Canadians in Singapore are finding a way to bi-pass expensive financial services. They’re figuring how to invest cheaply and simply with low cost index funds:
- It’s the method endorsed by Warren Buffett
- It’s the method endorsed by a slew of Economic Noble Laureates
- It’s the method endorsed by Charles Schwab, (the owner of the world’s biggest brokerage)
- It’s the method endorsed by a myriad of Ivy League Financial professors, ranging from Yale University’s David Swensen to Princeton’s Burton Malkiel.
Every financial study done comparing the long term results of actively managed mutual funds (which most people are sold) to low cost index funds (which financial service companies dislike) reveals that over a lengthy period of time, the odds of success are far better with low cost indexes.
Sadly, despite overwhelming evidence, most financial advisors recommend actively managed mutual funds and unit trusts—because it helps them make their own Mercedes payments.
After sales fees and advisory costs, their long term odds of beating a diversified indexed account are slimmer than a goldfish’s odds in a tank of Piranhas.
There are loads of marketing tricks to get you swimming in the high cost tank, such as the local Singaporean trick outlined in MoneyTalk.sg‘s blog, but academics and smart journalists have cut through the rubbish. Now that Singapore’s DBS Vickers is allowing Canadians to invest in their low cost brokerage, Canucks can build a simple investment portfolio that sidesteps the financial service industry—allowing you to easily outperform more than 90% of the professionals. It also lets you keep your money here, in Singapore, while it compounds free of capital gains taxes.
Forget expensive options offered by offshore groups like Zurich which might convince you to buy heavily commissioned insurance packages wrapped with your investments—and then gouge you silly if you need some money for an emergency.
Singapore is already off shore. It’s a capital gains free zone for non Americans investing in stocks or indexes. Low cost indexing is the best investment advice you’ll probably never get from an advisor:
Following a balanced, diversified indexed approach would have allowed you to turn $10,000 in 1976, into roughly $300,000 by 2010.
So how can Canadians build a cheap indexed account in Singapore?
With DBS Vickers, you can own the same products that an investor would own in this Canadian “Couch potato” account.
As a beginner, you might enjoy Dan Bartolotti’s article on how he became an index investor.
To follow Dan, and invest in a fashion recommended by Warren Buffett, a slew of Nobel Economic laureates, and every long term comparative study done that compares actively managed mutual funds (unit trusts) with indexes, then start by opening an account with
Probably the most important thing to remember is that the banks aren’t your friends—and nor are most of the people of the financial service industry. DBS Vickers would like nothing more than to get you into their more expensive products, so they aren’t exactly the knights in shining armor you might think.
That said, you can bi-pass their advice and invest in their low cost indexes through their discount brokerage.
Here are the steps you’d need to take:
- Open a discount brokerage account at DBS Vickers, and tell them that you’d like the option to trade stocks from the Singapore, New York and Canadian stock markets. Don’t worry. You won’t have to become a stock trader. This is just the supermarket you’ll be buying your indexes from. You will have to take an online multiple choice test first, but they will give you study material for it and you can take it multiple times. It’s tedious and the questions are completely irrelevant, but it’s the hoop you’ll need to jump through.
- When you make indexed purchases from this account (the products you’ll buy are actually called ETFs) you’ll need to do one of two things:
- Transfer money to the account first
- OR set the account up so that any purchase request sends money directly from your regular DBS account, straight to DBS Vickers, to cover the purchase.
- These are the ticker symbols you’ll need if you want a diversified account of indexes, much like the global couch potato portfolio:
- VCE = Canadian index
- VTI = U.S. Index
- VEA = International Index
- VSB = Canadian bond index
But how much in each?
Long term, it’s better to be consistent, rather than trying to dance around, following market based news, and trying to figure out which index is going to do better over the short term. Studies show this to generally be a loser’s game. Establish your allocation, and stick to it.
Here’s a sample for a 40 year old investor:
30-40% of their money in the Canadian bond index (VSB) with the remaining money in their portfolio split evenly between the Canadian, U.S. and International indexes.
Making the purchases
You’ll need to figure out what price each of these indexes (ETFs) is trading at so you’ll know how much to buy when you place your order.
Going with ETFs, you’ll want to make sure that you’re investing at least $3000 at a time. After all, it costs roughly $30 to make a single purchase, so it might as well be worthwhile.
If you were going to buy the Canadian bond index (ticker VSB) you would look up the price at yahoo finance.
Don’t forget that when searching for a price, each of the above indexes is represented by a .TO after it. For example, the International index is VEA.TO, the U.S. index is VTI.TO (You only need to do this when looking up the price.)
So if the price of the Canadian bond index is $29, and if you’re investing $3000, then you divide $3000 by $29 to see that you can buy 103 shares of the bond index. Just to be safe, when placing your order, make it out for 100 shares, in case the price goes up the next day. You need to have enough money for your purchase, and the price you pay could be higher or lower than what you see. It will be based on the market price at the time your order goes through.
Your order entry will look like this:
1. The market you’d be choosing is “Canada”, as you can see by the second line.
2. You’d place an order to “buy” as you can see by the third line
3. The quantity is the number of shares you’re ordering
4. The symbol for the Canadian bond index is “XSB” (or VSB if you want a lower expense ratio)
5. And the order type is a “Market Order”
6. You’d then plug in your trading password and press submit.
Commissions for purchases and sales are 0.35% of your purchase, or 0.55% if you are buying off the Canadian market. If you make a single purchase of $100,000, you would pay $350 for the purchase commission off the U.S. market and a $550 commission if you purchased off the Canadian market. The minimum commission would be $29.
If you’re investing every quarter or every month, make sure that it’s at least $3000 at a time, so you don’t pay DBS too much in commissions, relative to your purchases.
And while you’re making your purchases each month, allow your purchases to rebalance your portfolio back to the originally desired allocation. For example, if your international index has underperformed the others, for that month, then buy the international index. If your U.S. index has underperformed for that month, then buy that one. Keeping an even allocation between your U.S., Canadian and International indexes will easily let you see (by simply looking at your statement) which index needs “bolstering”.
Remember Warren Buffett’s Motto: Be greedy when others are fearful.
And keep the greedy mitts of the international financial service operators away from your money.