On September 11, 2006 I spoke to a group of teachers at Singapore American School about investing.
I created a hypothetical account with $200,000, and I promised to track that account and report on its results.
With no money added, that $200,000 account would be worth $250,549.25 by Friday, January 20, 2012 – gaining $50,549.25.
I echoed, back in 2006, what uncontested academic research suggests:
If we diversify our investments with low cost index funds, we stand a far greater chance of success, compared to a commonly practiced alternative among international schoolteachers:
That alternative, unfortunately, is the act of falling for salesmanship (and high costs) of travelling financial salespeople who make the rounds at international schools, stockpiling clients and new accounts, in exchange for enormous commissions.
There are a few things that investors should never do:
- Never pay a sales commission to buy an investment product. These go directly to the salespeople. Some of my colleagues pay 5.75 percent of everything they invest. To break even on that money the following year, they have to make 6.1 percent. That’s not a good deal for investors, but it’s a great deal for the person selling the product.
- Never buy financial products that penalize you for selling them early. I’m not talking about a tax penalty here; I’m referring to back end loads—costly fines delivered by your friendly financial company if you sell your funds before a given time period. These funds are sold by immoral folk (or those who don’t know the damage they’re causing). Don’t buy them.
- Never mix investing with insurance. It’s universally accepted as a bad deal for you, and a great deal for the sales rep.
- Never allow an investment advisor to charge you a wrap fee or advisor’s fee to stuff your account with actively managed mutual funds.
Here are the Vanguard funds that I suggested, back in 2006, with the following allocations:
- 1. 33% in the U.S. stock market index (VTSMX)
- 2. 33% in the International stock market index (VGTSX)
- 3. 33% in the U.S. bond market index (VBMFX)
The concept is quite simple:
Once a year, you check the portfolio’s alignment. If the stock indexes are worth less than the bond index after one year, then you sell some of your bond index to top up your stock indexes, bringing the account back to the allocation above. I tracked this account using the portfolio tracker at www.smartmoney.com.
As mentioned, the hypothetical $200,000 investment that I used on September 11, 2006, would be worth $250,549.25 on Friday, January 20th, 2012.
That’s a $50,549.25 increase with no money added.
Even simpler, as I suggested in 2006, you could have plopped your money into Vanguard’s Target Retirement 2020 fund. It has a similar allocation as above: roughly 35% bonds and 65% stocks. Its investment returns would have been very similar to what you see above. You can check out a chart here.
And there’s a third option for Americans who want to wipe their hands clean of the investment process themselves, while paying a small fee to do it.
A company called Assetbuilder (which I also mentioned at my seminar) manages indexed portfolios for its clients. And they charge a fraction of what most international financial planners charge.
Assetbuilder’s portfolio #10 has roughly 30% allocated to bonds, with the rest in stocks and REITs. If $200,000 were invested in this portfolio of funds in September, 2006, the gain would be slightly north of $49,000, with no money added.
There’s only one catch:
To open an account with Vanguard or Assetbuilder, you need to be American, and you need to present them with an American address. Assetbuilder has been increasing its number of American expat clients at a rapid pace. They’re easy to deal with, and they understand the challenges faced by American school teachers abroad.
For the record, I write for Assetbuilder, but I am not compensated for my articles, nor do I receive financial remuneration from the company.
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18 comments
Gerry Born says:
January 21, 2012 at 11:14 pm (UTC 8 )
Andrew,
I loved your 4 things an investor should never do. What do you think about Vanguard’s LifeStrategy funds now that they use only index funds? I enjoy your articles.
Gerry
Andrew Hallam says:
March 5, 2012 at 8:35 pm (UTC 8 )
Hi Gerry,
I love Vanguard’s index only life strategy funds. They sure make things easy for Americans to invest effectively.
DIY Investor says:
January 21, 2012 at 11:30 pm (UTC 8 )
I agree with Gerry. In fact, they could be formulated as 4 questions to ask at the very beginning and to be answered in writing by financial salespeople. It would get a lot of them running in the opposite direction.
Diana says:
January 27, 2012 at 3:39 am (UTC 8 )
In fact, they could be formulated as 4 questions to ask at the very beginning and to be answered in writing by financial salespeople.
Daniel says:
January 29, 2012 at 5:45 am (UTC 8 )
While on the subject of expats. I’m a Canadian born guy who foolishly decided to use my fathers American citizenship to become a naturalized US citizen at age 19. I say foolishly because now all dual US/ Canadian citizens have found out they MUST file taxes in USA and will face huge penalties for not doing so and must reveal all their Canadian banking information to IRS. Canadian tax shelters like T.F.S.A and RESP will be taxed 15% on capital gains and dividends. All this even if you have NEVER resided in USA or received any benefit from USA. Renouncing US citizenship is very difficult and will most likely put you under an instant and in depth IRS audit.
My wife is a Chinese citizen with landed immigrant status in Canada. I’m thinking i better open a TFSA with her and transfer everything in my own TFSA to her account so IRS can’t get their greedy hands on it. Does this seem like a good move? I hate doing all this work to follow your advice only to have a foreign nation tax retirement savings gains at 15%!
Andrew Hallam says:
January 29, 2012 at 12:09 pm (UTC 8 )
Hi Daniel,
I wish I could advise you on the above matter, but I probably shouldn’t. I would hate to pretend I’m an expert in an area where I clearly am not.
Cheers,
Andrew
Giovanni says:
January 31, 2012 at 2:48 am (UTC 8 )
Hi Andrew!
I just read your book and I have a general question to my current situation. I”m 26, I have a great girlfriend and want to buy a house within the next 2-3 years. Should I invest as much as I possible can over that time and use that invested money as a down payment on a house? Or should I invest little while saving other money for that big purchase?
Thanks!!
Giovanni
Washington
Stanley says:
January 31, 2012 at 11:25 am (UTC 8 )
Hey Andrew ,
I am a big fan of yours after reading your book. I always lookout for this website for updates. I would be thrilled if you could answer any of my questions.
I started investing religiously after reading your book. I don’t have money to set up the bond , total market and international vanguard fund as you suggested but I have opened up a total retierment account 2050. Is this good enough? Or I should look for your sort of portfolio. I am ready to make considerable effort.
I am just starting out so I am ready to take on a lot of risk early on.
When you started out, how much could you save per month for investing. I am a big fan of your after reading your book , seriously you drive your point really well. I am excited to know you personally reply in this website.
Thanks a lot for writing a superb book.
Andrew Hallam says:
February 1, 2012 at 8:44 pm (UTC 8 )
Hey Stanley,
Thanks for the kind words about the book. Using a Vanguard Target Retirement fund is a great option. YOu can start with just $1000 and get diversification with a single fund.
When I first started out, I invested $100 a month, then quickly increased it to nearly $300 a month. Every year, I invested more each month.
Starting when I was so young had its advantages because today I don’t really have to invest much if I don’t want to. The power of compounding has worked its magic.
Andrew Hallam says:
February 2, 2012 at 9:20 am (UTC 8 )
Hey Giovanni,
You asked a great question. And I think it’s great that you are saving for a home. With luck, house prices will remain somewhat depressed, and you may end up getting a fantastic deal, in retrospect, when looking back at this point in time when you’re older.
There’s a general rule of thumb (and it’s a good one) suggesting that you should never put money in the stock market that you plan to use within the next five years. The markets are always too unpredictable over the short term. They always have been.
Interest rates on CDs are paltry at the moment, but if you’re saving for a house, park your money in a CD and keep saving, making sure that you can pull your money out when you’re ready to buy that home.
Once you make your purchase, you can take advantage of tax deferred investment accounts (a IRA or 401K) will also trying to pay a bit extra on that mortgage. See if you can pay the house off in 20 years, rather than 25 or 30. You’ll end up paying a lot less for the house that way. And while interest rates are low, you’ll be able to pay much more off your principle.
Good luck Giovanni!
squasher55 says:
February 3, 2012 at 6:57 am (UTC 8 )
Hey Andrew,
This is a bit late to be writing…but it is about your article entitled ‘America’s Promise’. I was actually in Korea when you wrote it….so I missed it. I was at two Universities there, as my wife is a Scientist and was giving talks at both Unis. So this article is really interesting to me…esp since I am a retired Mathematics teacher from Ontario. I did teach many Asian students back in the early ’90′s….they were from Japan, Korea, and China. I agree with your writing very much……their work ethic just blew my students away quite quickly. I know they were weak in creativity…but I did not teach that discipline. But their problem solving ability was very solid.
I am now involved more with University Grad students…..many from Asia. And I agree in this sense……their theoretical ability is awesome, but solving real world problems is lacking….they just love theory.
BTW, this is an awesome article that you have written. It will cause many people to sit up and notice….but… will it actually awaken the U. S. school authorities before it is too late? I am not sure on that one.
Andrew Hallam says:
February 7, 2012 at 9:08 pm (UTC 8 )
Hey Squasher,
You’re right about the U.S. having their backs against a barbed wire fence. It’s going to be interesting to see what the future holds. I think it’s going to take time to set things straight–and I don’t even know if the U.S. can do so. Asia might bury them. But at the same time, I believe that it will take many generations for Asia to catch up on the analytical thinking front. I don’t think it will happen within the next 30 years.
kiwi says:
March 5, 2012 at 9:10 pm (UTC 8 )
Hi Andrew
As an international educator like yourself I just bought your book as I was keen to see what advice you could offer that would apply to me. However, I am not American (nor Canadian or Australian) but a New Zealander, and I am having trouble finding out a way to invest in index funds in New Zealand that sounds as simple as using a company like Vanguard. I assume since long term I intend to retire in New Zealand, that I should invest there – do you have any advice for me? I am a complete novice in terms of investment and I find the range of possibilities quite overwhelming.
Andrew Hallam says:
April 22, 2012 at 2:10 pm (UTC 8 )
Hi Kiwi,
This depends on where you live. Are you currently in New Zealand?
Katrina Mangous says:
April 22, 2012 at 7:42 pm (UTC 8 )
At the moment we’re living in China (and probably will be for at least another 6 – 7 years).
Andrew Hallam says:
April 22, 2012 at 9:47 pm (UTC 8 )
Hi Katrina,
If you can find a brokerage in China giving you access to the U.S. stock market, you could buy a New Zealand ETF, a world stock market ETF and a world government bond ETF through the New York Stock Exchange. It’s a wonderful supermarket (of sorts). If you can’t find access to the U.S. exchange through a local brokerage, Singapore might be your best option to open an account. But you would have to fly here and open it in person. After that, you could wire money here and manage your account online.
Cate says:
May 11, 2012 at 3:27 am (UTC 8 )
Hi Andrew,
I’m am educator who found out about your book from another Minnesotan who was in the know.
I am 30 and am wondering which specific type of account I should open with vanguard an ETF? I have about 50gs to put into it.
I have a ROTH IRA making nothing and a tax free 403b with 1,500 yearly matching through my employer should I keep contributing to those or not?
Thanks,
Cate
Andrew Hallam says:
May 11, 2012 at 7:30 am (UTC 8 )
Hi Cate,
Here are the steps I think you could take:
1. Make sure your contribution room in tax sheltered accounts (like IRAs) is fully used up before investing in taxable accounts.
2. Rollover your current IRA into a Vanguard Target Retirement Fund. This one would do nicely: https://personal.vanguard.com/us/funds/snapshot?FundId=0304&FundIntExt=INT
This is the only investment you’d need to make. It’s diversified, indexed, will rebalance for you, and will become more and more conservative as you age (increasing its bond allocation)
3. Have a look at your 403b options. Do you have any? Where, specifically, does the money get invested? Often, the employer doesn’t have a choice, but if you’re allowed to choose Vanguard as an option for your 403b, you know where to put the money.
4. If your tax deferred contribution room is maxed out, open a Vanguard non retirement investment account, and buy the same target retirement fund I mentioned above.
I hope this helps.
Andrew