Random Post #2 – Australian Superannuation

I was giving some long over due thought to my Superannuation today, and thought to myself, “I bet there are some low cost ETF-like offerings available to choose from as the underlying funds”.

And I was right!

Thankfully my existing Superannuation managing company offers a fair few to choose from, and even more thankfully – they offer products from Vanguard.

For those that don’t know, Vanguard was started by the master himself, ‎John C. Bogle.

Vanguard is owned by the funds themselves and, as a result, is owned by the investors in the funds. This means lower ongoing management fees which is great for investors.

In the time that I’ve been in Singapore I have not been contributing to my Super any longer, but I built up enough before leaving to make it something that I periodically check on to see how it’s doing.

So last year I received the 6 monthly statement around December, and took a look at it and saw the following:

SuperBefore

And I thought to myself, “Wow those Property Securities sure do stink. Since I only have about 10% of my portfolio allocated to this I may as well just sell it off and buy more of those awesome Ethical shares.”

WRONG!!

Look what happened in the next 6 months:

SuperAfter

It was the one that flourished! 12.4%! Classic rookie mistake, selling low and buying high.

This is a very important lesson as it reinforces what you should do with your portfolio allocations – check your target percentages and top up the one that is falling below.

If I do my calculations after the fact of what I should have done, I would have been 1.473% better off over my entire portfolio. (Instead I am down 1.495%). If I had done nothing, I’d be down 0.56%.

This is why most investors typically under perform the market even when buying Index’s simply because they do the opposite of what they should have done – purchase the laggard to bring it up to the target %. Instead they try and chase the winners.

In my case my laggard had dropped down to 5% of my allocation instead of where it should have been at 10%. This was the right time to buy more, not sell it off.

Before I forget, in order to reach my 36% Bonds allocation for my overall portfolio, I have decided to sell off all of these Funds in the tables above to purchase the “Vanguard® Diversified Bond Index Fund” instead.

This Index fund is more aggressive in terms of risk compared to the ABF SINGAPORE BOND INDEX FUND (A35), however I think it should complement my overall profile quite well.

This new fund has an ongoing management fee of 0.37% which is very good for this kind of product in Australia.

Previously my funds were charging me:

  • Australian Property Securities   0.83%
  • Australian Shares – Value         0.65%
  • Australian Shares – Ethical       0.98%

Fingers crossed that this new Vanguard Index fund continues to perform well and maybe gives me a little more upside to my Bond allocation.

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#5 – Opening a Trading Account

As a bogle-style low-cost investor (i.e, tightarse Aussie), choosing a brokerage almost did my head in. Anyway, let me tell you my story.

To start with I found this comparison website here that I found quite useful and and re-affirming in the sense that I already bank with Citibank and their rates for SGX are quite low so I may as well stick to them.

So after trying quite some time ago for them to ‘contact me’ from their website, I finally gave up on waiting for them and went into a branch to get the necessary forms.

Duly filled in I then waited, and then they came back to me in the mail saying some new form was required. So okay no problem, fill it out and post it back. And then they come back again, saying something else wasn’t right. Fix and send, and then they come back again, saying signature is not matching somewhere, fix and send. On and on and on. I think this easily took 2 months to complete.

One of the major reasons for this delay was because I was asking Citibank to open up the CDP account on my behalf. CDP is the Central Depository for all SGX traded products which is quite unique in the world. I believe the idea is that if a brokerage goes bankrupt, your shares will still be safe. Anyway SGX seem to take forever to open up a CDP account through post when coming from a brokerage.

In the end I gave up and just went to the CDP office and opened up the account in a few minutes. Problem solved.

Then back to Citibank with my newly minted CDP account number. But then, they need to link the accounts, oh boy. This took another 2 weeks of getting it ready. By the way, my NYSE and HKSE accounts were opened up straight away as Citibank themselves act as the custodian of your shares. This is the downside of the CDP safety.

Finally, finally, finally one day it was there and ready to use! I was ready! But then, my wife wasn’t. Obviously with an intent to top me one day, she wanted to know what would happen if I “accidently” died. Fair question. So back we went to Citibank to open a Joint account and let the whole wonderful process start again. This time it took only a month.

In the meantime, I was still reading Andrew Hallam’s site and his new book – The Global Expatriate’s Guide to Investing.

On his site and in his book, he mentions about Saxo International as a good broker with very low fees. Also at the same time I had discovered that risk of buying US based ETF’s due to estate taxes. Unfortunately my Citibank account only traded on SGX, NYSE and HKSE.

My plan required access to the Toronto Stock Exchange, so now I needed a new broker. Great.

So off to Saxo I went, filled out all the forms and was totally ready to rock and roll. Account was opened, and then my rep told me that they would be introducing custodian charges of 0.12% as of next year. Noooooooooooooooo!!!!

These tiny tiny percentages add up, and if you have a choice to avoid them then you should. However, if you are already with a broker, you should probably stick with them as you will likely play a game of ‘expensive musical chairs’ (Stole that from Andrew).

Brokers are also competitors and at certain times they will run promotions to get new customers, and at different stages one might be more attractive one day, but change their rules the next day making another broker seem more attractive.

I did up one of my fanciest ever spreadsheets and worked out an uber cool formula for compound interest in a single equation, and this is what I discovered:

exchange comparisons

If you were to start with 100K, and add $3.5K a month, the new custodian fees would make you $94K worse off over 25 years. Down 2.11%.

Also Saxo have a currency conversion fee of 0.5% of the trade value. I’ll be honest here and Andrew if you ever read this this is my chance to say up front that this has driven me absolutely bonkers. You say this 0.5% conversion fee is a bad thing. But seriously it is very very hard to find better than that out in the Retail market.

forex compare

So once again I made an awesome spreadsheet (if I do say so myself), that used Web connectors to automatically download forex rates for many of the local Singapore banks and foreign currency exchanges.

From there I was able to calculate the most attractive rates, and guess what, Saxo is right up there! This really did my head in as Andrew seemed to mention this 0.5% rate as a bad thing. For my own sanity, please spill the beans on where you can do better than that!!

Anyway, with these new custodian fees I just couldn’t in good conscience open up an account with Saxo. By the way, for Saxo buying on SGX they would act as the custodian. For my own peace of mind now that I have the Joint CDP account, I would prefer to use Citibank for my SGX trades.

At this stage I should also mention about Standard Chartered Bank. They have no minimum commission which is fantastic for people looking to start with smaller trades. The downside apparently is that their forex spreads are not attractive. Unfortunately they also don’t have access to the Toronto Exchange (but they have 13 others which is great).

As you can see though from my spreadsheet above, I decided to go with DBS Vickers. As someone that follows Andrew Hallam’s site quite closely, it was this original post that had turned me off them in the first place. I’ve come to learn that Andrew is also constantly learning and re-adjusts his view when new information comes to light.

Opening the account with DBS Vickers was quite straight forward. I had printed off the forms from their website, but realised I would need a DBS bank account if I wanted the Vickers account to open up quickly. This part was fantastic as DBS were able to open a Joint bank account within minutes of just dropping into any branch. They also give you an ATM card on the spot (finally after 6 years I now have a card that does NETS).

Now with the bank account opened, I marched on over to the Vickers office (and boy what a cool modern place that office is). The nice lady checked my forms and made sure everything was in order the first time. (Looking at you Citibank).

A few days later the account information and password arrived in the mail and I was ready to go. Almost.

Unless you can demonstrate prior experience or a relevant qualification, you won’t be able to trade SIP’s (Specified Investment Products). In order to do so you will need to pass an exam from SGX’s learning website. My wife and I had passed this exam and had used the results to open up our accounts with Citibank and Saxo, but for some reason DBS wants to check directly with SGX. I’m still pending on this as I write this.

So there you go. My saga of opening up a brokerage account. My advice to you is as follows:

  1. Take the SGX exam. It’s a bit of a pain but it needs to get done unless you have prior experience.
  2. Open an account with either Standard Chartered or DBS Vickers. SC is good for small trades, but not so great for larger ones due to the currency spread (you may be able to fund the account though in other ways if you can get a better rate elsewhere (Andrew I’m begging you, please tell me how!).
  3. If you plan to trade on SGX with DBS Vickers you will need to open a CDP account with SGX. Go directly to their office to do this, don’t get your brokerage to do this unless you’re a fan of waiting a really long time. For SC you won’t need this as they will act as the custodian.

That’s about it actually. By the way, you can call your bank or trader like DBS Vickers to lock in a better exchange rate than what they published. So far I’ve found that DBS Vickers offers the best rate, but I am guessing that DBS Bank may also give better rates if they go and check with their treasury departments.

In the next entry I will discuss a little more theory before moving on to funding your account, and how to make your first trade.

#6 – Understanding all those numbers on a stock exchange.

Random post #1 – Missing out

AAARRGGGHHH!!!

As I’m in the stage of trying to buy the ABF SG BOND ETF (A35), I’m willing to pay around the NAV to reach my target percentage.

So a few times a day I’ll check on SGX’s site to see what’s happening and if what the lowest seller is looking for.

This morning however I almost spat out my coffee when I saw that some bodoh went and sold 35,000 units at $1.15 when the previous closing price was $1.168 and the NAV (as of 26 November 2014) was $1.16620!!! Why did you do that!!?? And why wasn’t I fast enough to snap it up!!

A35 1.15

Can’t believe it, I want that bargain! Why would you do that to me!?

stupid

idiot

#4 – How to allocate your ETF holdings

By now hopefully you’re convinced by this passive investing strategy. If not, you’re probably a fund manager.

This is fairly straight forward topic to understand. All that it requires is for you to check it every year and rebalance your holdings if necessary.

The golden rule is that you allocate your age as a percentage into an ETF that is investing in solid bonds, such as the ABF SINGAPORE BOND INDEX FUND (A35). If you have a plan to relocate back to your home country, you may wish to select a bond ETF from there. 

For example, if you are 36 years old, and have no other bond like assets, out of your entire portfolio you would allocate 36% of it to this ETF. As you get older, the percentage would increase.

The reason for this is that bonds are typically much more stable throughout market crises such as the 2008 GFC, i.e, you won’t lose your shirt! (maybe your pants but don’t worry you’ll make that back soon enough).

The rest of your portfolio will be allocated to other equities, maybe 40% or so to an ETF that follows a US Index such as the Vanguard S&P 500 ETF (VFV.TO). The US is a huge market and most gains come from there. The remaining balance you should invest in a Worldwide Index fund, such as Vanguard FTSE Developed ex North America Index ETF (VDU.TO).

So to recap, if you were a 36 year old with no other bond like assets your portfolio may look something like this:

36% = A35.SI
40% = VFV.TO
19% = VDU.TO
5% = Cash

This is my exact allocation right now. I currently don’t have any plans to retire back in Australia which is why I am going with the A35 Singapore Bonds for the time being.

One usual question at this point in time is why don’t you just invest directly on the US NYSE market to buy that S&P500 ETF? The answer for this is coming from some paranoia in the fact that the US still has estate tax. Meaning that if you unexpectedly pass on, the US government may be entitled to take 55% of your holdings above $60K USD. Ouch! For this reason, many ex-pat investors prefer to buy funds that are not domiciled in the US, instead possibly in Canada, Hong Kong, Singapore or the UK.

It’s worth noting here that for US citizen this advice may not be relevant due to their tax regulations. Please check out Andrew Hallam’s site for more advice on what you can do as a US citizen.

Now the next concept you need to understand is how to add to your portfolio, and what to do in a crisis.

  • For your regular monthly contributions, you should top up the laggard. That’s right, don’t top up the one that’s gaining the most! (That would be buying high, selling low). Every month only top up one of your ETF’s in order to save costs on trading fees.
  • For example, if one month the S&P500 ETF went gangbusters and all of a sudden made up 45% of your portfolio, you would want to buy more into your bonds, or your global ETF depending on which one was moving too far away from your original allocations.
  • Sometimes it may get so far ahead that your monthly contributions can no longer keep up (a nice problem to have). In that situation you may need to sell some of those gangbuster ETF’s to buy the laggards.
  • On the contrary, if the market drops drastically your bonds should hold solid and will probably end up being over your allocated percentages. If your regularly monthly contributions cannot make up the difference, then you may need to sell some of your bonds in order to purchase more on the equities which have dropped (buy low, sell high).

This last one will be the most challenging for any normal human being and will tempt you to pull the plug on the whole scheme. Don’t! This is the time that you will be able to turbo charge your portfolio buy buying a lot of great ETF’s at a cheap price! When the market recovers and reaches new highs as it has historically done, you’ll be thanking your lucky stars and hoping for more market crashes!

In the next entry, I will discuss how to open up a trading account and hopefully make your first purchase.

#5 – Opening a trading account

#3 – The math behind Active vs Passive investing

Be wary of small percentages, they add up! You may think that 1.5% a year in management fees is not a lot to pay for a product, but with passive investing you can pay just 0.2% a year in management fees. Let’s see how this impacts you over a working lifetime: Historically you should expect 9% returns on your combined portfolio over a longer period of time.

10K principle 12K a month 9percent

So this example above from the moneychimp calculator shows that you should expect to see $1,194,118 from your investment over 25 years if you started with 10K, and added another 12K a year. Not bad at all! (By the way if you left it in the bank, you could expect that figure to only be about 310K based on the current record low interest rates – you’ll be eating cat food for your retirement if you can even afford that!). Now let’s see what happens when we subtract 0.2% from that.

10K principle 12K a month 8.8percent

So already you can see a $38K loss here compared to the full 9%. This is peanuts to what you’ll see next though:

10K principle 12K a month 7.5percent

This is at 1.5% of management fees. Now you’re down $256K. If we go down to 2.5% of fees it obviously goes downhill fast, and this is still being generous. You’ll be shocked to see that many of these actively managed funds have fees within fees within account management charges to that point it may end up being up to 4% a year!

10K principle 12K a month 6.5percent

$393K down just because of some smooth talking sales person! That’s 32% less than what you could have had. Let me give you some more examples. $3200 a month is what it takes to reach the Zurich Vista ‘gold’ plan or whatever it’s called. You’ll get all these “bonus” units up front which will make it look like you’re doing really well the first couple of years, and then eventually you’ll start to see the sad state of affairs…

No principle 36K a year 9percent

$3.32m, not bad! Let’s see what happens once it becomes Actively managed…

No principle 36K a year 6.5percent

$2.25m, hang on. Are you seriously telling me that just because I let some so called expert manage my money, I have walked away from $1.07 million dollars! Yes!!! These examples are also best case in the sense that it does not calculate for annual additions that you may make to your retirement fund. Those will add up significantly in your favour but those seemingly small percentages being deducted will rob you of your full potential. In the last example, I just lost out on a Ferrari for my retirement! Once I figure out how I’m going to link to a couple of Excel spreadsheets that I have come up with that will give you some additional tools to play around with.

Don’t get fooled! #4 – How to allocate your ETF holdings

#2 – Active versus Passive investing

I’m going to keep this short and sweet as it’s already been done to death but it is critical to understand the difference between the two.

Active investing

Active investing is all about picking stocks, or buying a managed fund where someone is making decisions about what equities to invest in. As someone is making the effort, and may be doing this for a job, they will want to get compensated for it.

This is why you will see management fees that can be 1.5-2% annually, and often also come with an entry fee that may be 5% of your original capital.

You may think these are not big percentages but I am going to show you how they can really add up!

Passive investing

Passive investing – as Investopedia describes it:


“An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.

Also known as a buy-and-hold or couch potato strategy, passive investing requires good initial research, patience and a well diversified portfolio. 

Unlike active investors, passive investors buy a security and typically don’t actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable.”


Typically the passive investment style that I will be describing utilises Exchange Traded Funds, or ETF’s.

ETF’s can come in many shapes and sizes, in a sense they are similar to a regular managed fund, the difference is that they trade on the open stock markets such as SGX, NYSE, TSX, LSE.

In particular, the ETF’s that I and many others would recommend to follow are products that follow Index Funds, such as the S&P500, ASX200, STI, HSI.

The reason that we follow these Index’s is that they average the performance of the top companies in that market. You are not buying one stock, you are buying hundreds at a very low cost!

It is this diversification that makes this a very safe investment option. Long term you should expect to see 9% returns, and compounded year on year you will retire very comfortably, easily beating inflation.

Before you rush out and just go and buy one of these Index tracking ETF’s, there is still a little more to it to ensure your portfolio safety over the long run.

In the next post I will talk about allocations and how am I making my allocations based on my particular situation.

#1 – The Journey Begins…

I’m creating this blog so that it will hopefully serve others well in their investment journey, and will quickly get to the crux of it all without too much messing around.

I myself have been on a long 6 year journey now and have learned a lot in that amount of time and wish to share it with others in order to help the average Joe or Jane out.

Why am I writing this?

To hopefully save someone from getting talked into purchasing a long-term investment product that is going to do you no favours over the long run, which coincidently is the same one that will serve your advisor very well!

Specifically I am calling out all investment linked products from companies such Zurich International, Friends Provident, and Generali Vision to name a few.

These products are targeted at naive expats who have recently arrived in a new country, are making decent money and don’t know what to do with it.

Enter the sales shark.

Mysteriously you may receive a call or email, asking you to catch up over a coffee to discuss your retirement plans. To this day I don’t know how they got my number but none the less they did. (If you’re in Singapore, take note to register yourself on the Do Not Call list).

So my story is as follows, I was 30 years old, had just moved to Singapore from Australia, had spent the last 10 years working for a multinational IT vendor, was one of the best in my field, but had spent all of my life to date focusing on my career and knew next to nothing about finance. I was always a good saver though, so was not in any debt, and owned nothing else to my name (no house, and no other investments except for Superannuation).

I had also been burned a few times to a minor degrees due to some bad forex trade advice. (Whatever you do please don’t try and make money off forex).

Warning: Don’t have too much faith in your banker. They are on a commission just like anyone else and they have targets to make and will sell whatever product that helps them make their goals. Not what’s actually in your best interest.

So there are two traps to avoid:

  1. Private banking, CitiGold, DBS Treasures, etc. Once you reach a minimum sum in your bank account you’ll get ‘upgraded’ and made to feel like a real VIP. This is of course designed in order to soften you up and listen to their “experts”, and ultimately get you to spend some money on some Unit Trusts and the like. They will show you the past results of how well it has done but of course they are only showing you the ones that did actually have a good past result (and not the hundreds of others that did not). By the time you will have bought it, it’s probably already hit its peak. I bought some of these, but fortunately escaped relatively unscathed. Not a big deal in the long run, and a good learning experience to wise up.

    There are some other benefits in these programs, but I’d suggest you’d be much better off holding less cash and investing it yourself.

  2. The sales people selling the aforementioned investment linked products from Zurich International, Friends Provident, and Generali Vision to name a few. These are the ones with mega commissions, high on-going costs and long-term contracts with heavy penalties if you break. Avoid at all costs.

Most of these “fee-free advisors” will act like they are doing you a favour. In reality they are mainly taking advantage of your lack of knowledge in this area.

There are actual real advisors out there that will charge you for advice. These guys are okay as long as their on-going costs are 1% or less, and they use passive (indexed) portfolios for clients. I will advocate that you can do it yourself though for on-going costs of around 0.25% or less.

One thing I will admit though, even buying some of these high-fee and under-performing products is usually better than doing nothing at all and leaving your money in cash. They may even end up meeting their stated goals, BUT, you could do so much better, with much more flexibility and control.

This is what I want you to learn and to take control of your own financial future, and not let some salesman take away your hard earned cash.

It is not difficult and my goal is to show you how you can do this on your own or with your partner.

In my next entry I will discuss the difference between Active and Passive investment styles.

In the meantime, please checkout Andrew Hallam’s site – it was his book “The Millionaire Teacher” that finally woke me up. I cannot recommend it strongly enough and consider it mandatory reading for any first time investor.

I will be taking you through my own personal experience of following Andrew’s advice and John C. Bogle and all the other passive investors after him, but in hopefully a little more detail of how to actually get it done.

Next Post: #2 – Active versus Passive investing