:

    1. Why do people (your good self included) recommend keeping the majority of one's investments in the currency of the country you intend to live long-term in? Is it to hedge against currency exchange spreads?

    2. I would like to continue passive investing in Singapore. However, I'm concerned that the equity allocation you recommend (30% STI ETF:30% world) greatly overweights the stocks of one country (Singapore). My understanding from my reading has been that one should diversify across many asset classes as well as countries. Do you think that your strategy might be rather risky in that "country" sense, being less diverse?

    3. A big reason why I'm considering moving my US money home is because Non-resident Aliens (non-US citizens basically) are charged 30% taxes on their dividends, and additional estate (death) taxes on their US-situated assets above $60k. You recommend buying the VT ETF (VTI?). However, as far as I know, it is denominated in US$ and is domiciled in the US. With these taxes in mind, do you think it still makes sense for a Singaporean to buy the VT? If we don't buy US-domiciled funds to reduce our tax rates, do you have any good alternatives in mind on the SGX?

    Many many thanks for your time and wisdom!

  18. avatar
    Andrew Hallam

    Hi Sigil,

    My apologies for taking so long to respond. I'll do my best to answer your questions:

    1. Why do people (your good self included) recommend keeping the majority of one’s investments in the currency of the country you intend to live long-term in? Is it to hedge against currency exchange spreads?

    I recommend that a person's bond allocation should be in their home country, if possible, and that they should have a healthy exposure to their home stock market as well. If you are going to live in Singapore, you'll be paying future bills in Singapore dollars. Having the bulk (or at least half) of your money in Singapore dollars assures you that when your portfolio has a given amount in it, that's going to be real money to you–money that you can and will be spending on the streets. If your dollar falls, so what? If the Sing dollar rises, what will it matter to you? In my view, a resident of a country takes a currency risk when the majority of their investments are in a foreign currency, and not in the currency that they pay for their own groceries in. You may have read some of William Bernstein's books. He actually emailed me and suggested that this line of thinking has been something he has believed in for years. To me, it just makes practical sense.

    2. I would like to continue passive investing in Singapore. However, I’m concerned that the equity allocation you recommend (30% STI ETF:30% world) greatly overweights the stocks of one country (Singapore). My understanding from my reading has been that one should diversify across many asset classes as well as countries. Do you think that your strategy might be rather risky in that “country” sense, being less diverse?

    From what I have read, the international exposure mentioned above (50% of stock market assets to be globally diversified) is far more global than most books and experts will lead you to. In other words, I think my recommendation gives far more international diversification than other models that I have seen. If you look at Swensen's, Bernstein's, Swedroe's, Malkiel's, Bogle's, Jim Lowell's, Frank Armstrong's, Jonathan Clement's, Paul Merriman's, Timothy Middleton's, Richard Jenkin's, Carl Delfeld's, Kiplinger's and Morningstar's respective models, they all recommend far less global exposure than I have (with the remaining equities in a home country index). The only person whose portfolio model of international equity exposure is as high as mine (from all the reading I have done) is Andrew Tobias' model, which mirrors my own.

    3. A big reason why I’m considering moving my US money home is because Non-resident Aliens (non-US citizens basically) are charged 30% taxes on their dividends, and additional estate (death) taxes on their US-situated assets above $60k. You recommend buying the VT ETF (VTI?). However, as far as I know, it is denominated in US$ and is domiciled in the US. With these taxes in mind, do you think it still makes sense for a Singaporean to buy the VT? If we don’t buy US-domiciled funds to reduce our tax rates, do you have any good alternatives in mind on the SGX?

    It would be great if the SGX had such a product, but even if it did own U.S. equities, the U.S. government would still take 30% witholding taxes from the dividends. You just wouldn't see it happening. The best thing, however, about using DBS Vickers, or another Singapore-based brokerage, is that you won't have to pay capital gains taxes (If you lived in the U.S. you certainly would)

    So imagine making 10% per year on your VTI index, here in Singapore. Imagine roughly 2% coming from dividends and 8% coming from capital gains. You would pay 30% tax on that dividends (taken at source) which would give you a net dividend return of 1.4%.

    Adding your capital gain of 8%, plus your dividend net gain of 1.4%, would give you an after tax return of 9.4%.

    We are extremely lucky to be living in Singapore. Where else can someone "clear" net profits of 9.4% on a 10% investment, in a regular investment account? If any Canadians or Americans are reading this, they'll absolutely drool. This IS NOT a RSP or IRA account. Nor is it a Singapore CPF account (somewhat equivalent to a Canadian RSP or U.S. IRA). This is simply, a fully taxable account, where Singaporeans can make a gross return of 10%, and a net return of 9.4%.

    Just by making that comment, Sigil, I'm afraid we could get a rush of overseas applicants!

    We're lucky, indeed, to be living in Singpapore.

  19. avatar
    Martin

    Hi Andrew,

    I'm intending to overweight my stocks to my home currency (SGD), but have an issue with the fixed income portion.

    I was just about to buy the Singapore Bond ETF that you talked about above, but when I dug a little deeper, it seems that the trading volume for this ETF is extremely thin. Most days, it doesn't even have pricing / vol information on SGX because it's so rarely traded.

    I'm concerned that this might present a liquidity issue. What are your thoughts on this?

    Best Regards,

    Martin

  20. avatar
    Andrew Hallam

    Hey Martin,

    Thanks for the comment and the question. I know that a number of launched ETFs in Singapore have low trading volume. I can imagine this affecting the bid/ask spread, to a degree. But I have been helping a couple of Singaporean friends with their DBS Vickers accounts, and we have always been able to make our fixed income ETF purchase. That's not to say that one day we won't have trouble, but for now, it seems OK. With more people in Singapore catching on to the advantages of ETF investing, perhaps the volume will increase over time. Let me know how it goes. I would like to stay on top of this kind of thing. Perhaps I should buy some for my own account as well. Then I can have a regular, updated firsthand feel for it.

    Thanks again Martin

  21. avatar
    Martin

    Thanks Andrew.

    I'm still not that comfortable and might end up splitting between Vanguard's bond ETF and the S'pore one or substituting the S'pore one with an international bond ETF.

    What do you think?

    A side note. Why are your friends using Vickers? Unless they are priority customers and have special rates, I think it's worth checking out Standard Chartered's new online trading platform… and no I don't work for any of the banks :-)

    Stanchart has similar commission rates but a few excellent features. They don't have minimum commission rates, don't charge custody fees (important if you're buying US traded ETFs), don't allow short selling on their system, don't hold shares at the Central Depository (so the holdings you see on your online portal is what you have unlike the local brokers where the most updated / accurate holdings is actually the CDP account NOT your online trading portal) and enables one to trade on about a dozen exchanges globally. Check it out.

    Cheers,

    Martin

    1. avatar
      Andrew Hallam

      Thanks Martin,

      I'll have a look at Standard. With so many changes within the industry, I think I'll keep my money where it is…otherwise I could get convinced to keep changing brokerages. But for newbies, it Standar could be a better option.

      Thanks!! This is the best thing about blogging about money. It's a massive educational community.

  22. avatar
    Sam

    Hi Andrew,

    Singaporean here. What do you think of getting a HK index? Is it true that the HK stock exchange have a better standing than the Singapore exchange? Will a HK index as a whole perform better than a SG index? And ETFs = index funds? Sorry for such annoying basic questions.

    Regards,

    Sam

  23. avatar
    elta

    Hi Andrew,

    Just finished reading your book. Thanks for making investing easy! Have started buying the ETFs you recommended. Just one question please….what is the difference between VT and VTI?

    Thanks

    1. avatar
      Andrew Hallam

      Hi Elta,

      I'm glad you like my book, and I'm happy to hear that you're ready to take the low cost approach to investing!

      To answer your question, the ticker symbol "VT" represents the world stock market index. Everything! This includes the U.S., Singapore, China, England, France….everything.

      VTI is just the U.S. stock market index: U.S. stocks only.

      Let me know if you have any other questions and I'll do my best to help.

      Cheers,

      Andrew

      1. avatar
        elta

        Thanks so much, Andrew. You are our walking investment encyclopedia! Have a blessed day!

        1. avatar
          Andrew Hallam

          Glad I could help Elta

  24. avatar
    elta

    Hi Andrew,

    Just finished reading your book. Thanks for making investing easy! Have started buying the ETFs you recommended. Just one question…what is the difference between VT and VTI?

    Thanks

  25. avatar
    Andrew Hallam

    Hi Sam,

    Over the long term, I think both the HK index and the Singapore index will perform similarly (over our lifetimes). Short term, it's anyone's guess.

    Just build a very diverse portfolio and rebalance it with new purchases (or by selling some of the winners once a year, to top up the losers) and you'll do very well. Don't try to guess which countries market will do better over the short term because over the long haul, that kind of thing won't be very productive.

    Cheers,

    Andrew

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