EARCOS Seminar 2011 – Indexed Investing

Additional Reading

1.  Here are some books that I recommend, on indexed investing.  I’ve categorized them from “Beginner books” to “Advanced Books”  here.

2.  If you’re interested in what some of the world’s greatest financial authorities say about indexed investing, you can see what I collected here

3.  Last year, I was asked to contribute a chapter for a book.  The focus of my chapter was on personal finance for teachers.  It was published by Michigan State University, and I tweaked it to apply to international school teachers here.

4.  Last month, I was asked by one of the heads of United World College, in Singapore, to give a series of investment talks on indexed investing.  One of the biggest questions I wanted to address dealt with how much money you’ll need to retire.  I hope you find this post particularly useful, you can read it here

5.  This isn’t an exhaustive list, but it’s a sample of some American financial advisory groups that are doing the right thing.  They provide index fund solutions for their clients.

The biggest of them all is Vanguard, the world’s largest supplier of index funds.  What’s so impressive about Vanguard is that it’s a non-profit organization.  Because nobody owns this company, fees are kept exceptionally low, and you can hire a Vanguard advisor to build you a portfolio of index funds.  This is the top rated fund company in the United States, based on comparative fund performances.  There are no annual fees and the individual investor doesn’t pay fees to either buy or sell their funds.  You can see the comparative tables here

Note that America’s top 2 fund companies (Vanguard and Dimensional Fund Advisors) are the two largest providers of index funds.

There’s one downside to using Vanguard for overseas American investors.  If you’re living in the U.S., opening an account with Vanguard is easy.  But if you live overseas, they’re sticky about account openings.  You could try giving them a U.S. address (if you have one) and see if you get lucky.

Investment firms that build accounts of indexed funds for clients include:

Some of the firms above require minimum amounts to open accounts.  For example, Assetbuilder doesn’t accept accounts with less than $50,000 in assets.  Evanson Asset Management has an account minimum requirement of $500,000 although their website suggests that they do make exceptions.

6.  Expatriates of other nationalities can create indexed accounts with exchange traded funds.  Those in Hong Kong, Indonesia or Thailand can use the same broker that I use, DBS Vickers:

  •  DBS Vickers

Those in other countries can do something similar if they can find a brokerage allowing them access to either the New York Stock Exchange or the Toronto Stock Market Exchange.  Consider these as “supermarkets” that will allow you access to a wide variety of indexes.

I’ve given some instructions for Singapore-based British, Australian and Canadian investors here:  

 The premise is the same for other nationalities as well.  Please have a look.

Comments/Questions

 I hope you find these links to be helpful. 

If you have any comments or questions, I’d love to hear from you in the comments section.  You can remain anonymous, if you like, but your comments and questions can help to build a learning community.

I’ll do my best to answer questions–as will some of my other readers.

And everyone can learn.

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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20 Responses

  1. I just received this email from an attendee at my index fund session today. I've posted it here, in case others would find the question and the response useful. I've deleted his name to protect his privacy:

    Hi Andrew – I just attended your Saturday 11:45-12:45 seminar at the EARCOS conference and wanted to follow up with a couple of questions. I didn't want to bother you after your presentation plus you were speaking with others. Here goes:

    1) I'm curious about the issue of rebalancing and how to do it with my portfolio. What tools can I use to determine how my main retirement account is out of balance and then what I need to sell/buy to rebalance it? In other words, what's the best way to make that determination as I look at my portfolio? To be sure, your talk today put the spark in me to make some changes, and rebalancing is certainly one of them.

    2) I taught in private schools in the States for years, so I have a TIAA-CREF account. Do they have index funds? I seem to remember that they have low expenses for their regular accounts. Also what is your opinion of TIAA-CREF as someone to handle my retirement funds?

    Today's session was perhaps one of the most valuable conferences that I went to at this or any other conference, so I wanted to thank you for your words and advice. I look forward to hearing from you and reading your thoughts at your website.

    Hi A,

    Thanks for the kind words. I'm glad you liked the session.

    The rebalancing process is quite simple. I don't know how old you are, but you could have an allocation of bonds that's equivalent to your age.

    Then you could split the rest of your assets between U.S. and International funds.

    You could add a proporational amount to each fund. For example, if you're 40, you could add 40% of your monthly deposit into the bond fund, 30% into the U.S. fund and 30% into the international fund.

    At the end of the year, have a look at your total portfolio. Do you still have 40% in bonds? It's simple math, and some statements will even tell you what your allocation is in each fund. But if yours doesn't, no worries. If your portfolio value is $100,000, and you want a 40% bond allocation, and if you only have $30,000 in bonds at the end of the year, then you can sell (at the end of the year) some of the other two funds to bring your bond allocation back to 40%. In this case, it would need to be worth $40,000, not $30,000.

    It's rare that you'd need to do this more than once a year. Some years, you'll find that you won't need to rebalance at all. I rarely rebalance annually, because I adjust my deposits manually. I figure out which fund (index) performed the poorest between my last deposit date, and the next deposit date, and I buy that index. Doing so ensures that I'm constantly buying the laggard.

    If the markets take a significant crash, then I'll manually rebalance by selling some bonds to bring my allocation back in alignment. My general rule of thumb is that I'll rebalance if the stock market falls 20% or more. It's not a hard and fast rule, but it's just something I set for myself. Because I always buy the lagging fund (to keep my allocation aligned every month) it takes some big market swings for me to say, "Oh, I'm going to have to sell some bonds (for example) and buy some equities, because the markets have fallen heavily"

    As for TIAA CREF, they're an excellent fund company. They rank third in the U.S., behind Vanguard and DFA. Their U.S. equity index has an expense ratio of 0.28%. Although higher than it should be (you can get one through Vanguard charging 0.07%) it's still acceptable. They don't have a total international index, but their actively managed international fund has an expense ratio of just 0.75%. That's low for an actively managed fund.

    Their bond index has a surprisingly high expense ratio: slightly north of 0.6%. That's pretty high. Considering that their actively managed bond fund is cheaper than their bond index, you might consider it.

    TIAA CREF is a low cost, non-profit mutual fund company. It's miles cheaper than what you'd get with Raymond James Financial, or nearly all other financial service companies.

    That said, with Vanguard's costs being a fraction of TIAA CREF's costs, you might consider trying to open an account with them. You'd need to give them a U.S. address to do it. And they get sticky when they find out you live overseas. That ball is in your court. But it's worth a try.

    Overall, I think your portfolio would perform better with Assetbuilder, than with TIAA CREF, and I do know that you an open an account with them, even if you live overseas.

    The benefit of assetbuilder over TIAA CREF is that they'll rebalance the account for you. It's automatic, hands free sailing.

    If you have other questions, feel free to post them here.

  2. Chris the Truck Driv says:

    Hi Andrew, AS you know I just bought into VTTHX mutual fund for 5000.00, this is my starting principal(it's a Roth) so I'm going to Max my yearly contribution to 5000.00 for 28 years until I'm 68 then draw on this. I'm a little late in the game at 40 to just be getting started…this is the bad news! The good news is I'm also Debt free now and I also have some Cash savings at one of the Giant Mega Banks that received a bailout. I also plan to save a thousand dollars a month here in Cash until I'm about 60 and I can live on that until I'm 68 and start drawing on my Roth IRA at Vanguard. Is there a better use of my second savings of cash at the Mega Bailout Low Interest bank? What's your opinion and what can I do better since I'm so late in the Game? I'm glad you are well Andrew, Thanks Chris the Truck Driver. 10/4

  3. Hey Chris,

    It sounds like you're going to invest $5000 a year into your Roth IRA, and then save an additional $12,000 a year in cash. Is that right?

    If it is, I think a better option for that $12,000 savings would be putting it in a non retirement investment account with Vanguard, and purchasing the same target fund (VTTHX) that you are using for your IRA. You can do that, even if it's not a IRA account.

    Because that target fund is a compilation of indexes, along with a bond component, it's well diversified. And each year, it will automatically increase its bond component. Every year, that fund will grow more and more conservative.

    Anyway, that's what I would do. What do you think?

  4. Lance Riley says:

    Hi Andrew – I wanted to say thank you very much for your two part series of seminars at the EARCOS conference on Indexed Investing. My wife and I attended both sessions and enjoyed them both immensely. We were already heading down the path to Exchange Traded Funds with Vanguard and your information only further cemented our determination and confidence and gave us even more details on how to set the portfolio up with a surprisingly low amount of maintenance.

    I did have a follow-up question regarding the whole "re-balancing" process:

    I am 40 years old and a U.S. citizen so I will initially follow your 40-30-30 rule (40% bond fund, 30% U.S. fund, 30% international fund). My question is regarding future re-balancing with respect to the U.S. fund. I believe I understood you to say that you determine the percent allocated to the U.S. fund based on how much the U.S. stock market represents in proportion to the entire world. Right now, I think you said the U.S. represents 50% of the the world, so you suggest a 50-50 balance between U.S. and international (half of the remaining 60% of the portfolio left after the bond allocation is indeed 30%, so this makes sense to me).

    How do I determine what this number is over time (the percent of U.S. stocks to the whole world)? Is there a good resource that provides this number? I found this link:

    http://seekingalpha.com/article/259736-china-surp

    It suggests that as a "percent of world cap" the U.S. is currently at about 30%. Is this the right data (percent of world cap) or am I looking for something else?

    Thanks again for your excellent workshops! And thanks in advance for any light you can shed on my re-balancing question. Your workshop was truly valuable – one of the best we attended here – and left my wife and I quite energized about our finances and ready to be proactive about the future. Much appreciated!

  5. Hey Lance,

    Thanks for the kind words about the workshop. I really enjoyed sharing that information with everyone–especially considering that, like me, most of you won't have pensions to look forward to, so it's important to realize how to maximize returns while minimizing risk.

    Here's an interesting component to world capitalization that I didn't mention before. As the world becomes more global, the lines can get blurred. Here's an example. John Bogle, the founder of Vanguard, correctly asserts that having just a U.S. total market index is actually like having 30% of it exposed internationally. I can isolate the Coca Cola company as an example of what he means.

    The Coca Cola company generates more than 70% of its revenue from non U.S. dollars–overseas sales/profits. Because of that, it's a very international business. As the U.S. dollar has fallen, Coke's profits have risen, based on growth, but also based on the currency difference between the greenback and other world currencies. When its other currency sales are converted to U.S. dollars, and then reported on Coke's corporate earnings statement, it reports as a significant gain. That, in turn, moves the stock price upward (as long as the stock is reasonably valued to begin with)

    Your U.S. index has 30% of its business' profits derived from non U.S. dollars, and as other countries grow wealthier, that will shift (think Starbucks, McDonalds, The Gap in China)

    Anyway, that's the reason for the blurring of market capitalization.

    Rather than chasing it (ie. increasing your international exposure when it grows in proportion to the U.S. market) its best to keep whatever you settle with, and rebalance based on the worth of that index, relative to the others, in U.S. dollars.

    Here's why:

    If the International markets continue to grow, chasing it by adjusting our international allocation upwards just ensures that we're buying more at a higher price. But if you set an allocation, and rebalance it regardless of what happens to the global economy as a whole, you'll have a steady benchmark allocation that will always allow you to be greedy when others are fearful and fearful when others are greedy…while rebalancing, or purchasing the lagging index.

    The exact allocation between the international index and the U.S. index won't matter much over the long haul. You'll find plenty of people who try suggesting which market will outperform the other, but it's best to ignore forecasts. If they really knew, they sure wouldn't be telling the world on TV.

    So…whether you choose 40% bonds, 30% international, 30% U.S. or whether you choose 40% bonds, 40% international, 20% U.S. won't matter much over the long term. Over your lifetime, different markets will be "in favor", but keeping the allocation you set from the beginning (while only adjusting your bonds upwards as you age) will give you a great, statistical chance of success, and you won't be chasing "the winners" by allocating more money to a growing market segment.

    Global capitalization will certainly do a lot of shifting around. But as I mentioned, the lines are blurry, so it's a good idea to just find an allocation and stick to it.

    Thanks for asking such a great question. If you have more, feel free to post them.

    • Lance Riley says:

      Thanks very much for your explanation of the rebalancing process Andrew! You clarified things for me perfectly – it gives me a perspective on how the U.S. stands as a percent of world market cap – but the key thing is that I don't want to chase this number down as the international climate shifts and jumps around. I want to give myself the best statistical chance of success, and the approach you describe – rebalancing the overall portfolio based on the worth of the U.S. index as a percent of my overall invested dollars – plus adjusting the bond allocation with age – makes a lot of sense. Thanks!

      I'm tossing around the idea of a 4-asset portfolio…40% BND (Vanguard Total Bond Market ETF), 30% VTI (Vanguard Total U.S. Stock Market ETF), 15% VEU (Vanguard All-World non-U.S. Stock Market ETF), 15% VWO (Vanguard Emerging Markets ETF). Any thoughts on this idea of adding an emerging markets ETF to the portfolio?

      • That would be a great option Lance. And when the emerging markets do their volatile thing, you won't get sucked into buying more of it when it rises. You'll be buying more of it (mechanically rebalancing) when it falls. Nice work!

        I'm rare in my absence of emerging markets from my personal account. Long term, emerging markets haven't outperformed developed markets (although we only have data back to 1985). So given the higher expense ratios and corruption in the EM markets, I choose to skip the ride.

        That said, your strategies will take advantage of any peaks and valleys that do occur. I think it's going to be a great strategy for you. Your account might even end up beating mine over the long haul. But hey, who's going to quibble over the difference between $3.1 million and $3.15 million, right Lance? Soldier on, my friend. We're going to be just fine!

  6. Chris the Truck Driv says:

    Hi Andrew, Thanks again…but I sure do like to ask a lot of Questions! So I called Vanguard and told them the same story as I told you, they said since I was already maxing my Roth contribution that I could open a separate Brokerage account, deposit the minimum(3000)in any fund I chose, make cash contributions and unlike my Roth I would have to pay US Capital gains tax on this every year. Capital Gains Tax!….I forgot about those. Now I feel some hesitation….I have a good tax guy so thats not my problem, it's just with this new info I think I would need a fund with a lower expense ratio than VTTHX(.19%)….Andrew I just want my dollars to work for me the best they can. Again I would do a Buy and hold strategy, buy more stock when the market crashes(stocks are on sale) and I think Capital gains taxes for me are around 15% long term! What do you think Andrew? Christian the Truck Driver

  7. Hey Chris,

    Because your fund is a collection of indexes, the capital gains will mostly be deferrred, so your money will compound, almost capital gains free, until you pull it out. Indexing is the most tax efficient form of taxable investing, in the stock market. If, in contrast, you put it all in a CD, you'd pay higher taxes on it, because you'd be liable to pay taxes on it every year. But in the target fund, you'd be surprised how incredibly tax efficient it's going to be. And yes, when the markets fall, borrow money from your neighbour (if you have to!) to buy more.

  8. Paula @ AffordAnythi says:

    Hi Andrew –

    I love your emphasis on low-cost index funds; I'm a devotee of these types of funds myself. One more company I'd like to add to the mix: Charles Schwab, which has a decent selection of commission-free ETFs with expense ratios as low as 0.08%. Personally, I divide my money between Schwab and Vanguard and have been happy with the expense ratios on both. I also have some money actively managed by Dodge and Cox, which charges around 0.60 percent for a broad fund! This is much too high!

    • Thanks Paula,

      You're so right. Schwab has really stepped up to offer some amazing options. They're a bit like a massive WalMart of sorts, wouldn't you say? If you know what you're doing, you can buy some low cost ETFs (indexes) and build a fabulous portfolio. But if you don't know what you're looking for, you could end up with anything!

      Did you know that Charles Schwab himself indexes all of his personal money? That's not a surprise, but what is cool, is that he has gone public with it .

  9. Tony says:

    Andrew, I thoroughly enjoyed your second session at EARCOS. I have been doing my own thing for many years but your discussion about balancing has spurred me into action to re-balance my very unbalanced portfolio.

    The thing I am lacking is bonds. I did take a look at the Vanguard Total Bond Index Fund – I noticed that it had roughly 70% US Treasuries and 30% Corporate bonds.

    I have had a Fidelity Brokerage account for a few years so decided to look at the breakdown for a couple of their bond funds.

    FTBFX – 28% Treasuries, 27% Corporate + Fannie Mae + Freddie Mac

    FBIDX – 32% Treasuries, 18% Corporate + Fannie Mae + Freddie Mac

    Does the Vanguard have any Fannie Mae + Freddie Mac?

    I am a little cautious about the Vanguard fund because of the enormous US debt – is this justified in your opinion?

    Could the two Fidility funds have problems because of the bail outs of Fannie Mae + Freddie Mac?

    Should I consider a fund that has some international bonds?

    Once again thank you for spurring me into my re-balancing act.

    Tony

    • Hey Tony,

      The Vanguard total bond market index has 14,206 holdings. http://moneycentral.msn.com/investor/partsub/fund… If it does own some Fannie Mae and Freddie Mac within the fund, it would take up the smallest sliver of an amount. Neither of the above mentioned corporate bonds (I'm assuming that you're referring to their corporate bonds) are not among the top twenty five holdings. And the top 25 holdings, all told, only make up 8% of the total–when combing all 25. So…Fannie and Freddie could disappear, and if this bond fund owned them, you wouldn't notice.

      Actively managed bond funds are generally a bad idea. The performance discrepancy between indexed bond funds and actively managed bond funds is even greater with bonds than it is with stocks. Historically, your Fidelity U.S. bond fund (FBIDX) is an apples to apples comparison with VBMFX, but it's less diversified than the Vanguard bond index. But it has run, neck and neck, with Vanguard's bond market index, in terms of performance. That said, over time, it will lag (in all likelihood) based on its higher costs. And when there's a capital gain, it won't be as tax efficient because the turnover is higher.

      You could consider some international bond funds if you want. There's an ETF, with the ticker symbol ISHG that you could add, if you want some international exposure. Having said that, risks often get priced into market levels. I mean, at some point, the U.S. dollar is going to be undervalued, but nobody is going to say when that is. Flocking to international bonds is the reaction many people are considering–and acting on. That said, the masses (and even the smart masses) tend to be very wrong, as a group. They're fearful when others are fearful. I will be paying future bills in U.S. dollars (my wife is American, so we'll spend time there) and in Canadian dollars (I'm Canadian, so we'll spend time there). The only currency risk is not having money in the currency of your future bills. If you're going to settle in the U.S., then I think a bulk of your bond money should be American.

      • Tony says:

        Great comments Andrew. I do like the idea of the large number of holdings that the Vanguard index has – especially if I am going to put a large chunk of money into it.

        I have read in the past that fees affect bond funds more than stock funds so I agree with your comment about that and it does make the Vanguard fund more attractive.

        Does the size of the US debt concern you? One concern I have is having too much money in US Treasuries when they have so much debt. It is the largest economy in the world for the time being but there is a limit to how much it can repay.

        I am a NZer and my wife is from the US so I have tried to keep money in both places for the same reasons you do.

  10. Hey Tony,

    I don't worry about the U.S. debt. I do try looking beyond that, and asking the question, "so what?" If they have troubles repaying it, they'll print more money and the currency value will fall. But that has an upside and a downside, so for me, personally, it's a non issue. I would love to see the currency fall, for a variety of reasons. For one, if it does, I would enjoy knowing that the U.S. index is comprised of businesses that generate 30% of their revenue from overseas, non U.S. dollars. That will increase the income of those businesses, in U.S. denominations, so the stock prices will rise, offsetting the currency drop. And if they don't rise, then I'll enjoy loading up….because they will rise. It's inevitable that, over the long term, earnings growth equates to stock price appreciation. The long term ratio there is directly proportional.

    But as a Kiwi, you can enjoy not paying capital gains taxes on your investments, as an overseas resident. Why are you considering Vanguard when you could build a portfolio of ETFs for less, and not pay capital gains (legally) on that money? Perhaps you could leave the Vanguard assets as is, and contribute to an ETF portfolio in your name. You could own the following:

    NZ index

    World index

    International bond index

    What do you think?

  11. Tony says:

    Good insight into the $US situation. I was aware that US companies were getting a lot of revenue from overseas but was not aware that it was 30%. I have wondered how companies that are investing in China (we live in Shanghai) repatriate their money.

    I have a NZ index fund based in NZ and while I have some individual stocks/shares in Australia, I intend to sell these down gradually and go into a NZ based Australian index fund.

    I like the idea of a Bond ETF – is there an ETF for total US bond index that you could recommend? I will check out ISHG but if the costs/risk/reward are not that favourable then I will be defeating the idea of being conservative.

    At present I don't have anythiing with Vanguard so I am interested in the idea of an ETF portfolio. Should I set this up myself or are you thinking of me contacting one of the companies like Assetbuilder?

    Once again thank you for your insights Andrew.

  12. Hey Tony,

    The world is becoming so much more global. Because of this, there are academics in the U.S. who don't even think that international exposure is really worth it. Fifty years ago, U.S. businesses certainly didn't generate 30% of their revenues from overseas. Companies like Coca Cola generate roughly 75% from overseas revenue, and Johnson & Johnson isn't far behind them.

    Will you have to pay capital gains taxes on your NZ based index/ETF?

    The U.S. bond ETF that you might want has the ticker symbols, SHY.

    You wouldn't be able to use Assebuilder, as a non American, but you can invest (via a citibank brokerage, likely) in Shanhai, and not pay capital gains. You would pay 30% withholding tax on your dividends and interest (the IRS would take it "at source") but you wouldn't pay a penny in capital gains. It's a great deal for non American expats. It's best not to be American, if you're overseas. Check out this link for a sample on how Aussies in Singapore can do it. As a Kiwi, you could switch the Aussie ETF for a NZ ETF

    http://andrewhallam.com/2010/10/expatriate-austra

  13. Teach in VN says:

    Hey everyone,

    I'm currently teaching in Vietnam, and would really like to get into ETFs, but I'm not sure how to start searching for a reliable option that I can register for.

    DBS Vickers seems to be available only for Singapore or Hong Kong residents.

    I'm from Spain, if that makes any difference.

    Any suggestions for alternatives? Thanks!

  14. I think you should try opening an account in Singapore and sending your money there, if possible. DBS Vickers is the brokerage I use. If they would allow it (which I think they might) could you let me know?

  15. Teach in VN says:

    Hi Andrew,

    Thanks for the advice. I am planning to send them an email to find out. If they let me do it, it would be great.

    Being European, once I get everything going, I'm thinking on choosing my portfolio around a different, larger (healthier?) economy than the Spanish. Possibly the Germans make a good option. What are your thoughts?

    I've seen you refer to the Global Couch Potato portfolio, but that does 20-20-20-40 (at least the Canadian version I found), and in your articles you only do a 33-33-33.

    I've picked up a couple of the books for beginner and intermediate readers that you recommend, and will be doing some studying… Expect more comments!

    Thanks again for all the information you share here!

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