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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:
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.
I hope this was helpful.
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.
Sample for a 40-50 year old who is unsure of where they want to retire
- 30% New Zealand Stock Market Index (ENZL)
- 30% Total World Stock Market Index (VT)
- 20% International Government Bond Index (ISHG)
- 20% U.S. Short Term Government Bond Index (SHY)
Sample for a 40-50 year old planning to retire in New Zealand
- 50% New Zealand Stock Market Index (ENZL)
- 10% Total World Stock Market Index (VT)
- 20% International Government Bond Index (ISHG)
- 20% U.S. Short Term Government Bond Index (SHY)