#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


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