Index funds offer a simple plan for retirement riches

24 comments

1. 

   Janice Goh says:

   April 24, 2012 at 2:46 pm (UTC 8 )

   Reply

   US Index

   Hi Andrew, I’ve just read your book and am excitedly embarking on my index portfolio. Which US Index fund would you recommend? I’ll be doing 30% Singapore bond index A35, 50% Singapore Stock Index ES3 and 20% US Stock Index. Thanks!

   1. 

      Andrew Hallam says:

      April 24, 2012 at 6:34 pm (UTC 8 )

      Reply

      Hi Janice,

      If you want to buy a global index instead (allocated roughly 45% to the U.S.) then you could buy the ETF with the ticker symbol VT. It has low expenses, and would be a great addition for the missing 20% that you are asking about.

      As for the real estate, there is at least one business here in Singapore that would allow you to buy U.S. real estate, and they sort out a property manager for you. I’m confused by your question about capital gains. If you buy at $100K and sell at $200K, you make a $100K capital gain. You would only make a capital gain if you sold at a profit.

2. 

   Janice says:

   April 24, 2012 at 7:28 pm (UTC 8 )

   Reply

   Hi Andrew,

   Thanks for replying quickly! Sorry I wasnt clear.

   1. We are looking for a pure US stock index instead of world index. Do you know which one I could buy from Singapore?

   2. I meant that after selling at $200k as per your example, would we be able to transfer the money back to Singapore or would we need to leave it in a holding account in the USA?
   Cheers!

   1. 

      Andrew Hallam says:

      April 25, 2012 at 7:20 am (UTC 8 )

      Reply

      Hi Janice,

      A total U.S. market ETF you could use would be VTI.

      And of course, you could transfer anything you make on U.S, shores back to Singapore without a problem after paying U.S. capital gains taxes.

3. 

   Bernard says:

   April 25, 2012 at 1:15 pm (UTC 8 )

   Reply

   Hi Andrew,

   I am totally new in this. However, I will like to start planning financially. You mentioned in your book that the typical allocation portfolio is typically around 30% bond, 35% local index, 35% international index. I would like to know if the 30% is based on the total number of shares or based on the value of the total shares?

   In addition, in the Singapore context, majority of the share can only be bought in a per lot basis (1000 shares), that makes a monthly contribution to the investment pretty challenging isn’t it?

   Regards
   Bernard

   1. 

      Andrew Hallam says:

      April 25, 2012 at 3:25 pm (UTC 8 )

      Reply

      Hi Bernard,

      It’s all based on market value when determining what percentage you have in each portion of your portfolio. However, I didn’t recommend a specific percentage of fixed income. If you are between 30 and 40 years old, then yes, a 30% allocation to fixed income would be fine. But I didn’t generically suggest a 30% allocation of fixed income (bonds) for everyone. It depends on your age, whether you will receive a defined benefit corporate pension etc. I mentioned this in my book.

      You may consider using your CPF as your fixed income component if you’re Singaporean. After all, it is fixed income. Then you could just rebalance between your equity indexes. Someone doing just that, between the Canadian and U.S. indexes (for example) would have beaten the returns of both market indexes over the past 30 years.

4. 

   Barry says:

   April 25, 2012 at 6:51 pm (UTC 8 )

   Reply

   Hi Andrew

   I’m enjoying reading your blog having purcahsed “The Millionaire Teacher” on the kindle. This then lead to “how a 2nd Grader beat wall st” the Bogleheads book and I’m currently reading Bogle’s Little Book of Commonsense Investing

   I’ve also begun perusing Morningstar and Vanguards Australian website and contemplating an OZ version applicable to my situation

   The 10% stock picking solution or casino fund also seems like a viable plan which will provide ongoing lessons also ;o)

   Regards

   Barry

   1. 

      Andrew Hallam says:

      April 25, 2012 at 7:33 pm (UTC 8 )

      Reply

      I’m glad you liked the book, and I’m thrilled that it precipitated some further reading Barry. Nice work! I’d be thrilled if you could spare a minute or two to review my book on Amazon. Thanks Barry! Here’s the link, if you have a moment: http://www.amazon.com/gp/product/0470830069/ref=as_li_tf_tl?ie=UTF8&tag=nextstep07-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0470830069

      Thanks Barry!

      Andrew

5. 

   Mark says:

   April 27, 2012 at 2:03 pm (UTC 8 )

   Reply

   Hi Andrew,
   I have a question about something I’ve been wrestling with for a while.
   I’ve invested an amount in a bond index fund roughly equivalent to my age, as you suggest. Is it not true that the price of that index fund will increase as interest rates decrease and vice versa? If that’s the case, and over the next couple of years, at least, interest rates have nowhere to go but up… does that not mean that the value of my index fund has nowhere to go but down?
   Mark

   1. 

      Andrew Hallam says:

      April 27, 2012 at 2:12 pm (UTC 8 )

      Reply

      Hi Mark,

      If you believe that interest rates have nowhere to go but up, short the bond index and make a fortune for yourself. If, however, you’re not so sure, stick to a sensible, rebalanced game plan. If interest rates rise, bond prices will fall to give them a more attractive yield for incoming investors. If you’re relatively young, like me, and collecting stock and bond assets, you should relish such a drop, if it occurs. As a 41 year old, I have just a fraction of the money in bonds that I will have when I am 60. So….as an accumulator, I want to buy more over time. I don’t plan to retire during the next five years, so I much prefer falling prices for my asset classes, not rising ones.

      And again, if you are so sure that interest rates will rise and bond prices have nowhere to go but down, you can make your gamble and short the index. You’d make an absolute fortune if you are right. But if you aren’t……it could be an expensive education teaching you not to speculate. Everyone’s natural inclination (almost always) is to speculate, Mark. But often, when the masses believe something, prices are already built into that speculation. Rebalancing your asset classes over your lifetime is going to be a much better option than speculating.

      Having said that, those who are wired to speculate will always want to speculate. I’m going to hope that you’re among the minority who doesn’t get swayed by news and the economy.

      Cheers,
      Andrew

6. 

   Mark says:

   April 27, 2012 at 2:32 pm (UTC 8 )

   Reply

   Wow. That was an unbelievably quick reply!
   I must admit that I’m tempted to speculate, but to be honest, it seems like making the assumption that interest rates will go up seems like a pretty safe bet under the circumstances. I live in Canada, and the governor of the bank of Canada has been using every chance he can get to sound the alarm bells over very high rates of consumer debt and the negative impact this will have once he starts raising interest rates. Besides, interest rates are at historical lows. At 52 years of age, I’ve got half my money in a bond index and I’m worried that the best case scenario is that this money will at least not decrease in value over the next few years.
   Thanks again for your time and insights in making this blog so great.
   Mark

   1. 

      Andrew Hallam says:

      April 28, 2012 at 7:16 am (UTC 8 )

      Reply

      Don’t forget that if the future is that obvious, this will already be priced into your bonds. Probably eight times out of ten, when we speculate in a direction that “makes sense to most people in the know” we’ve taken the wrong path. Best not to speculate. Check Japan’s rates, if you want to see how low rates can go.

7. 

   Boris says:

   April 28, 2012 at 3:41 am (UTC 8 )

   Reply

   Hi Andrew,

   I purchased your book two weeks ago and got very excited about investing in index funds. I have some mutual funds with big Canadian bank and just an hour ago I called them and switched my money into their low-cost index funds. They are not as low-cost as some other funds,but still much better then typical mutual funds MER. What surprised me is that the adviser did not really try to deter me from buying the index funds but just warned me that they are not actively managed – I was ready for a big sales pitch about how great their mutual funds are.

   Anyways, I just wanted to thank you for a great book and a great blog.

   Best of luck,
   Boris

   1. 

      Andrew Hallam says:

      May 9, 2012 at 8:43 am (UTC 8 )

      Reply

      Thanks so much for getting in touch Boris. It’s great hearing from a fellow Canadian, and I’m glad that my book was helpful. If you have a couple of minutes, I’d be thrilled if you could paste a really short review on Amazon.ca. Here’s the Amazon link to the book, if you have time: http://www.amazon.ca/gp/product/0470830069/ref=as_li_tf_tl?ie=UTF8&tag=andrhall-20&linkCode=as2&camp=15121&creative=330641&creativeASIN=0470830069

      Thanks Boris,

      Cheers,

      Andrew

8. 

   Gareth says:

   April 28, 2012 at 12:14 pm (UTC 8 )

   Reply

   Hi Andrew

   I’m a 21 year old student in Singapore. I have read your book and I have enjoyed and learnt much from it. I will be starting an account with DBS Vickers, like you encouraged, as my first foray into investing. Here are some follow up questions. Hopefully my mind will be at ease and I will have a clearer idea what I should do when you answer them.

   1) Being a student, I will only be venturing into index funds with only a few thousand dollars. Am I right to say that, a recommended set up, going by the guidlines that you have listed, for a 21 year old it will look something like this.

   20% in the Singapore Bond index (A35)
   40% in the Singapore stock index (ES3)
   40% in the world stock index (VT)

   In this case, with my few thousand dollars, should I invest in wholly into 1 component at a time or split them up in the above ratio?

   2)I am keen on making regular contributions to this portfolio. However I understand that there is a $25 commission for each purchase with DBS vickers. In that case given my current circumstance as a student, will saving my intended contribution for a yearly top-up/portfolio balancing be more prudent, still as relevant?

   3)Will it be advisable to bring forth most of my savings from my current savings account into this indexed portfolio? Any advice on how a savings account should work in conjunction with this index fund?

   4)Should I consider CPF as part of my portfolio and integrate it into my calculations, perhaps under Bonds?

   Thank you for educating such illuminating information through your book, website, and advice to the rest of us in your comments. As a clueless 21 year old this has all been very enlightening on how I should start off on my own to manage my money. Pardon me for the barrage of questions above. Will be looking forward to your answers.

   Best regards,
   Gareth

   1. 

      Andrew Hallam says:

      May 9, 2012 at 8:51 am (UTC 8 )

      Reply

      Hi Gareth,

      To keep commission costs low, just add one index at a time. The allocation, at your young age, shouldn’t matter much until your account grows much further. Yes, I would consider the CPF to be your bond component. And yes, I would invest the money in your savings account. The earlier you can invest, the better.

      By the way, the portfolio you chose looks great, but you could skip (if you like) the bond index, considering your CPF.

      Cheers,

      Andrew

9. 

   Joanne says:

   April 28, 2012 at 7:01 pm (UTC 8 )

   Reply

   Hi Andrew,
   I’m an American international teacher as well and I have a quick question. We already invest monthly in Vanguard in the Index Funds you recommend, have a Roth IRA, and have emergency money set aside. But we have a sum of about $10-15,000 sitting around that we would like to invest.

   I’m wondering if instead of having this extra amount in the bank doing nothing, should we open an ETF, or should we open a Traditional IRA, or what would you suggest? I don’t want to put it in what we already have with Vanguard as a lump sum, and we already diversify and dollar cost average by investing 4 times a month, so we’re not sure what to do with it.

   Any suggestions would be welcomed. And thank you in advance for helping us.
   Joanne

   1. 

      Andrew Hallam says:

      May 9, 2012 at 8:48 am (UTC 8 )

      Reply

      Hi Joanne,

      I can only tell you what I would do with it. If my IRA contribution room were already maxed out, I would open a traditional investment account with Vanguard and split the money into the U.S. short term government bond index (or inflation protected bond index) as well as the U.S. and international bond indexes. This $10K to $15 might look like a lot of money, but in the grand scheme of things, when looking back years from now, you’ll see it as a fairly small sum. I think you should invest all of it. But then, that’s just what I would do. Your own decision, of course, is going to be a personal one, and the best one for you.

10. 

    Jamie says:

    April 29, 2012 at 7:43 pm (UTC 8 )

    Reply

    Dear Andrew,
    Thank you for sharing useful advice for DIY investing in your book and on this blog. I’m already spreading the knowledge to my family and friends, and am thinking of getting more copies of your book to pass around!

    Since reading your book, I have been doing some further reading and research on Index funds, in particular ETFs. Unfortunately, its appears that most books approach the issue of Index/ETF portfolio construction from an American investor’s standpoint. Furthermore, the Singapore currency-based ETF products on offer (by Nikko AM and iShares) at the moment appear extremely limited in terms of variety, returns and trade volume. Singapore is after all a very small market!

    I am thus considering a portfolio consisting entirely of US Dollar-priced ETFs using Vanguard’s ETF products (35% VBMFX, 35% VTI and 30% VXUS based on my risk tolerance and age of 32).

    You advised in your book and elsewhere in your blog that a substantial portion of an investment portfolio should consist of bonds/stocks of the country that one intends to retire in. This is to prevent foreign currency fluctuations affecting one’s real purchasing power in the country of retirement.

    I came across an article (http://mdm.ca/investment-strategy/pdf/articles/ManagingCurrencies-e.pdf) which suggests that in the long run (say 20 years), foreign currency fluctuations are mean reverting and have minimal impact on one’s portfolio returns.

    Given this piece of information, is it still too risky for a Singaporean not to own any Singapore index ETFs but rely entirely on Vanguard’s USD-priced ETFs? It seems the risk is worthwhile, even after the 30% tax to Uncle Sam as the American ETF products have greater variety, returns and trade volume. It also makes it easier for me to apply the advise in books cartered for US investors!

    Would like to hear your thoughts on this. Thanks!

    Warmest,
    Jamie

    1. 

       Andrew Hallam says:

       May 9, 2012 at 8:55 am (UTC 8 )

       Reply

       Hi Jamie,

       Considering that your CPF is going to be in Singapore dollars, I don’t see your proposed strategy as too risky. Over the long haul, your theory on currencies is correct. But as you get closer to retirement, you might want to trade some of the international stock indexes for some more Singapore exposure. It’s nice not to get nasty exchange surprises once you’re retired. Congratulations on the plan you have set up, at such a young age….yeah, early 30s is young. Keep it up!

       Cheers,

       Andrew

11. 

    Jim says:

    May 1, 2012 at 1:48 am (UTC 8 )

    Reply

    Hi Andrew….just wondering why you never mention GIC’s ?….thanks from Jim

    1. 

       Andrew Hallam says:

       May 9, 2012 at 8:56 am (UTC 8 )

       Reply

       Hi Jim,

       I don’t have anything against GICs. As short term vehicles, they’re super. But I don’t consider them “investments”. If I were saving for a home downpayment, I would put my money in GICs, certainly.

       Cheers,

       Andrew

12. 

    Juliana says:

    May 7, 2012 at 1:39 am (UTC 8 )

    Reply

    Hi Andrew! I bought your book im the kindle store amd recently finidhed reading it. I am interested in opening an index fund account and I was wondering if you had a recommendation for doing that in the latin american market? I currently live in Mexico but I am from Colombia and might be moving back. I have been searching for options to open an account but had not found anything, and manynof the companies you mention in your book, ex vanguard, dont operate here. I will really appreciate your advice. Thanks Juliana

    1. 

       Andrew Hallam says:

       May 9, 2012 at 9:01 am (UTC 8 )

       Reply

       Hi Juliana,

       I don’t know whether you have access to the New York stock exchange, via a local brokerage, but I believe that you probably do. Is there a Citibank near you? If so, they may offer a brokerage, allowing you to buy ETFs off the New York stock market. You could get away with just two indexes: a world stock market index (VT) and an international bond market index (ISHG). These, of course, are both exchange traded funds. And they would give you very broad, international diversification. If you also would like a home country stock ETF, you could likely find one trading on the New York stock exchange, and you could always add that to the mix. I’m glad that my book was helpful. If you have a moment, I’d be thrilled, Juliana, if you could post a short review on Amazon. Here’s the link, in case you have time: http://www.amazon.ca/gp/product/0470830069/ref=as_li_tf_tl?ie=UTF8&tag=andrhall-20&linkCode=as2&camp=15121&creative=330641&creativeASIN=0470830069

       Cheers,

       Andrew