Read Millionaire Teacher Online
Authors: Andrew Hallam
Investing in ETFs does have a cost advantage once an investment account clears about $120,000, but it does require a bit more work on the part of the investor. Also, if the investor's account isn't well above $120,000 and if they make more than 12 purchases in a year, the cost savings can swing back in favor of the e-Series Funds. Note, from
Table 6.6
, that a $700,000 ETF account would save $580.12 a year compared with an e-Series indexed account, even after paying $9.99 a month ($119.88 a year) in annual commission fees.
To purchase Exchange Traded Index Funds, an investor has to open a discount brokerage account. There are a variety of Canadian brokerage firms offering this service, including TD Waterhouse, <
www.tdcanadatrust.com/easyweb5/start/tdw/get_started.jsp
> CIBC's Investor's Edge, <
www.investorsedge.cibc.com/ie/home.jsp
> The Royal Bank Action Direct, <
www.rbcdirectinvesting.com/
> and Q-trade Investor <
www.qtrade.ca/
>.
Commission fees differ, but it's a competitive market and fees are falling. If you're still interested in ETFs and you want to buy like Keith, you'll have to purchase the following indexes off the Toronto Stock Exchange, via your brokerage. The initials before each respective index represent the code you'll need to enter (called a ticker symbol) before making each purchase.
Whether you buy the e-Series index funds from TD Bank or whether you opt for brokerage-purchased ETF indexes, you'll beat the pants off the majority of the prosâjust as Keith has.
Indexing in SingaporeâA Couple Builds a Tiger's Portfolio in the Lion City
Singaporeans looking to invest in low-cost indexes might Google their options online. But like hidden vipers in the jungles of the Lion City, there are snakes in the financial service industry waiting to venomously erode your investment potential. Googling “Singapore Index Funds” will bring you to a company offering index funds that charge nearly one percent a year. That might seem insignificant, and that's exactly what marketers want you to believe. Paying one percent for an index fund can cost you hundreds of thousands of wasted dollars over an investment lifetime.
Singaporean index-fund retailer Fundsupermart <
www.fundsupermart.com/main/home/index.svdo
> flogs the Infinity Investment Series. It offers a S&P 500 Index Fund <
www.fundsupermart.com/main/fundinfo/viewFund.svdo?sedolnumber=370283#charge
> charging 0.97 percent annually (as an expense ratio) and they charge up to an additional two percent front-end sales fee to make the purchase.
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Let's assume that two Singaporean sisters decide to invest in a U.S. index. One of them buys the S&P 500 Index Fund through Fundsupermart while the other chooses to go with Vanguard's low-cost S&P 500 Exchange Traded Index Fund that charges just 0.09 percent annually, which they can buy through Singapore's DBS Vickers brokerage firm.
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Before fees, each fund would make the same return because they track exactly the same market. Costs, when presented in tiny amountsâlike 0.97 percentâlook minimal. But they're not.
Table 6.7
shows how seemingly small fees can kill investment profits over a lifetime. If the U.S. S&P 500 index makes five percent a year for the next five years, an investor paying “just” 0.97 percent is giving away nearly 20 percent of her profits every year.
Table 6.7
Two Sisters Invest SGD$20,000
| Sister 1 | Sister 2 | |
| $20,000 given to each sister to invest for 35 years | Sister 1 invests in an S&P 500 index fund that costs 0.97% annually | Sister 2 invests in a Vanguard S&P 500 exchange traded fund via DBS Vickers that costs 0.09% annually |
| Assume an 8% return for the S&P 500 index for the next 30 years | Sister 1 makes 7.03% annually after expenses | Sister 2 makes 7.91% annually after expenses |
| How much will each sister have after 35 years? | Sister 1 will have $215,637.05 | Sister 2 will have $287,203.17 |
| After 40 years, assuming the same rate of return? | Sister 1 will have $302,866.34 | Sister 2 will have $420,240.29 |
| After 45 years, assuming the same rate of return? | Sister 1 will have $425,381.54 | Sister 2 will have $614,902.36 |
It's hard to imagine that, over 45 years, the true cost of such “small fees” can amount to more than a $180,000 difference on just a $20,000 investment. Costs matter, and you don't want the industry to fool you with small percentages.
Singapore residents embrace their indexing journey
Seng Su Lin and Gordon Cyr met in 2001 while volunteering at the Special Olympics in Singapore. Gordon teaches at Singapore American School and Seng Su Lin (who goes by Su) teaches technical writing at Singapore Polytechnic and at the National University of Singapore, while busily pursuing her PhD in psycholinguistics, the study of how humans acquire and use language.
The couple married in 2008, and Gordon (originally from Canada) looked over his investments with frustration. He explained his concerns:
“I used to teach in Kenya, and the school mandated that we invest our money with one of two companies. One of them was an offshore investment company called Zurich International Life Limited, <
www.zurich.com/international/singapore/home/welcome.htm
> headquartered on the Isle of Man. They invested in actively managed funds, but I started to feel cheated. Before opening the account, I clearly asked the representative if I could have control of how much or how little I was investing, and he said that I could. But after some time had passed, I wanted to stop contributing. The statements were really confusing. I couldn't see how much I had deposited over time and it was tough to see what my account was even worth.”
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Feeling uncomfortable, Gordon thought it would be easy to stop making his monthly payments to the company. But the Zurich representative (who no longer works for the firm) said Gordon had signed a contract to deposit a certain amount each monthâand that he had to stick to it. Frustrated, Gordon pulled his money from Zurich, and was levied a heavy penalty for doing so.
Keen to take control of his money, Gordon opened an account with DBS Vickers <
www.dbsvickers.com/Pages/default.aspx
> in Singapore, to create a balanced, diversified account of Exchange Traded Index Funds similar to the “couch potato” formula that Keith Wakelin (our previously profiled Canadian) was following. The main difference was that Gordon didn't know where he and Su would eventually retire.
Su's family is in Singapore, Gordon's family is in Canada, and they own a piece of land in Hawaii. For that reason, Gordon thought it would be prudent to split his assets between Singaporean, Canadian and other global stock and bond markets. Here's what their portfolio of Exchange Traded Fund indexes looks like:
The first two indexes above trade on the Singaporean Stock Market; the following two trade on the Canadian Stock Exchange; and the last one, the World Stock Market Index, trades on the New York Stock Exchange. But you can purchase them all online using Singaporean brokerage firm DBS Vickers.
Gordon and Su rebalance their account with new purchases every month. For example, if the Singapore Bond Index hasn't done as well as the others, after a month it will represent less than 20 percent of their total investment. (Remember that they've allocated 20 percent of their account for each of the five indexes.) So when they add fresh money to their account, they would add to the Singapore Index. If the World Stock Index, the Canadian Stock Index, and the Singapore Stock Index have increased, leaving Gordon and Su with less than 40 percent in their combined bond indexes, then they would add fresh money to the bond indexes when making their next investment.
This ensures a couple of things:
If you are interested in following step by step instructions on how to buy Exchange Traded Index Funds in Singapore, you can access my website at the following: <
http://andrewhallam.com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/
>.
More Singaporeans are catching on
Always remember that the financial service industry's goal is to make moneyâfor them, not for you. Not to miss the boat, Singaporeans are catching on to the benefits of low-cost investing.
Financial blogger Kay Toh, at Moneytalk.sg, compared the Singapore Straits Times Index Exchange Traded Fund performance (May 6, 2004 to May 6, 2009) with the Singapore stock market unit trusts available through Fundsupermart. You can see the results of each of the funds in
Table 6.8
.
Table 6.8
Singapore Market Unit Trust Performances vs. Singapore Stock Market Index (May 6, 2004 to May 6, 2009)
Sources:
Fundsupermart, Singapore Exchange, Streetracks
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| As of May 6, 2009 | Annualized Returns over Five Years |
| UOB United Growth Fund | 2.16% |
| Schroder Singapore Trust CL A | 2.21% |
| SGAM Singapore Dividend Growth | 6.1% |
| Lion Global Singapore Trust | 3.18% |
| HGIF Singapore Eq-A USD | â2.23% |
| DWS Singapore Equity Fund | 6.36% |
| DBS Shenton Thrift | â0.03% |
| Aberdeen Singapore Equity | 5.42% |
| The returns for the above funds include the effects of reinvested dividends | |
| Singapore Straits Times Index Exchange Traded Fund, including dividends | 7.66% |
Will some of the unit trusts have years where they beat the market index? Absolutely, but you don't know which ones will dominate and no one else does either.
Considering that no one can pick which unit trusts (actively managed funds) might outperform the indexes in the future, the educated investor doesn't bother with the gamble and follows Su and Gordon's lead: building portfolios with low-cost indexes.
Indexing in AustraliaâWinning with an American Weapon
Twenty-eight-year-old Australian, Neerav Bhatt, makes his living doing something few people could have imagined possible just a decade ago. He's a full-time blogger. Sitting behind a computer screen for most of the day, Neerav says he does a lot more reading than writing. Constantly on the lookout for inspiration, he devours online articles to spark his creative energy, often giving him something to comment on for his own blog.
His prolific reading exposed him to the superiority of index funds over actively managed mutual funds (known as unit trusts in Australia). “Most financial advisers are just salespeople. And people are far too trusting of them,” he says, explaining that most Australians just wander into a bank and buy their investment products, which generally charge nearly two percent a year in fees.
After first reading a newspaper article on index funds, Neerav investigated further by studying a copy of Princeton University Professor Burton Malkiel's classic book, A
Random Walk Down Wall Street.
Then, he discovered the American nonprofit investment company Vanguard, which had set up shop in his native Australia.
“Vanguard had been around for ages in Australia, but nobody was talking about it,” he said. And Neerav recognized why. Most people get their financial knowledge and education from advisers who make their living selling high-cost products. Vanguard's the thorn in the side of an investment-service community that wants to keep reaping as many fees as possible from unsuspecting investors.
Neerav discovered that Australians can open accounts with Vanguard and they can usually transfer their superannuation to Vanguard as well.
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Vanguard offers individual indexes for the Australian markets and the international markets, but one of the more cost-effective ways of investing with Vanguard Australia is with its Life Strategy Funds. They're combinations of indexes, complete portfolios in a single fund, and the fee structure decreases as the account swells in value.
Alternatively, if they built a portfolio of separate index funds through Vanguard Australia, they could feasibly end up paying much higher overall fees. That's because the fee structure is determined on the size of each fund, not on the size of each account. The more money an investor has in each fund, the lower the percentage fee. So an investor with $200,000 could pay a lot less with a Vanguard Australian Life Strategy Fund than he or she would by building a portfolio with separate Vanguard indexes.
Table 6.9
reveals the relative costs.
Table 6.9
Vanguard Australia's Life Strategy Fund Options (Quoted in Australian dollars)
Source:
Vanguard Investments Australia
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| Life Strategy Index Funds | Allocation | Fees Based on Account Size | |||
| Vanguard Life Strategy Conservative Fund | 70% bond indexes and cash | 30% Australian and International stock indexes | 0.9% on the first $50,000 | 0.6% on the next $50,000 | 0.35% on the balance above $100,000 |
| Vanguard Life Strategy Balanced Fund | 50% bond indexes and cash | 50% Australian and International stock indexes | 0.9% on the first $50,000 | 0.6% on the next $50,000 | 0.35% on the balance above $100,000 |
| Vanguard Life Strategy Growth Fund | 30% bond indexes and cash | 70% Australian and International stock indexes | 0.9% on the first $50,000 | 0.6% on the next $50,000 | 0.35% on the balance above $100,000 |
| Vanguard Life Strategy High Growth Fund | 10% bond indexes and cash | 90% Australian and International stock indexes | 0.9% on the first $50,000 | 0.6% on the next $50,000 | 0.35% on the balance above $100,000 |