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:
- You’d be rebalancing your portfolio to increase its overall safety
- 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.
- First, you select Singapore as the market, as you can see on the first line
- Then you place an order to “buy” (see the second line)
- 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.
- Then type in the symbol. In this case it’s ES3
- Then you’ll need to select “Limit Order” and put the most recent price in the “Limit Price” box below it.
- 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:
- BRIC fund phenomenon
- Under the ‘Emerging’ Curtain
- What Does a Good Economy Really Mean for Your Portfolio?
- Growth in China, India and Brazil Might Not Mean Great Investment Returns
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:
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?