In September 2006, I gave a seminar to teachers at Singapore American School, suggesting that they could thrash the investment returns of most professional investors (especially after taxes) if they built low cost portfolios of index funds.
Creating a sample portfolio with a hypothetical $200,000, I promised to track the returns, while giving the attendees access to the online tracking account at smartmoney.com
Just a few months later, the American Funds company introduced its Target Retirement Funds. Each Target Fund represents a combination of American Fund mutual funds: entire portfolios rolled into one. They contain bond funds and stock funds, with the bond components increasing slightly each year, as the investor gets closer to retirement.
In contrast, the portfolio of indexes that I created didn’t require a bunch of overpaid analysts. Nor did it come with a broker’s sales commission incentive. It simply represented the world’s stock market, balanced with a U.S. bond market index. And you could purchase the indexes without paying a sales commission.
The indexed portfolio was split into thirds:
- 33% in Vanguard’s U.S. total stock market index
- 33% in Vanguard’s international stock market index
- 33% in Vanguard’s total bond market index
I rebalanced the portfolio once a year, taking roughly 10 minutes out of my day. Every other year, I increased the bond market component as my hypothetical investor grew older (bonds currently represent 38% of the total portfolio).
How has the indexed portfolio compared with the results from the slick team at American Funds?
The closest American Fund Target Retirement fund, based on similar stock/bond allocations, is the Target Retirement 2020 fund. Since January 2007 (when the American fund was first available) the indexed portfolio has given it a royal hiding.
Comparative Returns – January 2007 to August 2012
Is your broker’s annual Christmas card worth $46,064?
The comparative difference between the hypothetical $200,000 portfolios amounts to $46,064 after just five years, eight months.
Exactly $11,500 of that money would have gone to the salesperson—some of it into college funds. Too bad it wasn’t for your kids. The remaining $34,564 was a penalty investors suffered for internal fund costs and poorly allocated money.
Without a pension to look forward to, I can’t afford to invest in actively managed mutual fund products—especially those charging sales fees of 5.75%
Can you?
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37 comments
DIY Investor says:
August 27, 2012 at 12:09 am (UTC 8 )
An expensive Christmas card indeed!
Barry says:
August 27, 2012 at 5:47 am (UTC 8 )
Great update Andrew
And the Christmas Present gets bigger each year ;o)
I hope those Teachers took heed of your seminar suggestions
On another note, did you see Warren Buffetts Long Bet http://longbets.org/user/buffett/ ?
And an update here http://www.bloomberg.com/news/2012-03-21/buffett-seizes-lead-in-bet-on-stocks-beating-hedge-funds.html as the Vanguard Fund moved forward
It will be interesting to track that bet to its conclusion also
Andrew Hallam says:
August 27, 2012 at 9:34 am (UTC 8 )
Thanks for the timely link Barry. I just finished showing it to my personal finance class this morning.
Joe says:
August 27, 2012 at 9:44 am (UTC 8 )
Wow, look who is making fancy graphs! You’ve come along way in technology young Andrew. Great post by the way. I remember when you threw out that challenge and I offered up a portfolio that was something like 50% Simpson Manufacturing. Glad you deleted it, that would be embarassing – that portfolio must have taken a shellacking
Andrew Hallam says:
August 27, 2012 at 10:32 am (UTC 8 )
Hey Joe!
I’m still pathetic with technology…but a picture, in this case, is worth more than 46,000 words.
kenneth says:
August 27, 2012 at 9:51 am (UTC 8 )
I am retired and 61 years old and guessing you would recommend about 60% of my investments should be in the Vanguard’s total bond market index? Thanks for valuable info! I just wish I would have read your advice about 40 years ago!
Andrew Hallam says:
August 27, 2012 at 10:39 am (UTC 8 )
Thanks Kenneth,
Yes, I would recommend something like that, or you could buy an inflation protected bond index. That said, if you’ll be receiving social security or a pension, you could build a portfolio with slightly less bond exposure: say, 45% bonds, 55% stocks…or a 50/50 split. Did you know that a 50/50 split would have beaten the average hedge fund in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011 and so far, in 2012. The emperors, Kenneth, of the big money management industry truly wear no clothes. I’ll be having an article published about this tomorrow.
Cheers!
Andrew
Mark says:
August 27, 2012 at 6:39 pm (UTC 8 )
Hi Andrew
I am well and truly sold on indexing and want to be sure I am minimising the costs of investing. With this in mind, would you be able to give me a percentage range you’d feel was good value and something you’d feel comfortable with? It seems my 3 funds would have TERs averaging at 0.16% and once I factor in the monthly transaction costs this would give total investment costs of approximately 1%.
Cheers
Mark
Andrew Hallam says:
August 27, 2012 at 7:37 pm (UTC 8 )
Hi Mark,
I’ll bet your monthly investment costs are a lot lower than 1%.
For me, 1% would be a very unacceptable cost.
Assume a $100,000 portfolio, costing 0.2% in expense ratio costs. This would be $200 per year. Add in 10 stock purchases at $10 each (the going rate in North America) and your total commission costs amount to $100 per year. Total costs would be $300 per year, or slightly less than 0.3% after counting the freshly added money.
If you have a $20,000 portfolio, your expenses (at 0.2% per year) would cost $40 per year. Add in 10 purchases at $10 each, and you would have total costs of $140, amounting to just 0.7% This is too high.
If your account is small, it’s much cheaper to go with index funds. Even if you had a $50,000 account and paid 0.35% in expense ratio fees, you would only be paying 0.35% annually, with no costs to buy and sell.
I don’t think it makes much sense to pay anything more than 0.35% annually for your investments.
Make sense?.
I pay roughly 0.14%, after making 10 trades per year at $30 each (trades in Singapore are expensive!)
kittylee says:
August 28, 2012 at 1:29 am (UTC 8 )
Hi Andrew, I just bought your book and read about also the index portfolio spread for a Singaporean investor. Pls advise how shall i get started ? Do i invest a lump sum at the ratio or I should invest an amount per month ? I saw all the prices are near 52 week high. Is it a good time to start investing or wait for where price are lower ?
Andrew Hallam says:
August 28, 2012 at 5:23 am (UTC 8 )
Hi Kittylee,
I’ve never concerned myself with speculation. If you have the money to build a diversified portfolio, you should do it. Thirty years from now (if you’re truly investing for the long term) is the horizon you should be looking at, rather than getting speculatively concerned about where the markets might (or might not) go in the very short term. If you buy now, and the markets drop, that’s a great thing. Keep buying more. If you’re young, you should hope your investments fall. The tragedy, of course, is when your investments underperform a collecation of stock and bond indexes. Never let that happen; buy stock and bond indexes (ETFs) so you never have to worry about that.
Matthias Kauer says:
August 28, 2012 at 2:47 am (UTC 8 )
Just wondering:
Since you’re saying that trades are expensive in Singapore: Any particular reason you haven’t tried the Standard Chartered 0.2% no minimum commission online trading?
Andrew Hallam says:
August 28, 2012 at 5:18 am (UTC 8 )
Hi Matthias,
My portfolio is well into seven figures. It doesn’t make mathematical sense to switch now.
In addition, when I make purchases with Vickers I could invest up to $40,000 and still pay just $30 in commission.. That’s significantly less than 0.2%.
If my account were much smaller, and I were investing or rebalancing smaller sums, then it would make more sense.
Mark says:
August 28, 2012 at 3:47 am (UTC 8 )
Hi Andrew
Thank you for replying to my post.
As I have been fortunate enough to be part of the teachers’ pension scheme in the UK so far, I am only just about to start up my investment portfolio. It seems that in the UK because I do not have a reasonable size portfolio my only option is to purchase indices as ETFs through a discount broker.
The best deal I have been able to find is £1.50 per trade. If I have a diversified portfolio this would be 3 ETFs and £4.50 a month. I am planning to invest £450 a month so in the first year this would be 1%.
Obviously this cost will decrease as a percentage as my portfolio increases. However, if my math(s) hasn’t failed me, it would take over 8 years until it reached the 0.35% (0.19% for the transaction costs + 0.16% for the TERs) mark.
Should I be worried about this in the grand scheme of things? After all, I am planning to invest for about 30 years and you have to make a start some how!
Cheers
Mark
Leonardo Pabroquez Jr. says:
August 28, 2012 at 3:51 pm (UTC 8 )
Hi Andrew,
I’ve read your book. I’m from Philippines, by the way.
How can I invest in Index fund like vanguard, etc (like what you’ve suggested) from here in Philippines? Where can I open an account, etc. I also don’t mind if you’ll be suggesting a singapore company/account since I have a sister working there.
Any suggestions? Thank you very much!
More power to you!
Regards,
Leonardo
jmondejar says:
August 28, 2012 at 9:46 pm (UTC 8 )
Hi Leonardo,
Kabayan! I’m also Filipino currently working here in Singapore. Glad you found this site.
To help you answer your question, I know currently in the Philippines there is no way for you to trade in other markets other then Philippine Stock Exchange so you wont have access to ETFs like Vanguard and others.
If you need to open a trading account under your name, you might need to come over Singapore and open one.
I found this website that could be helpful for you http://the-international-investor.com/investment-faq/open-offshore-brokerage-account-singapore
Leonardo Pabroquez Jr. says:
August 28, 2012 at 10:15 pm (UTC 8 )
Thanks jmondejar! This is great help. Will follow this up!
Andrew Hallam says:
August 31, 2012 at 5:29 am (UTC 8 )
Great stuff! I wish there were more options throughout SE Asia, but jmondejar is right. You’ll have to come to Singapore to do it. Give the Standard Chartered brokerage a close look. They charge less for smaller investment deposits.
Leonardo Pabroquez Jr. says:
August 31, 2012 at 12:21 pm (UTC 8 )
Thanks Andrew! I will look into it.
Barry says:
September 6, 2012 at 6:14 pm (UTC 8 )
Hi Andrew
Only a short term query, but how has the above portfolio moved over the last 12 months?
i.e. August 2011 to Aug 2012
Also, as a query only, how much of the increase has been from dividends, rather than growth and re-balancing ?
Barry
Andrew Hallam says:
September 7, 2012 at 5:39 am (UTC 8 )
Hi Barry,
Roughly 7.8% over the past 12 months overall. Only about 2% came from dividends. Rebalancing may have added another 0.2% at best. It’s a fairly big account and the amount I rebalanced was certainly small, relatively. But again, as mentioned, I just worked my way back to my goal allocations. No thinking required–which is just the way I like it. Keep in mind that rebalancing can detract from profits during certain years as well. Bull market years, for example, when the markets just keep rising. In those cases, rebalancing will detract from returns. But….rebalancing adds safety, and when the markets fall (which they always do, at some point) it puts you in a better position to take advantage.
Harjit says:
September 13, 2012 at 5:14 am (UTC 8 )
Hi Andrew,
I have read your book Millionaire Teacher and it is a great read especially for somebody who is new to investing like me.
I am based in the UK. I have looked at the UK Vanguard website and pondering between the following index funds:
1) FTSE U.K. Equity Income Index Fund or the FTSE U.K. Equity Index Fund – for the domestic index fund. Can you tell me what the difference between the two?
2) FTSE Developed World ex-U.K. Equity Index Fund – for exposure in the world market. You mentioned in your book that investing in the developed market is better than investing in developing markets
3) U.K. Government Bond Index Fund – for the domestic bond
What do you think of these choices? Also is it better if i choose the funds from the UK Vanguard website or could i choose from the US Vanguard website?
Andrew Hallam says:
September 14, 2012 at 6:13 pm (UTC 8 )
Hi Harjit,
As a non American, you won’t be able to buy Vanguard’s regular, U.S. based funds. And with Vanguard UK, you will likely need a very large investment account to avoid an intermediary broker. In other words, I believe that only large investors can invest with Vanguard UK, without a broker. Having said that, HSBC has some fabulously cheap options that you could take advantage of. In the UK, they call them “tracker funds”. This article might help: http://andrewhallam.com/2012/05/millionaire-teacher-guiding-british-investors/
Harjit says:
September 14, 2012 at 9:06 pm (UTC 8 )
Hi Andrew,
Many thanks for your reply. I have read the article you recommended and i am interested in the HSBC tracker funds due to the low cost.
I have seen the list of tracker funds that HSBC offer and I am looking at a tracker fund for the world exposure but it doesnt look like HSBC offer that type of tracker fund. Would the HSBC European Index Fund be suitable instead or what would you recommend as the world exposure tracker fund that HSBC offer?
For the bond segment of my portfolio would the HSBC UK Gilt Index be ok?
One more thing, for the UK exposure whats the difference between the HSBC FTSE 100 Index and the HSBC FTSE 250 Index and which one would you recommend?
Thanks agian in advance.
Andrew Hallam says:
September 14, 2012 at 9:11 pm (UTC 8 )
Hi Harjit,
I’m glad the article was helpful. For the UK market, go with the broader index (FTSE 250). If possible, always go broad. You’ll ensure higher diversification. The HSBC UK Gilt index would suit your bond requirement, and you should be able to add the U.S. tracker and the European tracker for your international component. I haven’t looked recently, but I’m assuming they have a U.S. tracker.
Jamie says:
October 1, 2012 at 9:19 am (UTC 8 )
We’re sold on index funds and will continue investing in our Vanguard (US) account from our earnings while living in Singapore.
But, how to move the money from Singapore to our US vanguard account?
1. Vanguard says they can’t debit from a foreign bank account
2. For a wire transfer, OCBC and Citibank charge about SGD 30 to send a wire, and my Bank of America US account charges USD 12 to receive a wire. Daily limits are 25k for OCBC and 20K for citibank, so we will face these fees on a regular basis.
3. Citibank’s global view / global transfer has very low limits (1k/day, 10k / 60 days) so isn’t really an option.
4. HSBC has some kind of global view of accounts, but you need 200k with them to qualify.
Any other ideas, or are we looking at about SGD 45 in fees for each 25k wire?
Thanks
Andrew Hallam says:
October 1, 2012 at 11:31 am (UTC 8 )
Hi Jamie,
I’ll ask around to see if there’s a better option. If not, it’s still (of course) worth sending the money and paying that $45. Bummer that you’d have to pay that, but without cheaper alternatives…..
Leaf11 says:
February 12, 2013 at 1:59 am (UTC 8 )
I use CurrencyFair.com to transfer money, but in the opposite direction — from US to Singapore. The exchange rates are very good and fees are minimal. Check it out.
Mary says:
October 6, 2012 at 3:01 am (UTC 8 )
Dear Andrew,
I just finished reading your book(via Kindle) and this blog. I tried to sign up with Vangaurd, to begin investing. They said I couldn’t because I live overseas. What gives? Do you know what is needed invest in index stocks and bonds with Vangard. I am a US citizen, teaching in China.
Thanks,
Mary
Andrew Hallam says:
October 6, 2012 at 10:08 am (UTC 8 )
Hi Mary,
This is what you’ll need:
1. A U.S. address (even if it’s your sister’s or your mother’s)
2. A U.S. bank account with routing number information and bank address
3. Go online and open the Vanguard account, giving the U.S. address when it asks for an address
4. You should be able to follow the instructions to transfer money from your U.S. bank account to your Vanguard account and make purchases. If you need help, call them. But don’t reveal where you live.
It isn’t against the law to have a U.S. investment account while living overseas. Prior to 2006, any expat American could open a Vanguard account. But then Vanguard got sticky. Existing expat account holders were fine, but new investors were running into the same trouble you had.
This will work. Can you give me a shout once you set it up, or if you have other questions?
Cheers,
Andrew
David says:
April 3, 2013 at 12:55 am (UTC 8 )
I just set up a Vanguard acct from Thailand. They asked me a ton of questions over the phone to verify my identity, but they set me up. Yes, you need a US bank acct and a stateside address. Good luck!
Kathryn Rekkedal says:
October 30, 2012 at 2:22 am (UTC 8 )
Hi Andrew, just 6 months ago we were talking with our retirement fund broker telling us that this past year American Funds did not increase their value at all and to “hang tight” until the market turns around. We have since read your book and realized that at 5.75% sales charge is NOT the norm and there are other avenues of investing and waiting for the market to turn is not the best strategy. Thanks to you we have seen the light! this blog post makes me glad I have become a more informed investor! No more giving away money!
Andrew Hallam says:
October 30, 2012 at 2:40 pm (UTC 8 )
I’m really glad to hear it Kathryn. Of course, when you have a diversified indexed portfolio, there will also be years when the account doesn’t make money. At this point, instead of changing strategies, you will have to sit tight and be patient. Falling markets are actually a good thing for those who are investing in the stock and bond markets, as I described in my book. It’s when we are losing money to fees and commissions where the losses become unacceptable.
Cheers,
Andrew
David says:
April 3, 2013 at 1:00 am (UTC 8 )
Hi Andrew. You mention Vanguard Target Retirement funds in your book. Wow they seem easy. Any disadvantages vs. the standard allocation you recommended to Kris Olsen on p. 102? (i.e. age = percentage of bond allocation, etc). Thanks!
Andrew Hallam says:
April 3, 2013 at 6:10 am (UTC 8 )
They sure are easy David! I don’t think there are any disadvantages. But pick your fund based on the bond allocation, rather than on the date named in the fund (for your projected retirement). Your tolerance for risk is determined by your allocation, not purely based on some arbitrary allocation selected by Vanguard. For example (and I’m making these numbers up just as an example) assume that I want to retire in 2030, and I have a pension from my school district to look forward to. I can take on more risk than most, so I would likely have a lower allocation of bonds than many others who wouldn’t benefit from a future pension. The 2030 fund (let’s pretend) has a bond allocation that’s higher than what I would want, under the circumstances. So….in this case, I may want to pick the fund dated name based on the allocation I want, rather than based on the date I want to retire. These are amazing products, and I recommend them if you want a hands off approach. Just look at what’s inside them (as I mentioned in my book) so you can find the one that’s right for you, based on allocation.
Jill says:
April 1, 2013 at 10:26 pm (UTC 8 )
Dear Andrew –
I stumbled across your website while researching information on retirement options for overseas US educators. Thank you for your wisdom and advice.
I have a question regarding opening a retirement account in the US through Vanguard. I do not declare income on my US taxes (because I pay local) and thus cannot contribute to an IRA. So, my retirement account options on Vanguard are limited to:
1. Taxable account. An account that doesn’t qualify for special tax treatment. Dividends, capital gains, and share appreciation may be taxable income to the owner of the account.
2. Variable annuity. An account that allows tax-deferred earnings growth and a future stream of income. Appropriate for savings above and beyond IRA or employer-sponsored retirement plan [e.g., 401(k)] limits.
I know that you do not recommend variable annuities, so I assume my only option is the taxable account. This option scares me. I want to invest in such a way that is as tax efficient and friendly as possible.
Do you have any advice?
Regards,
Jill
Andrew Hallam says:
April 2, 2013 at 4:12 am (UTC 8 )
Don’t be afraid of that taxable account Jill. Virtually all Americans use them. You will be taxed quite gently on dividends (your government is far kinder than many when it comes to dividend taxation) and your capital gains (if you invest with index funds) will accrue virtually capital gains free. Capital gains are taxed on realized profits. But it isn’t taxed on profits that aren’t “realized” or sold. In other words, if you own an actively managed fund, and the fund manager sells and replaces all of the stocks within that fund in a calendar year, then you pay short term capital gains taxes on the profits of the fund each year. However, if you own an indexed portfolio (with index funds) there is no manager buying and selling stocks within the fund. There’s nearly a 0% turnover. As such, you will only pay long term capital gains taxes on the amounts that you sell, upon retirement. Your income tax bracket will be lower than then, and long term capital gains are taxed far more gently than short term capital gains. As an investor, you are lucky to be American. Overall, you will pay among the lowest fees and taxes in the world—even with that taxable account. And keep this in mind. For stateside Americans, the amount of money they can invest in an IRA is a pittance each year…roughly $5000-$6000 depending on their age. For these reason, even stateside, the majority of invested money is in taxable accounts, not IRAs. IRA contribution room dries up quickly. Go for it Jill. Open that Vanguard taxable account. Please read my book for guidance if you need it.
Andrew