Index funds offer a simple plan for retirement riches

Everybody knows the mantra Buy Low, Sell High.

But when stocks are on sale, most investors shun them. They freak out, sell stocks and stuff money into mattresses, tin cups…and bonds. Then, when stocks increase in price, investors stampede into the same stock products they previously shunned…

 

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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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32 Responses

  1. Janice Goh says:

    US Index

    Hi Andrew, I've just read your book and am excitedly embarking on my index portfolio. Which US Index fund would you recommend? I'll be doing 30% Singapore bond index A35, 50% Singapore Stock Index ES3 and 20% US Stock Index. Thanks!

    • Hi Janice,

      If you want to buy a global index instead (allocated roughly 45% to the U.S.) then you could buy the ETF with the ticker symbol VT. It has low expenses, and would be a great addition for the missing 20% that you are asking about.

      As for the real estate, there is at least one business here in Singapore that would allow you to buy U.S. real estate, and they sort out a property manager for you. I'm confused by your question about capital gains. If you buy at $100K and sell at $200K, you make a $100K capital gain. You would only make a capital gain if you sold at a profit.

  2. Janice says:

    Hi Andrew,

    Thanks for replying quickly! Sorry I wasnt clear.

    1. We are looking for a pure US stock index instead of world index. Do you know which one I could buy from Singapore?

    2. I meant that after selling at $200k as per your example, would we be able to transfer the money back to Singapore or would we need to leave it in a holding account in the USA?

    Cheers!

    • Hi Janice,

      A total U.S. market ETF you could use would be VTI.

      And of course, you could transfer anything you make on U.S, shores back to Singapore without a problem after paying U.S. capital gains taxes.

  3. Bernard says:

    Hi Andrew,

    I am totally new in this. However, I will like to start planning financially. You mentioned in your book that the typical allocation portfolio is typically around 30% bond, 35% local index, 35% international index. I would like to know if the 30% is based on the total number of shares or based on the value of the total shares?

    In addition, in the Singapore context, majority of the share can only be bought in a per lot basis (1000 shares), that makes a monthly contribution to the investment pretty challenging isn't it?

    Regards

    Bernard

    • Hi Bernard,

      It's all based on market value when determining what percentage you have in each portion of your portfolio. However, I didn't recommend a specific percentage of fixed income. If you are between 30 and 40 years old, then yes, a 30% allocation to fixed income would be fine. But I didn't generically suggest a 30% allocation of fixed income (bonds) for everyone. It depends on your age, whether you will receive a defined benefit corporate pension etc. I mentioned this in my book.

      You may consider using your CPF as your fixed income component if you're Singaporean. After all, it is fixed income. Then you could just rebalance between your equity indexes. Someone doing just that, between the Canadian and U.S. indexes (for example) would have beaten the returns of both market indexes over the past 30 years.

  4. Barry says:

    Hi Andrew

    I'm enjoying reading your blog having purcahsed "The Millionaire Teacher" on the kindle. This then lead to "how a 2nd Grader beat wall st" the Bogleheads book and I'm currently reading Bogle's Little Book of Commonsense Investing

    I've also begun perusing Morningstar and Vanguards Australian website and contemplating an OZ version applicable to my situation

    The 10% stock picking solution or casino fund also seems like a viable plan which will provide ongoing lessons also ;o)

    Regards

    Barry

    • I'm glad you liked the book, and I'm thrilled that it precipitated some further reading Barry. Nice work! I'd be thrilled if you could spare a minute or two to review my book on Amazon. Thanks Barry! Here's the link, if you have a moment: http://bit.ly/mtreviews

      Thanks Barry!

      Andrew

  5. Mark says:

    Hi Andrew,

    I have a question about something I've been wrestling with for a while.

    I've invested an amount in a bond index fund roughly equivalent to my age, as you suggest. Is it not true that the price of that index fund will increase as interest rates decrease and vice versa? If that's the case, and over the next couple of years, at least, interest rates have nowhere to go but up… does that not mean that the value of my index fund has nowhere to go but down?

    Mark

    • Hi Mark,

      If you believe that interest rates have nowhere to go but up, short the bond index and make a fortune for yourself. If, however, you're not so sure, stick to a sensible, rebalanced game plan. If interest rates rise, bond prices will fall to give them a more attractive yield for incoming investors. If you're relatively young, like me, and collecting stock and bond assets, you should relish such a drop, if it occurs. As a 41 year old, I have just a fraction of the money in bonds that I will have when I am 60. So….as an accumulator, I want to buy more over time. I don't plan to retire during the next five years, so I much prefer falling prices for my asset classes, not rising ones.

      And again, if you are so sure that interest rates will rise and bond prices have nowhere to go but down, you can make your gamble and short the index. You'd make an absolute fortune if you are right. But if you aren't……it could be an expensive education teaching you not to speculate. Everyone's natural inclination (almost always) is to speculate, Mark. But often, when the masses believe something, prices are already built into that speculation. Rebalancing your asset classes over your lifetime is going to be a much better option than speculating.

      Having said that, those who are wired to speculate will always want to speculate. I'm going to hope that you're among the minority who doesn't get swayed by news and the economy.

      Cheers,

      Andrew

  6. Mark says:

    Wow. That was an unbelievably quick reply!

    I must admit that I'm tempted to speculate, but to be honest, it seems like making the assumption that interest rates will go up seems like a pretty safe bet under the circumstances. I live in Canada, and the governor of the bank of Canada has been using every chance he can get to sound the alarm bells over very high rates of consumer debt and the negative impact this will have once he starts raising interest rates. Besides, interest rates are at historical lows. At 52 years of age, I've got half my money in a bond index and I'm worried that the best case scenario is that this money will at least not decrease in value over the next few years.

    Thanks again for your time and insights in making this blog so great.

    Mark

    • Don't forget that if the future is that obvious, this will already be priced into your bonds. Probably eight times out of ten, when we speculate in a direction that "makes sense to most people in the know" we've taken the wrong path. Best not to speculate. Check Japan's rates, if you want to see how low rates can go.

  7. Boris says:

    Hi Andrew,

    I purchased your book two weeks ago and got very excited about investing in index funds. I have some mutual funds with big Canadian bank and just an hour ago I called them and switched my money into their low-cost index funds. They are not as low-cost as some other funds,but still much better then typical mutual funds MER. What surprised me is that the adviser did not really try to deter me from buying the index funds but just warned me that they are not actively managed – I was ready for a big sales pitch about how great their mutual funds are.

    Anyways, I just wanted to thank you for a great book and a great blog.

    Best of luck,

    Boris

  8. Gareth says:

    Hi Andrew

    I'm a 21 year old student in Singapore. I have read your book and I have enjoyed and learnt much from it. I will be starting an account with DBS Vickers, like you encouraged, as my first foray into investing. Here are some follow up questions. Hopefully my mind will be at ease and I will have a clearer idea what I should do when you answer them.

    1) Being a student, I will only be venturing into index funds with only a few thousand dollars. Am I right to say that, a recommended set up, going by the guidlines that you have listed, for a 21 year old it will look something like this.

    20% in the Singapore Bond index (A35)

    40% in the Singapore stock index (ES3)

    40% in the world stock index (VT)

    In this case, with my few thousand dollars, should I invest in wholly into 1 component at a time or split them up in the above ratio?

    2)I am keen on making regular contributions to this portfolio. However I understand that there is a $25 commission for each purchase with DBS vickers. In that case given my current circumstance as a student, will saving my intended contribution for a yearly top-up/portfolio balancing be more prudent, still as relevant?

    3)Will it be advisable to bring forth most of my savings from my current savings account into this indexed portfolio? Any advice on how a savings account should work in conjunction with this index fund?

    4)Should I consider CPF as part of my portfolio and integrate it into my calculations, perhaps under Bonds?

    Thank you for educating such illuminating information through your book, website, and advice to the rest of us in your comments. As a clueless 21 year old this has all been very enlightening on how I should start off on my own to manage my money. Pardon me for the barrage of questions above. Will be looking forward to your answers.

    Best regards,

    Gareth

  9. Joanne says:

    Hi Andrew,

    I'm an American international teacher as well and I have a quick question. We already invest monthly in Vanguard in the Index Funds you recommend, have a Roth IRA, and have emergency money set aside. But we have a sum of about $10-15,000 sitting around that we would like to invest.

    I'm wondering if instead of having this extra amount in the bank doing nothing, should we open an ETF, or should we open a Traditional IRA, or what would you suggest? I don't want to put it in what we already have with Vanguard as a lump sum, and we already diversify and dollar cost average by investing 4 times a month, so we're not sure what to do with it.

    Any suggestions would be welcomed. And thank you in advance for helping us.

    Joanne

  10. Jamie says:

    Dear Andrew,

    Thank you for sharing useful advice for DIY investing in your book and on this blog. I'm already spreading the knowledge to my family and friends, and am thinking of getting more copies of your book to pass around!

    Since reading your book, I have been doing some further reading and research on Index funds, in particular ETFs. Unfortunately, its appears that most books approach the issue of Index/ETF portfolio construction from an American investor's standpoint. Furthermore, the Singapore currency-based ETF products on offer (by Nikko AM and iShares) at the moment appear extremely limited in terms of variety, returns and trade volume. Singapore is after all a very small market!

    I am thus considering a portfolio consisting entirely of US Dollar-priced ETFs using Vanguard's ETF products (35% VBMFX, 35% VTI and 30% VXUS based on my risk tolerance and age of 32).

    You advised in your book and elsewhere in your blog that a substantial portion of an investment portfolio should consist of bonds/stocks of the country that one intends to retire in. This is to prevent foreign currency fluctuations affecting one's real purchasing power in the country of retirement.

    I came across an article (http://mdm.ca/investment-strategy/pdf/articles/ManagingCurrencies-e.pdf) which suggests that in the long run (say 20 years), foreign currency fluctuations are mean reverting and have minimal impact on one's portfolio returns.

    Given this piece of information, is it still too risky for a Singaporean not to own any Singapore index ETFs but rely entirely on Vanguard's USD-priced ETFs? It seems the risk is worthwhile, even after the 30% tax to Uncle Sam as the American ETF products have greater variety, returns and trade volume. It also makes it easier for me to apply the advise in books cartered for US investors!

    Would like to hear your thoughts on this. Thanks!

    Warmest,

    Jamie

  11. Jim says:

    Hi Andrew….just wondering why you never mention GIC's ?….thanks from Jim

  12. Juliana says:

    Hi Andrew! I bought your book im the kindle store amd recently finidhed reading it. I am interested in opening an index fund account and I was wondering if you had a recommendation for doing that in the latin american market? I currently live in Mexico but I am from Colombia and might be moving back. I have been searching for options to open an account but had not found anything, and manynof the companies you mention in your book, ex vanguard, dont operate here. I will really appreciate your advice. Thanks Juliana

    • Hi Juliana,

      I don't know whether you have access to the New York stock exchange, via a local brokerage, but I believe that you probably do. Is there a Citibank near you? If so, they may offer a brokerage, allowing you to buy ETFs off the New York stock market. You could get away with just two indexes: a world stock market index (VT) and an international bond market index (ISHG). These, of course, are both exchange traded funds. And they would give you very broad, international diversification. If you also would like a home country stock ETF, you could likely find one trading on the New York stock exchange, and you could always add that to the mix. I'm glad that my book was helpful. If you have a moment, I'd be thrilled, Juliana, if you could post a short review on Amazon. Here's the link, in case you have time: http://www.amazon.ca/gp/product/0470830069/ref=as

      Cheers,

      Andrew

  13. Thanks so much for getting in touch Boris. It's great hearing from a fellow Canadian, and I'm glad that my book was helpful. If you have a couple of minutes, I'd be thrilled if you could paste a really short review on Amazon.ca. Here's the Amazon link to the book, if you have time: http://www.amazon.ca/gp/product/0470830069/ref=as

    Thanks Boris,

    Cheers,

    Andrew

  14. Hi Joanne,

    I can only tell you what I would do with it. If my IRA contribution room were already maxed out, I would open a traditional investment account with Vanguard and split the money into the U.S. short term government bond index (or inflation protected bond index) as well as the U.S. and international bond indexes. This $10K to $15 might look like a lot of money, but in the grand scheme of things, when looking back years from now, you'll see it as a fairly small sum. I think you should invest all of it. But then, that's just what I would do. Your own decision, of course, is going to be a personal one, and the best one for you.

  15. Hi Gareth,

    To keep commission costs low, just add one index at a time. The allocation, at your young age, shouldn't matter much until your account grows much further. Yes, I would consider the CPF to be your bond component. And yes, I would invest the money in your savings account. The earlier you can invest, the better.

    By the way, the portfolio you chose looks great, but you could skip (if you like) the bond index, considering your CPF.

    Cheers,

    Andrew

  16. Hi Jamie,

    Considering that your CPF is going to be in Singapore dollars, I don't see your proposed strategy as too risky. Over the long haul, your theory on currencies is correct. But as you get closer to retirement, you might want to trade some of the international stock indexes for some more Singapore exposure. It's nice not to get nasty exchange surprises once you're retired. Congratulations on the plan you have set up, at such a young age….yeah, early 30s is young. Keep it up!

    Cheers,

    Andrew

  17. Hi Jim,

    I don't have anything against GICs. As short term vehicles, they're super. But I don't consider them "investments". If I were saving for a home downpayment, I would put my money in GICs, certainly.

    Cheers,

    Andrew

  18. Joe says:

    Hi Andrew,
    I’ve been very impressed with both your book and your other writings. I know you prefer home-country bond savings, but I am an American who is losing faith in the US government. Although I know Canada and much of the rest of the world would take years to move away from their own investments in US bonds, would you recommend Canadian or German bonds for an American who won’t retire for at least another 25 years or would you stick with home-country bonds due to the tax and exchange implications?

    Please give me your thoughts.

    Thank you,
    Joe

    • Hi Joe,

      You may consider an international bond index. I’m not sure where you are writing from (what’s available depends on where you live) but no matter where you are, you could buy an first world short term international government bond index. One such ETF has the ticker symbol ISHG. When you look it up, it will look volatile because it trades it’s denominated in USD, so it fluctuates with currency as well. No big deal, long term, of course. And if you rebalance it with a U.S. bond (SHY) you will always be greedy when others are fearful. This is a much better option than speculating.

      Cheers,

      Andrew

  19. Barbara says:

    Dear Andrew,

    I have the happy problem of a nice windfall to invest. With stocks so high right now, my intuition is to invest in 10k chunks every 6 months until fully invested. Does this seem wise to you? I will likely buy & hold, but re-balance, for at least 10 years. Also, what Vanguard bond fund do you recommend?

    Thanks very much,
    –Barbara

  20. Lisa says:

    Hi Andrew,

    You are such an inspiration to me. As a fellow teacher and beginning invester I really appreciate your book and blog. Though I have to admit I’m feeling really overwhelmed with choice. I was so happy to see your plan on pg 112 of “millionaire teacher” with td e-series because I thought I was sorted. But since exploring your blog I see that this is no longer the best option in 2015. I have been searching for the best plan for a Canadian invester but would love some help. I’m a 31 year old Canadian, where should I put my money? Bmo invester line, scotia itrade, td e-series…? Please help! Thanks Andrew!

    • Hi Lisa,

      Go with those e-Series funds on page 112. They are fabulous. With them, you won’t pay commissions. You can reinvest dividends automatically, for free. And they are cheap.

      Cheers,
      Andrew

  21. Lisa says:

    Hi Andrew,

    Thanks for the quick reply! I will happily take your advice. Just one more thing: I have a pension since I am teaching in Canada. Given this, what percentage of my portfolio should I allocate to bonds? I realize it is important to have cash on hand to take advantage of opportunities as they arise. Thanks again. I look forward to passing on your book to my colleagues.

    • Hi Lisa,

      If you have a pension, you could keep bonds to just 25% of your portfolio. Don’t keep cash on hand for opportunities. Just maintain a diversified portfolio that you rebalance once a year. Do keep some cash, however, for emergencies: teacher strike/unexpected job loss/burning house etc. Don’t keep cash aside for the purpose of investing. That’s what your bonds are for–when it’s time to rebalance.

      Cheers,
      Andrew

  22. Lisa says:

    Thanks Andrew,

    I really appreciate you taking the time to help me out.

    Take care,

    Lisa

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