Andrew Hallam

Over the past 3 years, I’ve spent thousands of dollars of my own money distributing books to teachers at Singapore American School, on the merits of indexed investing.

 The books were comprised of 15 different titles.  Call it a mission of a driven man, but I’ve been very surprised at the investment fees paid by local Singaporeans and expatriates—which is the only reason I’ve emptied my pockets to distribute free books on inexpensive, common sense investing.

When I first moved to Singapore, I searched for index investing alternatives for my expatriate and Singaporean friends.   I came across an article, ‘Buy Low Cost Index Funds‘,  by Mr. Tan Kin Liam (The Former Chief Executive at NTUC Income) but the indexed options he gave were still surprisingly pricey. 

It’s well known that investors stand the greatest statistical chance of stock market success when they buy index funds.  But a lack of financial education keeps many people buying their far more expensive cousins: actively managed mutual funds, also known as Unit Trusts.  What’s worse, is that many investment companies charge additional wrap fees on top of the excessive fees charged by unit trusts. 

When actively managed funds charge more than 1.5% annually, and then the investment service company takes a further 1.75% annually in advisor’s fees (See the Raymond James Freedom Account)  investors are giving away more than 3% annually.  If the stock market compounds at 9% annually, going forward, then investors are giving away 33% of their profits, when paying 3% in fees.  It shouldn’t be legal, but it is.

If the markets make 6% going forward (a rate of return many people would have been very happy with over the past decade) then investors paying 3% in fees are giving away 50% of their profits to fee-hungry firms.

What does this mean? 

Investors giving away 3% annually in fees are likely to make less than 1/3 of what they deserve over an investment lifetime, as you can see by the example below:

$10,000 at 6% annually =  $102,858.18

$10,000 at 9% annually = $314,094.20

Seemingly small fees make HUGE differences.

How about track records of indexed accounts?

In the U.S., more than 50% of pension funds are indexed.  Of the pension funds that aren’t indexed, nearly 90% have underperformed a combination of stock and bond indexes.

Investing with low cost, diversified indexes is a powerful strategy.  Most unit trusts/mutual funds are expensive.

And you don’t get what you pay for in the investment service industry.

It’s so bad in the U.S. that some companies are doing their best to educate their employees—trying to save them from paying excessive investment fees. Read More

While other people, like Yale University’s endowment fund manager, David Swenson, suggests that the systemic exploitation of individual investors (via unit trust/mutual fund fees) requires U.S. government action.  In his superb book, Unconventional Success: A Fundamental Approach to Personal Investment, he shows the industry for what it is:  a giant fleecing machine. 

If he saw what went on with offshore investment companies like Zurich, he’d rewrite the whole darn thing.  Massive early withdraw penalties with companies like Zurich ensure that you won’t move your money, even after you wise up to the drenching.

How about a comparison?

Over a short period of time, anything can happen with investments.  You might even have a high cost advisor who does well with your account over a short period of five years or so.  But over a lengthier period of time, an actively managed unit trust (mutual fund) account is like a swimmer wearing boots, while dragging a chunk of carpet through the water.  Eventually, the indexes are going to show him who’s boss.

Looking long term, if you had simply split $100 equally into 3 indexes (Canadian stock index, U.S. stock index, Canadian bond index) in 1976, it would be worth more than $3000 today, with no money added. Check it out here:  to see how this balanced portfolio of indexes would have weathered the 1987 market crash, the 2000-2003 crash and the 2008/2009 crash.

For Brits, Australians, New Zealanders and Singaporeans, you could create your own “home country bias”.   For example, instead of a Canadian bias (as with the indexed sample account above) you could have a home country bias with Singaporean, British, Australian or Kiwi indexes.

Historically, returns would have been similar to the Canadian example.

But how do you open an account and get started?

Those based in Singapore can open a brokerage account with DBS Vickers.  Instead of paying 3%+ as an annual investment fee, you could end up paying less than 0.3% while purchasing indexed products called exchange traded funds (ETFs)

The savings go to your bottom line.

In part II of this series, I’ll show you how to construct an account of inexpensive, diversified indexed ETFs through DBS Vickers. 

Donating to charity is great—but donating to the financial service industry is foolish.

Your workplace is stormed by well-dressed officials who grab you, throw you into a car, and take you to an interrogation centre. 

You’re part of a deeply rooted narcotics organization, they tell you—conducting its wholesale transactions in the bowels of Mexico’s Copper Canyon.

Despite being innocent, you know that somehow you’re doomed, because that slick, cool little red headed guy with the shades from CSI Miami is convinced you’re the one they’re looking for… and that you’ve killed a couple of his agents… and that you’ve slept with his girlfriend… so you’re screwed no matter what.

But one of the good-looking, 20 year old genius CSI dudes has built a cryogenic chamber set to freeze someone and automatically revive them 80 years into the future.  And he wants to test it.  Horatio (the red-headed guy) thinks this sounds like a good idea—because he figures that your chances of revival will be about as good as Walt Disney’s, and nobody really expects Walt to walk again.

“Hey!” you protest, “Even if this works, my family will be gone, my professional skills will be redundant in 2090, and I’ll have no way of making a living.”

Horatio leans forward.  Slowly taking off his shades he says, “One stock.  We’ll liquidate your bank accounts,” he smirks, “and put your money into one stock.  If it goes bankrupt in the next 80 years, too bad.  But if it makes even 8% a year for the next 80 years you’ll be rich if you survive.  So what’s it going to be?”

???

If you’ve read this so far, perhaps you could name the stock you’d choose.  If this little chat gets around, we could all learn quite a bit from each other.

To see my”One Stock” and reasons, and to add your choice with a short explanation, please use the ’comment‘ link.

In this entry, I make references to “bonds”.  But not all bonds are created equally.  In this case, I am referring to safe, government bonds, not risky, high yield (high risk!) corporate debt.

Few things are more fascinating for me, than rifling through other people’s private investment statements.

It’s not that I climb people’s backyard trees to reach their second story windows, where I  break into their offices or bedrooms to—James Bond style—snap photos of their Merrill Lynch statements.  It’s a lot easier than that.  People volunteer.  Where I work, at Singapore American School, I’ve examined the investment accounts of at least 30 of my colleagues.

And something always strikes me as odd.   It’s not that most of them pay higher account fees than they should—including sales fees and wrap fees.  I’m used to seeing that.  Nor am I surprised that their advisors buy them tax-inefficient actively managed mutual funds (which pay their advisors and the IRS well) instead of buying index funds (which, long term, pay the investors well instead).

What surprises me is my average colleague’s bond allocation.   When markets tank, bonds can be a more welcome site than a fireman to a treed cat.

I’ll be the first to admit—I’m what many people would call a wimpy investor.  But I work at a private school and won’t be able to enjoy a state or provincial teacher’s pension when I retire.

For that reason, I can’t afford to take silly risks.  I follow a widely accepted rule of thumb suggesting that I should have a bond percentage that somewhat equals my age.  For example, as a 39 year old, roughly 40% of my portfolio is in bonds.  It’s not sexy, but it can definitely protect my ass…ets during a downturn.

But pouring over my colleagues’ investment account statements is like watching my buddies going down class 5 rapids in leaking boats without life jackets.  I’ve seen accounts of 60 year olds that are 100% exposed to the stock market.   Without pensions, these guys are metaphorical “non swimmers” when markets fall, because their accounts have so little time to recover from a downturn, before they need to start selling off portions of their nest egg to cover life’s expenses.  Bonds can act as welcome life preservers when stock markets drop.

In fact, none of the dozens of accounts I’ve seen had a bond allocation as high as my own.  And most of the accounts I scrutinized belonged to investors much older than me.  I would have expected higher bond allocations.

There are a handful of possible reasons that my friends have such high stock allocations—and such limited exposure to bonds.

1.     In some cases, their advisors might not know any better.  A young or inexperienced advisor may be innocently unaware of how volatile a stock portfolio can be.  In these cases, the past year probably served as a great lesson.

2.    I hate to be cynical with this one, but it’s a possibility.  Under certain circumstances (depending on the financial service company you use) advisors receive higher “trailer fees” (meaning that they get paid more) for getting you into stock funds than they do into bond funds.  I like to hope that nobody makes a decision on your behalf, based on their own economics.  But it happens.

3.    For some people, the promise of higher returns with a portfolio weighted more heavily in stocks than bonds is worth the risk.  Or so they think.

This is what I find most fascinating.  How educated is the average investor, based on the probabilities of what that extra risk could mean?  And how great are the rewards reaped from taking on more risk?

If you had invested your portfolio 100% in a U.S. stock market index from 1973 until 2004, without a single bond index or bond fund, your annual return would have averaged 11.19% per year.

And if you had invested 60% of your money in stocks, and 40% in bonds, you would have averaged 10.49% per year.  Overall, you would have been rewarded for taking on more risk, with the 100% exposure to stocks.  But you’d be a bit like that gal on American Idol who auditioned in her bikini to an internationally televised audience.  Her body and audacity moved her into the next round—but beyond that?

The annual advantage, if you had invested 100% in stocks, would have amounted to just 0.7% per year during this time period, compared to an account that had just 60% allocated to stock, and the rest to bonds.  Like the gal on American Idol, you would have made the next round as well.  But at what risk?

Ryan Seacrest may not have mocked you on national television, but the 2008 market crash may have felt like you were strung up naked from a lamppost.

A quick check on the American Funds website www.americanfunds.com reveals that their average U.S. based fund, at the time of this writing, is down more than 30%, from May 31, 2008 to May 31, 2009.  When you’re down 30%, you have to gain 43% just to break even (It’s interesting math– if you’re down 50% in one year, you have to gain 100% the following year, just to break even).  If you were 55 years old, and hoping to retire in a handful of years, losing 30% could be devastating.

But if you were 55 years old, and had only 45% of your money exposed to the U.S. stock market instead, you would only be down about 12% during the same one year time period.  You’d only have to gain 13.6% to break even.  You’d have your back against the lamppost, but you’d be fully clothed, and your feet would still be on the ground.

If you’re still comfortable taking higher risks for only slightly higher return potential, you might consider this:  the U.S. markets didn’t move from 1965 until 1982.  For 17 years, they didn’t appreciate.  If that happens again, after a retiree or near-retiree loses 25% to 30% of their portfolio, they’re going to be hurting when they need that portfolio to cover living expenses.

Shakespeare said that nothing is either good nor bad, but thinking makes it so.  I think I’d prefer to keep my clothes on, stay out of leaking boats, and keep my feet on terra firma.  But that’s just me:  a wimpy investor.