Investing For Expatriate Americans in Singapore

When I was a kid, I had a red Ferrari. 

It was about a foot long, remote controlled, and came with a cool set of pylons for me to practice weaving in and out of.

I loved terrorizing our two cats with it.

Chasing tabbies all day took a toll on its battery consumption—so this was my first real foray into car expenses.  What did I learn?  You get what you pay for.

The red Eveready batteries were cheap and light.  I figured they were a great deal, so I remember buying multiple packs of them.  But the more expensive Duracells, I found out later, lasted a lot longer….and were ultimately a better value.

The problem is that many people carry this “higher price = higher value” mindset into investing.  But as the founder of Vanguard (John Bogle) suggests, in the investment world, you get what you don’t pay for.

One-Stop Shopping

Many investment companies have offered simplified investment solutions:  single funds that combine other funds within them.  They’re usually referred to as “Target Retirement Funds” and the general idea is that you’d choose a fund name that corresponds with the proposed date of your retirement.  For example, if you planned on retiring in 2035, you could buy a Target Retirement 2035 fund.  Within it, are a blend of other funds, and as you get closer to your retirement date, the fund increases its bond component (adding further safety) while decreasing its stock component.  After all, if a retiree is going to be withdrawing funds to live off, they won’t want their money gyrating wildly with the stock market.

Geniuses At the Helm

There’s a company called “American Funds” that sells actively managed stock and bond funds.  As far as actively managed funds go, they have a solid reputation.  Entering the “Target Retirement” fund market in 2007, they provided one-stop shopping for investors:  blends of their actively managed funds within a single fund, and again, with a bond component that is supposed to increase as the investor ages.  This fund company has a keen group of advisors who enjoy selling these funds to clients, mostly because the advisors get a full 5.75 percent of every penny an investor deposits into one of these funds.  But are investors getting good value for their extra expense?  Let’s have a look.

Cheapskates Sleeping on the job

Like the “American Funds” company, the non-profit investment group, Vanguard, has its own brand of “Target Retirement” funds.  But Vanguard (unlike American Funds) isn’t interested in paying commissions to brokers, nor do they have fat cats at the top of their pyramid who reap the rewards of the company’s profits.

Unlike “American Funds”, Vanguard doesn’t employ highly trained traders to buy stocks and bonds for the funds within their “Target Retirement Funds.”  Instead, Vanguard compiles baskets of index funds.  Nobody trades stocks within an index fund, so there are no traders to pay salaries to.  Nobody researches stocks for indexes, so there are no researchers to pay.  And nobody will try to sell you a Vanguard fund.  Why would they, when they aren’t promised a commission?

The Tale of the Tape

Let’s examine the five year performances for three of the American Funds Target Retirement Funds, and compare them with three lower cost Vanguard Target Retirement Funds, between January 2007 and September 29, 2011.  It’s a short, five year time period, but let’s see if it reveals anything interesting.

We’ll put these funds in the ring with their most equivalent counterparts.  For example, if the American Funds have a Target Retirement fund with 30% allocated to bonds, then we’ll compare that fund to the Vanguard Target Retirement fund which most closely matches this bond allocation.

The first two going head to head will be Vanguard’s 2035 Target Retirement Fund and American Funds 2030 Target Retirement Fund.  Each of them has roughly a 10% bond allocation.  In taxable accounts, if these two funds made the same amount of money, the Vanguard fund would earn the investor a higher return because the Vanguard fund’s turnover (the amount of trading that goes on within the fund) is less than what takes place with the American Fund.  But let’s see if the American Fund can outperform the Vanguard fund, before taxes:

January 2007 – September 29, 2011-09-30

Fund

Amount Invested

Sales Charge

End Value

Vanguard Target Retirement 2035

$10,000

$0

$9,510

American Funds Target Retirement 2030

$10,000

$575

$9,086

The Victor:  Vanguard

Commentary:   The stock markets are currently lower than they were in 2007, so with these Target Retirement Funds allocated mostly to stocks, it’s not surprising that neither of them made money over the past five years.  That said, investors in American Funds suffered even further at the hands of fees.

More Bonds, more short term safety

Let’s compare two more Target Retirement funds, this time with bond allocations of roughly 15% of the total.  Will the more expensive American Funds prove their mettle this time around?  Let’s have a look.

Fund

Amount Invested

Sales Charge

End Value

Vanguard Target Retirement 2030

$10,000

$0

$10,290

American Funds Target Retirement 2035

$10,000

$575

$9,086

 The Victor:  Vanguard

Commentary:  With higher bond allocations, each of these funds performed better than the previous two Target Retirement Funds we tested.  But have a look at what the five year difference was between the two funds.  Again, the American Fund couldn’t overcome its higher fees.

More Conservative Still

The Vanguard Target Retirement 2015 and the American Funds Target Retirement 2015 each have similar bond weightings:  38% and 34% respectively.

From January 2007 to September 29, 2011 was the American Funds company able to redeem itself and prove to offer value for investors who chose its 2015 Target Retirement Fund?

Fund

Amount Invested

Sales Charge

End Value

Vanguard Target Retirement 2015

$10,000

$0

$11,230

American Funds Target Retirement 2015

$10,000

$575

$9,622

 Victor:  Vanguard

Commentary:  The American Funds company isn’t giving its customers everything they deserve…although they’re making their advisors very happy, with that chunky 5.75% commission. Unfortunately, as previously mentioned, even if the American Fund returns did equal the Vanguard returns, the Vanguard investor would pay fewer taxes on those returns, putting the advantage back in Vanguard’s court.

That said, I compared all of the Target Retirement Funds for Vanguard and American Funds—ensuring that I compared funds with similar stock/bond allocations. 

Were any of the American Funds able to overcome their sales fees and beat the Vanguard funds since January 2007?

Nope.  None of them did.

A Note To American Expatriates

When you save and invest for your future, most of your money is held in taxable accounts.  You don’t have the option of dumping the majority of your investments in an IRA.

For that reason, it doesn’t make sense to invest with actively managed products.  Your portfolios won’t likely keep pace with indexed portfolios, and you’ll pay higher relative taxes on your investment returns.

Unless you already have an account with Vanguard, it can be tough for expatriates to open one.  That said, there are fabulous businesses, like Assetbuilder, that are encouraging American expatriates to open accounts with them.

Assetbuilder also offers combinations of indexed portfolios, much like the ones we compared above.  And the 5 year returns earned by Assetbuilder’s indexed portfolios were even better than Vanguards.  It’s something to consider, if you’re sick of paying high investment costs.

For more information on the superiority of low cost investing, you can order my book, Millionaire Teacher, also available as a Kindle edition.

It’s also available in Singapore’s bookstores, and if ordered now, Amazon will deliver paperbacks at a discounted price to North American addresses by November 1, 2011.

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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19 Responses

  1. Barbara says:

    Hi Andrew,

    Read your book & really loved it. Thanks. Got a question for you. I have a bunch of money in IRAs with Fidelity. Some of it is in an index fund & some in a bond fund, but not enough, so I am going to start rebalancing & taking money out of their managed funds. The index fund I am currently in is Spartan 500 with an expense ratio of 0.10. That is lower than Vanguard's Total Stock Market Index ER of .18. Is there anything I am not seeing here? any other costs associated with Spartan 500.

    Thanks very much.

  2. Hi Barbara,

    Many thanks for the kind words about my book. I think it is great that you are looking at the expense ratios on your account.

    The Fidelity S&P 500 index you own is a bit like a display of cheap bananas in an otherwise expensive store. It can get you in the door where the other Fidelity products are handily available.

    Unfortunately, it's the cost of the overall grocery bill that counts most when you get to the checkout counter. If you build a complete portfolio of Fidelity products, you'll have a much higher bill than you would with Vanguard.

  3. Barbara says:

    Thanks for your reply, Andrew.

    So, if I only buy the cheap bananas I should be OK. Right?

    • That's right Barbara–cheap bananas are best!

      The trouble is that you won't be able to build a complete, cheap account with Fidelity. How cheap, for example, are their international stock indexes and their bond indexes? The bottom line is the cost for the entire account, not the cost of a single product.

      If you could switch everything over to Vanguard, I certainly would. It's probably best to have all of your money in the same place. It makes it a lot easier.

      Cheers,

      Andrew

      • Barbara Levy says:

        Hi Andrew,

        I am an American living in Singapore for the past 5 years. I do have a US PO Box and a physical address (my mother’s) in the US. Fidelity just sent a letter to my US PO Box saying that because I am overseas they can no longer continue to provide investment services to my accounts. They will be restricted as of July 1.

        What are my options? Is this a recent change?

        • Hi Barbara,

          Find out what this means. Does it mean that they’ll close your account? I doubt that, because they would be responsible for any unwanted capital gains. Does it mean that you can’t add fresh money to your account? Or does it mean that they will not provide you with advice.

          About six years ago, Vanguard shut the door on expats that told the truth about where they lived, by not allowing them to open new accounts. When calling, they had to keep mum about where they were calling from.

          There are options, if Fidelity shuts down on you: http://www.assetbuilder.com

          They have taken on a number of expat Americans recently, and they won’t shut the door on you.

          But if your money is with low cost indexes (with Fidelity) and they will still allow you to add new money, you should stay where you are. If, however, you are using actively managed funds with Fidelity, and they won’t let you switch to their indexed products now, it will be time to move firms.

          Andrew

          • Barbara Levy says:

            Hi Andrew,

            Thanks for your reply. If you send me your email address, I am happy to send you a pdf of their letter to me. But an excerpt of the letter states, “these restrictions will prevent you from purchasing new holdings or making additional deposits of cash or securities…you will only be able to sell your holdings”

            I am in index funds only. The funds have exp ration of 0.20. These are mostly retirement accounts that I re balance periodically but do not add new money to very much, as I am not working.

            Thanks,
            –Barbara

  4. Anthony says:

    I am delighted to find your website, Mr. Hallam.

    I am a 26 year old American citizen. I was told by a couple of IFAs in Japan about the Generali Vision plan and the Friends Provident Premier Advance plan. They both appeal to me, but I am concerned being a first time-newbie, especially after finding a lot of concerning info online. I have never done any sort of investment in the past. I am interested in doing this because I intend to start saving up for the future as I look towards a longtime residence here in Japan. I work as an English teacher too.

    My dilemma is that I have read a lot of negative reviews about the Generali Vision plan and the Provident Premier plan. But of all the possibilities, these too are the only ones that can fit within my budget. The Generali plan's minimum monthly premium is $200 US, while the Provident plan is $300 US monthly.

    I am aware that putting my money in a savings account in Japan would amount to nothing much. So, I am searching for good savings accounts that yield reasonable returns in the future, as well as being safe investments.

    I checked out your links that you recommend to expat Americans. But Assetbuilder requires a minimum initial investment of at LEAST $50,000. That is way beyond my league. It would probably take me 16 years from now as a teacher to have savings that amount to that (assuming that I set aside 10% of my gross income). And as you mentioned, Vanguard makes it extremely difficult for expats to avail for their services when applying from abroad.

    Thus, I am at a dead end. If Generali, nor Provident are wise investments, and if Assetbuilder or Vanguard are beyond my financial means, then I know I have to look for options elsewhere.

  5. Anthondy,

    There's still a Vanguard option. Email me: investlikebuffettATgmail.com

  6. Krista says:

    Andrew,

    I have read your book and attended one of your presentations this year.

    I am 24 and just finished paying off my student loans!

    I don't have a large amount of extra funds, but enough that I would like the start investing.The issue is I live and work here in Singapore, I am in a partnership with a Swedish/Norwegian and I am an American. Ideally I want my investments to reflect my mixed lifestyle and locations.

    Because I have zero investments right now… what should I purchase first and in which part of the country? Help!

    • Hi Krista,

      As an American, you have to declare your money to the IRS, so you might as well use Vanguard or Assetbuilder. If using Vanguard, you could buy a global index and perhaps a global ETF for your bond component. If you plan to live in the U.S. one day, you could simply buy a Target Retirement fund, which (although U.S. equity centered) would rebalance for you. Or, you could easily use Assetbuilder (same thing) as they'd rebalance the money for you as well. In each case, you'll need to provide a U.S. address. This will be easier to do with Assetbuilder. With Vanguard, you would have to tell them that you live in the U.S. And I don't recommend lying. You wouldn't be breaking any laws, but do you really want to fib like that?

      Your partner could start an account with DBS Vickers: buying a global equity index (VT) and a global bond index (ISHG). I don't know where you plan to retire, which is why your partner's account (if neither of you have a retirement locale in mind) could be generically diversifified, which VT and ISHG would give you. VT is a total world stock market index based on market capitalization. This means that roughly 45% of it is U.S. and the rest is spread internationally, based on each respective countries representation of the global market. It's an ultra simple account, but also very effective, I believe. Add in ISHG (the global bond index) and you truly would own the world.

  7. Rebecca Davidson says:

    Hi Andrew

    As an American who is paid in Singapore dollars, how concerned should I be about currency conversions?

    I don't intend to end up in the US. Do I need to go through multiple conversions: Converting my SGD salary to USD to invest with Assetbuilder and then converting to the targey retirement currency (currently unknown, but possibly SGD) later?

    Is there a savvy way to avoid currency conversions or is it unavoidable for us Yanks who aren't paid in USD?

    Thanks!

    Rebecca

    • Hey Rebecca,

      Thanks for posting this question here. A lot of other people will likely have the same question. And because we're neighbours, if this isn't clear, let me know and we can talk about it.

      There's no way to avoid the initial conversion to USD if you're paid in Singapore dollars. But is it the currency bid/ask spread you're concerned about? That's the spread you see at the airport currency exchange (for example) suggesting the "buy" price and the "sell" price. Overall, that's peanuts, of course. Or is it something else you're concerned with? Are you concerned about currency swings instead? If you are, I wouldn't concern yourself with it. Many expat teachers concern themselves greatly with currency swings, when it comes to investing, and I don't really understand why. If you build a global portfolio (which you should, of course) then your money may be quoted in U.S. dollars (with Vanguard or Assetbuilder) but the money is really spread throughout a basket of currencies. A plummetting US dollar would be good for your international stock index, for example. Let's assume that you were retiring to Thailand. Because your money will be spread over various currencies (USD and otherwise, with your international index) then a dropping or rising U.S. dollar would have a very insignificant effect on your bottom line, converted into Thail baht. Plus, here's something even more important to consider. Let's say you retire to Thailand (or any other country). You would never sell all of your invested money at once anyway. You would only sell 4% of your assets each year–the maximum safe withdrawal rate (to ensure that you never run out of money and can increase you dollar "payouts" to cover inflation). You will likely live many years after you retire. And during that time, the old Thai baht will have periods of strength and weakness, relative to a global benchmark of currencies–which you will have (sort of) if you own an international stock index. If you really want to spread your jam, you could have a U.S. bond index, an international bond idex, a U.S. stock index and an international stock index. If you know that you'll retire outside of the U.S., then you could (should you choose) have slightly more money in the internationals than in the U.S. And even though your investment sums will be quoted in USD (because you'd be using a U.S. company) you wouldn't be exposed to any single currency at all. You're spread your jam over rye bread, whole wheat bread, white bread and nutbread (even though you may have bought them all in a bakery called "White Bread bakery") I hope this makes sense. If not, we'll chat soon. Thanks again for posting the question Rebecca.

  8. Anthony says:

    Hi Mr. Hallam,

    I recently heard about the Australia-based MAN investments.

    http://www.maninvestments.com.au/

    Have you ever heard of it? I like the idea of giving a lump sum and then waiting 8 to 10 years for maturity, which is likely to double by then. At least this makes it easier to manage than a monthly contribution offered by other offshore plans. Would you agree?

    Sincerely,

    Anthony

  9. Dave says:

    Dear Andre, I read your first book and love your blog! I’m a American living in Singapore and am a bit confused on how best to invest. Can I invest using DBS vickers or will I have to use asset builder? I’m concerned about the money transfer fees. Thanks!

    • Hi Dave,

      You won’t be able to use a non U.S. brokerage. But even if you could use a local brokerage, the money transfer fees to the U.S. are small, compared to the much higher fees you would pay if you used a Singapore based brokerage. If you open an account with Schwab, you could buy their ETFs and not pay commissions at all. There would be no extra account charges to pay.

  10. Mindy says:

    Hi Andrew,

    What do you think about products that combine life, major disease insurance as well as retirement pension.
    I signed up for a Tokyo Marine product through Citibank a few years ago thinking that I would need this sort of safeguard.
    But, after reading your book, I question whether it was a good idea.
    The premium is around $4500 a year for 25 years and I get $8000 a year starting age 65 until death.
    Is it good to have something like this or am I better off investing that money into index funds?
    Thank you for your time and concern,

    Mindy

    • Hi Mindy,

      You should never buy a product that blends insurance with investment. Buy term insurance for your insurance needs. Buy investments for your investment needs.

      Let’s assume you invested $4,500 a year for 25 years. If you earned 9% per year, you would have roughly $415,457. If you withdrew 4% per year, after those 25 years, you would be able to take out just over $16,000 per year. What’s more, you could also increase that withdrawal each year to cover inflation and still likely never run out of money….no matter how long you live.

      If you are currently younger than age 40, the policy you are paying into would be an even bigger ripoff.

      • Mindy says:

        I’m partly glad that I realize this sooner than later..

        They will take away hefty amount for “early termination” around 40%! I think. I suppose it would be difficult to get the full amount back.. What an immoral practice to take advantage of everyday working people who try to plan for the future and are naive enough to trust “professionals” to guide them. Thank you again, Andrew, to shed a light in this dark tunnel.

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