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Jan 20 2013

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Index Investing in Singapore For Expat New Zealanders


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If you’re a New Zealander living in Singapore, you may be wondering about investment options. 

Perhaps you’ve been approached by someone representing Friends Provident or Zurich International.  Salespeople representing these firms usually peddle insurance linked investment products because of the massive commissions they earn.  Such commissions are being banned in countries like England and Australia.

These expensive products are like sailing boats with hull breaches.  And much better options exist.  In my book, Millionaire Teacher—The Nine Rules of Wealth You Should Have Learned in School, I wrote about index investing.  Based on overwhelming evidence, it’s the most efficient form of investing you could do.  Only very rare advisors  manage portfolios of index funds for their clients.  These are special people willing to put your financial interests ahead of their own.  

But building an indexed portfolio is something you could also easily do on your own.  You won’t have to follow the stock markets or read investment news.  And it only takes about an hour a year to manage such a portfolio. 

How do you do it?

To build a portfolio of low cost indexes, you will need to open a brokerage trading account.  Those living in Singapore can do so with DBS Vickers, Standard Chartered, Citibank, or any other low cost brokerage.  Here’s the story of a woman I’ll call Hilary.  She wasn’t previously invested with a firm like Friends Provident or Zurich, but she was invested in actively managed funds—the kinds of products not recommended by most members of the financial academic community.  She eventually sold those actively managed products to buy low cost indexes instead.

Here’s Hilary’s story:

I believe that I am pretty much an international person…global nomad of sorts…having been born and raised in New Zealand but leaving there in my early twenties to work overseas, and have not returned. I married an American and we decided to purchase and build a home in Phuket, Thailand.

 I love to travel and am very fortunate to have experienced a great many amazing places all over the planet. It is difficult for me to think of retiring one day to just one place, when there are so many fabulous places to spend time!

Not knowing where I may eventually end up has meant that I want to make sure I have a pretty good investment distribution globally.

As part of that plan, and with direction from Andrew, I have started a diversified portfolio of low cost exchange traded index funds (ETFs) through Standard Chartered. The account was easy to set up – I opened a current account with the bank, which I did in person, in order to open a trading account with them. I was able to do that online. As part of the process, I did need to indicate that I had a minimal amount of trading experience, and list down three recent trades. I am not sure how this is checked, but managed to get through this step.

The trading currency required for purchases on the New York Stock exchange is U.S. dollars, so I selected that, filled out the appropriate IRS form, and the trading began! 

The globally diversified portfolio I built has a slight bias towards my home country of New Zealand. You can see what I purchased below:

I’m 44 years old.  Following the plan in Andrew’s book, I have roughly 40% of my money in government bonds, both U.S. and international.  Especially if you don’t have an upcoming pension, he talks about having exposure to the bond markets in a percentage that’s roughly equal to your age.  Bonds are less volatile than stocks.  As we age, we slowly increase our exposure to bonds to decrease our portfolios’ volatility.

The global stock market index I own constitutes exposure to stock markets in the United States, Europe, South America, China, India, Singapore, Canada, Australia and Japan.  It’s the ultimate piece of geographic diversification, all wrapped up into a single index.

Then there’s my New Zealand index.  I may never retire to New Zealand (in fact, I have no idea where I’ll end up) but most investment books suggest a home country bias, so that’s what I’ve created here. 

The plan is to maintain these percentages, and add money monthly.  In my case, I would buy the poorest performing index from the previous month, to ensure that my account represents something close to its goal allocation.  In other words, if my New Zealand market index represents only 20 percent of my portfolio at the end of the month, as opposed to the 30 percent exposure I started with, then I would add fresh money to this index.

If you’re starting your investment portfolio from scratch and haven’t deposited a lump sum into the account (as I have) then you may want to alternatively add money to a different index each month.  For example, you could buy the New Zealand market index for January, the International government bond ETF for February, and the U.S. government bond ETF for March.  You could follow it up in April with the Global stock market index. 

 As I build this portfolio over time, I’ll do my best to think dispassionately about the market’s direction.  This is the toughest part for most investors.

Have a look at the 6 month performance chart for my portfolio’s holdings below:

hilary_vtwi

The green line represents the New Zealand stock market, up 30 percent in the past six months, not including dividends.  After adding dividends to the mix, the New Zealand stock index would have gained roughly 32 percent.

The blue line is the world stock index.  Over the past six months, it has increased 15 percent, roughly 16 percent including dividends.

The purple and the red lines represent the international and U.S. government bond index prices, before interest.  Including interest, they have averaged roughly one percent during the past six months.

New investors might be drawn to the New Zealand index, based on its 32 percent rise.  But the index that outperforms during one period won’t necessarily be the same index that outperforms during another.  It usually isn’t.  This is why smart investors don’t dump fresh money into their best performing indexes.  They own a global representation of the world stock and bond markets, and they rebalance their portfolios once a year.

 I’m young enough to continue working for many more years, so while I’m adding assets to my portfolio, I’ll hope the market sends prices downward, not upward.

This, I realize, is an investor’s greatest challenge.  Poor investment behaviour, after all, ensures that most investors buy high and sell low.  Instead, I’ll be ensuring the opposite by annually re-balancing my portfolio to skim some money off the winners at the end of each year, while adding to the losers.  Fortunes always change (what rises one year can fall the next).  Such re-balancing will ensure that I’m keeping my portfolio aligned with my goal allocation.

 And when it’s time for me to eventually retire, I should be prepared with a reasonably sized nest egg.  Upon my retirement (when I’m no longer “collecting” market assets) the world’s stock markets can rise all they want.  And I, like most retirees, will celebrate!  

 Here’s a screenshot view of the orders I made with Standard Chartered.

 hilary_scb-order

I hope this was helpful.

Hilary

 

 

The two most common questions people like Hilary ask me are these:

How will I be taxed?

Hilary’s exchange traded index funds were purchased off the New York Stock Exchange.  Consider it a supermarket allowing you to buy an array of products providing virtually any geographic exposure you want. 

Because the exchange, however, is based in the U.S., Hilary will be paying withholding taxes on her dividends.  There’s no way around this.  If any corporation purchases U.S. stocks or products from the United States (including those “tax sheltered investment firms” from the British Isles) a 30 percent withholding tax on the dividends will be taken at the product’s original U.S. source.  This isn’t as bad as it might appear.

If the markets gain 10 percent, roughly 8 percent would come from a capital gain—which is an increase in the stock market level–and roughly 2 percent would come from dividends.  Those living in Singapore would benefit from rising markets without ever having to pay capital gains taxes.  After all, Singapore is a capital gains free zone for equities (stocks).  Your equities can grow, and when you sell, you will never pay tax on the profits.

However, each quarter you will receive a dividend pay-out, and the IRS would take its 30 percent share.  If it were a 2 percent dividend, you would earn 1.4 percent in dividends, not 2 percent, after the IRS took its 30 percent cut. 

Your 10 percent pre-tax gain would then be a 9.4 percent post tax gain.  This is still one of the world’s lowest taxed investment options.   If you complain about it, somebody from another country may want to hit you in the head with a hammer.

Best of all, you won’t have to file an income tax form because the IRS will take the money at its source.  And each quarter, when the dividend payment comes, you will see it detracted from your payment.

What About Currency Risk?

New investors often think that they are at the whim of the U.S. dollar when purchasing indexes off the U.S. market.  I’ve answered this question many times on my blog, but it’s worth repeating here.

 The indexes purchased by Hilary will always be quoted in U.S. dollars, but their profits or declines will only be reflected by the fortunes of the world’s stock and bond markets.  What happens to the U.S. dollar, specifically, would be irrelevant when you understand how the process works.

Assume that the New Zealand stock market does nothing in the year ahead:  no gains at all.  Let’s also assume that, in that given year, the U.S. dollar dropped 50 percent, relative to the Kiwi dollar.  In this case, the price of Hilary’s stock market index (which is quoted in U.S. dollars) would actually double.  It’s priced in U.S. dollars, but not exposed to the U.S. dollar.

As such, a portfolio like Hilary’s (with its completely global representation) poses no specific currency risk.  Because it’s a portfolio representing stock and bond market indexes throughout the world, it wouldn’t be affected by the swings of any single currency.

There is, as always, friction that occurs when converting Singapore dollars to U.S. dollars, as is required to buy these products.  That’s the bid/ask spread charged by banks–an unavoidable expense, of course.

Andrew 

 

Sample for a 40-50 year old who is unsure of where they want to retire

Sample for a 40-50 year old planning to retire in New Zealand

 

 

 

 

 

 

 

 

 

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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2013/01/index-investing-in-singapore-for-expat-new-zealanders/

10 comments

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  1. avatar
    Drizzt

    Hi Andrew,

    I was wondering. US have a 30% withholding tax but UK do not have withholding tax. So if the expense ratio is not that high and liquidity is better, perhaps we can use standard chartered trading to buy UK ETFs?

    Drizzt

  2. avatar
    Rockhiker

    Hi Andrew, some questions on the above.

    1. I had thought the likes of Bernstein recommended that bonds be that of your home country as opposed to overseas bonds , so as to minimise the associated currency risk. Is there any reason a NZ investor would not have NZ bonds comprising 20% plus of their portfolio?

    2. The bond composition in the above is all via treasuries as opposed to including corporate bonds as part of the mix. I realise that treasures are technically safer due to governments being able to print money so are less likely to default, but is there a reason that you do not advocate corporate bonds as being a suitable component of the bond component of the portfolio?

    3. I have noticed from your earlier posts that your own portfolio has it 's share component based on the US as opposed to Canada where are you from. In what circumstances is it prudent for an investor to forego their own countries sharemarket exposure and have a heavy focus on the US?

    Look forward to clarification

  3. avatar
    Toby

    I am from New Zealand and hold the following ETFs:

    VTI – Vanguard Total Stock Market. 30%
    VEA – Vanguard First World. 30%
    BSV – Vanguard Short Term Bond. 40%

    I add to my portfolio as regularly as I can. I am a citizen of the world and I am not sure where I will retire and this portfolio will suit me fine wherever I end up living in the future. I don’t know if I will end up in New Zealand or not. Because of this I decided not to include a New Zealand index in my portfolio. I prefer the global approach without the emerging market component. That is why I chose VEA rather than VEU or VXUS or VWO. I keep thinking about changing the bond ETF to the iShares International government short term bond ETF – ISHG. I think I will make that change in the future after investigating the fees involved). ISHG makes more sense to me than including a New Zealand bond index.

    Three ETFs is enough to keep track off in my portfolio. I try to add monthly to my portfolio and if I had more than three ETFs it would take a lot of work to keep it all in balance at the designated percentage weightings. I prefer owning VEA and VTI rather than VT and ENZL. Over the long term I don’t think it makes that much difference which indexes are chosen provided they represent the sizes of the various capital markets. Investing over the long term is made successful by living below ones means, keeping fees low and rebalancing dispassionately (not making predictions about the future direction of the market i.e. market timing) rather than trying to second guess the market.

    I react dispassionately to market movements. I ignore predictions and I ignore the financial media. If I am allowed one thought about the future of the stock market it would be that I hope for a big drop in the market in the near future. The bigger the better. I know how I will react to that. I will buy as much as I can of the equity indexes while they are cheap. This will serve me very well over the long term.

    All the best with your investing.

    Toby

    1. avatar
      Andrew Hallam

      Thanks so much for sharing this info Toby…greatly appreciated!!

  4. avatar
    Toby

    As a New Zealander in Korea, I am considering changing my US domiciled ETFs. After researching I found that iShares have many ETFs domiciled in Canada and Ireland which are denominated in US dollars. I can buy these through TD Direct Investing International.

    Would these be a suitable choice to build a portfolio to avoid US estate taxes without adding other taxes?

    Toby

    1. avatar
      Andrew Hallam

      They absolutely would be Toby. For your U.S. exposure, you may consider a Swap Based ETF through Horizon, which trades on the Toronto exchange. Buying this would also eliminate any dividend taxes you would need to pay, and although there’s a third party involved, that third party is the National Bank of Canada. So risks are minimal.

      Cheers,

      Andrew

  5. avatar
    Michael

    Hi Andrew,

    I am a New Zealander of 28yrs living in Abu Dhabi in the UAE. I signed up with Friends Provident in the Isle of Man through a financial adviser here, and was set to start paying into the scheme when stumbled across your website….Thank God I have not put a penny into it and I have since cancelled the contract. Thank you very much for sharing your knowledge with people like myself who have very limited financial know-how.

    I would like to follow your tactics of passive index investing and was wondering if you had any tips for myself being based here in the UAE?

    I plan to retire back in NZ but will be staying in the UAE for the next few years most certainly. Do you know of any trustworthy advisers out here that might help me set up a portfolio as I don’t have the know-how or confidence at this stage to do it myself.
    Also, what kind of sample portfolio spread would you recommend for someone in my situation with future NZ retirement plans.

    Best regards and thanks once again for the effort and info you share!
    Michael.

    1. avatar
      Andrew Hallam

      Hi Michael,

      Doing it yourself is quite easy. To get a grip on the general philosophy, check out one of the books under my “resource” section. Then check out my article on legally dodging U.S. estate taxes (use Google) and open an account with Saxo Bank. Building a portfolio of low cost index funds is very very easy.

      Andrew

  6. avatar
    Tim

    Hi Andrew

    I have stumbled across your website and have thoroughly enjoyed reading all the information about investing. I too am a teacher and have been investing for a number of years. I have wasted a lot of time reading broker reports etc about the next best stock. I do like the core and satellite approach with most of your money in index funds and depending on your level of interest some monies (small allocation) allocated to direct stocks.
    My question is how do I invest in index funds from NZ. Via my broker will cost 1.5% plus custodial annual fees. It is not a good idea to hold certificates in your own name. A number of indexes are available via the Australian stock market. Should one use a discount broker and access these. eg ETF SP500 is available from ishare on the ASX at an MER of 0.07%. Buffett does recommend this index. Your thoughts appreciated. Also New Zealand shares do pay high dividends, could this be taken as a replacement for bonds.
    Thanks for your highly educational site.

  7. avatar
    Wayne

    Hi Andrew

    I thoroughly enjoyed your book, thank you. I have been a Barefoot follower for some years, but becoming an expat (I am South Africa) has presented new investing challenges, and your insight has taken us to the next level. Being married to a Kiwi and our kids having been born and raised in China, we have absolutely no clue where we want to “settle” suffice to say we intend taking advantage of the expat privilege as long as we can which brings me to my questions:

    1. It seems from HK and China, the only option for index funds is through brokers, and we have been advised that Interactive Brokers has be the best fee offering. Should we be happy with an ER of around 0.35% after commissions (this is calculated adding the ER of the underlying index/ ETF to the commissions on a monthly purchase)?

    2. Taxes: If I understand your comments above, as an non-US expat, we should seek out index funds that are not domiciled in the US to reduce any withholding taxes on dividends?

    Thanks again
    Cheers
    Wayne

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