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.