Please critique this Singaporean portfolio

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
eugeneyan
Posts: 9
Joined: Sun May 05, 2013 1:52 am

Please critique this Singaporean portfolio

Post by eugeneyan »

I graduated two years ago, paid off my education loans, and am currently in my late twenties. Seeing my savings eroded by inflation (3.5 - 4.5% annually; the 0.1% bank interest rate here doesn't help!) I stumbled upon this forum and the Boglehead Investment Philosophy. My aim is to invest over the long term (30-40 years) until I retire. As I'm still young and yet to settle down, I'm willing to take a substantial amount of risk and stay the course. My tentative portfolio is:

i. Domestic Equity: 40% ES3 (This is an ETF of the Straits Times Index, a benchmark index for the Singapore Stock Market)
ii. International Equity: 40% VT and 10% VWO
iii. Bonds: 5% TIP and 5% ISHG / AGG

I foresee that I'll be spending most of my life in Singapore and have a substantial allocation to ES3--should I increase the allocation to domestic equity (ES3) to reduce currency risk? On the other hand, I'm concerned about having too much of my allocation in Singapore's tiny stock market and feel a need to diversify further.

You may be surprised at the low bond allocation. In Singapore, everyone has a scheme called the Central Provident Fund (CPF) Scheme. Under this scheme, 20% of your monthly income automatically goes into your CPF account which you can draw upon hitting the age of 65. CPF savings earn a minimum of 2.5% guaranteed by the government. I'm factoring my CPF savings into my bond allocation, thus the low bond allocation. However, I won't be able to use my CPF savings for rebalancing.

In addition, I'm unsure about the bond allocation. Local bond ETFs have a 0.6% ER and don't appeal to me, so I will likely have to get an international bond ETF. My question is this: how should my bond allocation be like? International bonds (ISHG) or US bonds (AGG/TIP)? Which would serve better in providing diversification for my portfolio?

Would appreciate your comments and suggestions on how to improve the portfolio!

Eugene
NOLA
Posts: 373
Joined: Sun Jul 10, 2011 1:23 pm

Re: Please critique this Singaporean portfolio

Post by NOLA »

Dont think im good enough to assist you but I will bump the thread for you. Good luck.
winguy
Posts: 41
Joined: Sun Nov 06, 2011 10:55 pm

Re: Please critique this Singaporean portfolio

Post by winguy »

Once again, watch out for taxes of US-domiciled ETFs.
http://www.bogleheads.org/forum/viewtop ... 1&t=115334

Which local bond ETF are you looking at? ABF Singapore Bond ETF has an ER of about 0.27%. The downside is it has poor market making (large spreads).

Equity:
My personal take is not to go >50% of equitiy portion in home country. Using your example, 40/90 is <50% which is OK for me personally.

Bond:
The classical Boglehead's philosophy on bonds is not to take currency risk with it. You can look at Singapore fixed income mutual funds (unit trusts) if you don't like the large spread of ABF Singapore Bond ETF. Although the unit trusts have higher ER, they provide a mix of government and corporate bonds at 0% sales charge. Its a dilemma for me as well: (1) Government bond ETF with lower ER and higher "sales charge" or (2) actively-managed unit trust with higher ER, 0% sales charge and exposure to corporate bonds?

I don't factor in CPF as there is no control over it. I just treat it as as bonus in my late years.
Some people factor in the SA portion. Its your take. :happy
Elbowman
Posts: 577
Joined: Tue Apr 03, 2012 2:25 pm

Re: Please critique this Singaporean portfolio

Post by Elbowman »

eugeneyan wrote:On the other hand, I'm concerned about having too much of my allocation in Singapore's tiny stock market and feel a need to diversify further.
I'd be concerned bout that too. The capitalization is probably similar to US microcaps. At some point that risk may outweigh currency risk, but I'm not sure when.
User avatar
dratkinson
Posts: 6108
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Please critique this Singaporean portfolio

Post by dratkinson »

A recent topic. Maybe you will find something there that could be of use to you.

"16, Singaporean, need advice"
http://www.bogleheads.org/forum/viewtop ... 1&t=115334



Stocks. Own a global stock portfolio. My own preference is to limit my home country exposure (Singapore) to its weight in the world marketplace... just in case Singapore tries to repeat Japan's decades-long economic woes of the '80s. Hopefully the whole world will not experience a market crash at the same time. (Yes, I do own a global stock portfolio.)

Bonds. Own a local bond portfolio. (I own only bonds from my home country, to avoid the currency exchange risk.)

Sorry, I can not help you select stock/bond funds/ETFs.



Learning your risk tolerance. If just starting to invest, the advice is to own no less than 25-30% bonds (75-70% stocks) until you know your risk tolerance in the stock market; that is, until after you have weathered your first multi-year stock market crash. After your first crash, then you may adjust your bond allocation (percentage) based on your reactions during the crash.

If during the crash, you were:
  • (1) Very worried and sold stocks, then you need more bonds. You have a lower tolerance for stock market risk than you believe.

    (2) Worried but didn't sell, and did buy more stocks, then your current bond allocation is probably correct.

    (3) Not worried, kept buying stocks, and wished you could have bought more, then maybe less bonds would be appropriate for you. You have a higher tolerance for stock market risk than you believe.
After you know your reaction to your first multi-year stock market crash, then adjust your bond allocation by 10% absolute: lower (15-20% bonds) to increase, or higher (35-40% bonds) to decrease your risk exposure to the world stock market. (These are the rules of thumb that I learned are appropriate for me.)




CPF. US history.

Your CPF scheme sounds a lot like our Social Security (SS) system. In its beginning (1930s), our SS system worked similarly: we pay in, the government holds the funds, and we get it back when we retire at 65.

However, after ~20 years, there was so much money in the SS system that our government could not resist the temptation. So in the 1950s, our government raided the SS fund, spent the money on favorite projects, and promised all SS owners that they would be paid, from then forward, from current income (taxes) each year. In this way, our SS system was turned from a pay-as-you-go system, into a Ponzi scheme---where current workers directly pay retired workers. Our SS system has been in trouble (underfunded) since then. Why?

In the 1930s, our average life expectancy was ~65, today it is ~80. Result: each year, the number of retired people living longer and withdrawing more from SS is increasing faster than the number of new workers paying into SS. It is simple math.


Bottom line. Plan for the worst; hope for the best. Don't count on your CPF scheme to be there when you need it. Be happy if it is.

Action step. Don't consider your CPF to be a part of your bond allocation; instead, consider it to be a reduction in the amount of money you will need each month during retirement... that must be made up by withdrawals from your investment portfolio (stocks and bonds).

This is my opinion why you need more bonds than you think.

I hope your government can resist the urge, and keeps its hands off your citizens' CPF funds.



Welcome.



Edit: linguini's correction.
Last edited by dratkinson on Thu May 09, 2013 6:14 pm, edited 1 time in total.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
durrrr
Posts: 33
Joined: Thu Apr 25, 2013 2:21 am

Re: Please critique this Singaporean portfolio

Post by durrrr »

You might want to read this paper to help you make a more informed decision regarding what percentage of your portfolio to allocate in domestic stocks.
linguini
Posts: 262
Joined: Tue Oct 16, 2012 2:49 pm

Re: Please critique this Singaporean portfolio

Post by linguini »

dratkinson wrote:CPF. US history.

Your CPF scheme sounds a lot like our Social Security (SS) system. In its beginning (1930s), our SS system worked similarly: we pay in, the government holds the funds, and we get it back when we retire at 65.
I would strongly disagree on this comparison. Social Security never had individual retirement accounts. There have been a lot of changes, but the basic form of the Social Security old age benefit as a monthly annuity depending in large part on revenue from current payroll taxes with a trust that is required to invest all excess funds into US treasury obligations has remained in place for over 70 years. You can read the original act here: http://www.ssa.gov/history/35act.html if you're interested in the original structure of Social Security. There have never been any individual retirement accounts in it.

From the OP's description, CPF sounds entirely different from Social Security, and a lot more like mandatory individual retirement accounts, comparable to IRAs if the government mandated that we fund them and mandated we buy treasury bonds at a particular rate with them. According to the wikipedia page (http://en.wikipedia.org/wiki/Central_Provident_Fund), there have been some rate changes in the past, so your concern that the government might seize money from the accounts or something along those lines seems far less likely than the possibility that the interest rate might be decreased in the future, though interest rate changes are of course a concern with any individual retirement account that depends on fixed income.
Bottom line. Plan for the worst; hope for the best. Don't count on your CPF scheme to be there when you need it. Be happy if it is.

Action step. Don't consider your CPF to be a part of your bond allocation; instead, consider it to be a reduction in the amount of money you will need each month during retirement... that must be made up by withdrawals from your investment portfolio (stocks and bonds).

This is my opinion why you need more bonds than you think.
I don't disagree that this could be a valid way to treat CPF: as additional income that is outside the asset allocation, similar to the way that most American bogleheads treat social security and pensions. According to the wikipedia article, you can even annuitize it, so you could use it the same way that social security works in the US, though you wouldn't have to. That said, let's not forget what the CPF accounts are essentially composed of: 100% Singaporean government bonds. Insofar as they might default in the future, so might any Singaporean government obligation, but there's no need to plan for retirement as if this default is guaranteed to happen in full, just like with any government or municipal bond. Making an asset allocation while socking away a full 20% of your income into government bonds that you are expecting and planning on to be worthless even though they most likely won't makes it difficult to do a good job of planning for retirement. It seems entirely reasonable to include these accounts as bond funds in an asset allocation because they are genuinely fixed income, even if the interest rate might change in the future. It does mean that the OP probably has no need to invest any outside funds in Singaporean government bonds, though, because he already has a large allocation in Singaporean government obligations through CPF.
Topic Author
eugeneyan
Posts: 9
Joined: Sun May 05, 2013 1:52 am

Re: Please critique this Singaporean portfolio

Post by eugeneyan »

Thanks everyone for the helpful replies; the shared link was especially useful. I had known about the US 30% dividend withholding tax but the way TedSwippet put it was really stark:
TedSwippet wrote: VTI dividend is 2%, TER 0.05%. 30% in US tax on the VTI dividend adds 0.6% to the annual cost. VXUS dividend is 3.4%, TER 0.16%. 30% in US tax on the VXUS dividend adds 1.02% to the annual cost. Only you can decide whether these (certain) added expenses are worth a possible extra edge from higher diversification.
It got me doing a couple of simple calculations. As I couldn't find dividend yield figures for the Vanguard ETFs on the LSE, I used the forward-looking dividend yields off Morningstar instead, under the Portfolio tab (is this an appropriate proxy?) Please do let me know if there are better resources available. Based on the calculations below, the 30% tax would add a significant percentage to ER.

Image

Just considering the variable of the 30% dividend withholding tax and its impact on ER, it would seem that purchasing Vanguard ETFs via LSE would make better sense would it?

Another factor that comes to mind is how well the Vanguard ETFs on LSE (i) correlate with their equivalent VTI/VT/VWO, and (ii) track the underlying index. Would someone be able to teach me how to go about calculating that?
durrrr
Posts: 33
Joined: Thu Apr 25, 2013 2:21 am

Re: Please critique this Singaporean portfolio

Post by durrrr »

eugeneyan wrote:Another factor that comes to mind is how well the Vanguard ETFs on LSE (i) correlate with their equivalent VTI/VT/VWO, and (ii) track the underlying index. Would someone be able to teach me how to go about calculating that?
VWRL was only released last year, hence there is not much data to go on with it. I don't know how others measure correlation but fwiw I compare both tickers on Google Finance/similar alternative and see if the graphs align over a time-span of say, 10-years.

Regarding how well the ETF tracks its underlying index, I guess this can give you a bit more information. However, the time-span is very short so I'd advise waiting a bit for more data before making a decision.
User avatar
dratkinson
Posts: 6108
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Please critique this Singaporean portfolio

Post by dratkinson »

linguini wrote:
dratkinson wrote:CPF. US history.

Your CPF scheme sounds a lot like our Social Security (SS) system. ...
I would strongly disagree on this comparison. Social Security never had individual retirement accounts... http://www.ssa.gov/history/35act.html ...
Read the linked article and also did not find any mention of individual accounts. Don't know where I got my misinformation, but remember having it in the '70s. Apologize for sidetracking thread.

I can not speak to the future of CPF, but I am generally distrustful of re-engineering of government-controlled programs when their need for spending increases. Barring a Cyprus-like government-seizure event in Singapore, then your CPF thoughts seems to be well-reasoned for the OP and put us back on track.

Thanks.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
winguy
Posts: 41
Joined: Sun Nov 06, 2011 10:55 pm

Re: Please critique this Singaporean portfolio

Post by winguy »

eugeneyan wrote:Another factor that comes to mind is how well the Vanguard ETFs on LSE (i) correlate with their equivalent VTI/VT/VWO, and (ii) track the underlying index. Would someone be able to teach me how to go about calculating that?
Hi,

First you got to understand the ones on LSE track a different index. Namely, VTI/VT/VWO are "all-cap"/IMI/broad market indices which include small caps. The ones on LSE are the "standard" (large-cap + mid-cap) indices.

(i) If you're talking about correlation, then certainly the ones on LSE have high correlation to VTI/VT/VWO because 80% (or more?) of VTI/VT/VWO = VUSA/VWRL/VFEM. 80% may not be accurate but you get what I mean.

(ii) I have no doubt on Vanguard's ability to track the underlying index. It should be within the ER.

Lastly, you are concerned about ER, but are you not concerned about the "cost" of estate tax?
Topic Author
eugeneyan
Posts: 9
Joined: Sun May 05, 2013 1:52 am

Re: Please critique this Singaporean portfolio

Post by eugeneyan »

Thanks for the clarification winguy. For VT, I think I'll probably go with the iShares S&P 500 on the Singapore Exchange (ER 0.07% and it seems to track VTI decently). I'll have to look to the LSE for my VT and VWO equivalents I guess.

Could I clarify what you mean by estate tax? I was of the impression that the inheritance tax in the UK did not apply to non-residents, or am I mistaken?
blues_diver
Posts: 2
Joined: Tue Jun 23, 2015 1:57 am

Re: Please critique this Singaporean portfolio

Post by blues_diver »

Hi All

Apologies for pulling out this old thread again. I wanted to seek some advise as I am also using the Singapore's CPF as my bond portion.

My target portfolio allocation is as follow
Bond (CPF) 30%
Equity 65%
Gold 5%

The issue I have is I started my investment journey late and my Equity portion has quite some way to go before i reach my target allocation as I have a reasonable size CPF account. I have been adding fresh money monthly to the Equity portion.

My concern now is the world equity markets continue to hit new high and i kept adding money in. Do I continue to add money into my equity until I meet my target portfolio allocation? If not, what will be the suggestion?

I guess I am supposed to ignore the market movement and invest consistently BUT I have my worries with the current world equity markets

Any advice is appreciated

Cheers
blues_diver
Posts: 2
Joined: Tue Jun 23, 2015 1:57 am

Re: Please critique this Singaporean portfolio

Post by blues_diver »

Hi, appreciate if someone can give a view on this. Thanks!
User avatar
dratkinson
Posts: 6108
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Please critique this Singaporean portfolio

Post by dratkinson »

blues_diver wrote:Hi All

Apologies for pulling out this old thread again. I wanted to seek some advise as I am also using the Singapore's CPF as my bond portion.

My target portfolio allocation is as follow
Bond (CPF) 30%
Equity 65%
Gold 5%

The issue I have is I started my investment journey late and my Equity portion has quite some way to go before i reach my target allocation as I have a reasonable size CPF account. I have been adding fresh money monthly to the Equity portion.

CPF is a reduction in your retirement cost of living, it is not a true bond.

Is this your CPF?
http://www.cpf.gov.sg/
https://en.wikipedia.org/wiki/Central_Provident_Fund

According to above links, your CPF sounds like our Social Security (SS) system. If so, then....

The forum teaches that SS/CPF is not an investment, it is only a reduction in our retirement cost of living.

Example: Assume our retirement expenses are $2500/month, but SS/CPF pays us $1500/month. That means SS/CPF has reduced our expenses, but we still need to come up with $1000/month from other sources (or reduce our cost of living by moving to a cheaper apartment). The "other sources" of retirement income is where our true investments come in.

The forum does not consider SS/CPF to be a true bond investment. Why? Because it is not under our control: we can't cash it out, use it to rebalance our investment portfolio, or transfer it to our heirs upon our death,.... It's only use is to reduce our out-of-pocket retirement expenses.


Gold.

Gold gets a lot of hype during market troubles, but it is only a commodity (like rice, bean, oranges, hog bellies,...), meaning its only growth is due to inflation. As a commodity, $1SGD worth of gold today will be equal to an inflated $1SGD worth of gold 20 years from now. If that money can only buy a loaf of bread today, then it is expected to only buy a loaf of bread 20 years from now.

So this forum does not consider gold to be a safe investment. Because it behaves like a commodity.


5% play money allocation.

It is understood that human nature wants to always be doing something. So you can have 5% of your total investment in play money to do anything you like, and no one will complain after you explain that it's your 5% play money investment.

But the rule is this: if you lose that money in a bad investment, you can't have any more. Why? Because you have proven that you pick poor investment.

If you like/must, then you can use your 5% play money to invest in gold.


Investments.

Your investments require true stocks/equities for above-inflation rate of growth. And true bonds to temper your market risk exposure.

Stocks. You want to invest in the lowest-cost broadest-index world/global stock option(s). If you have access to a total world index ETF (exchange traded fund), that would be great. If not, but you have access to world sector ETFs, that combined make up the world/global index, then that is also acceptable.

Bonds. You want to invest in the safest bond option(s). Preferably as an index ETF so you don't have the issue of managing individual bonds. Does the Singapore government issue bonds? Can you get these through an ETF?

N.B. If we make the mistake of thinking of our SS/CPF as a bond, then we would compound that mistake by having too great a stock allocation. This would mean that our investment portfolio would be much more volatile during a stock recession/crash. This is not what we want. We want our investment portfolio to have a tolerable level of market risk exposure. This means we need true safe bonds, to offset our true risky stocks, in our real investment portfolio.



My concern now is the world equity markets continue to hit new high and i kept adding money in. Do I continue to add money into my equity until I meet my target portfolio allocation? If not, what will be the suggestion?

That is the teaching. If we assume the world markets continue to rise, then now is their low point, and the time to buy. But no one knows the future.

It helps if you have true stock and true bond assets (not SS/CPF) to work with. Why? Because stock recessions and bond recessions don't generally happen at the same time. This means you should always have something doing well (and is high), and something else that is doing poorly (and is low). And if you follow your asset allocation, then you should always be putting your new money into the low asset... so always buying low. This is a good thing, and another reason to have true bonds.

It is only that you are just starting your investing that you have not yet understood this. When you reach your asset allocation, then a high stock market would be telling you to buy more bonds. Why? Because your bond percentage would be too low.

N.B. If you use low-quality bonds (also known as "high-yield": another term for junk/low-quality bonds), then they will act like stocks and are equally hurt during a stock recession. This is why you want only the best quality/safest bonds. The safest bonds (generally government bonds) should rise in value during a stock recession. Why? Because investors will flee stocks during a stock recession and run to the safety of the safest bonds. Here this is called "...the flight to quality". And from the economic theory of "supply and demand", you know the more people want something, the more it's price will rise. And a rising bond price during a stock recession helps to stabilize our total investment portfolio. But this only happens with safe high-quality bonds, it does not happen with low-quality bonds.

Bottom line. Your investments should be composed of: true low-cost total-world stock index ETFs, and true safe bond index ETFs.

What ETFs do you have available to you on the Singapore stock exchange?



I guess I am supposed to ignore the market movement and invest consistently BUT I have my worries with the current world equity markets

We too worry about all of the doom and gloom news reporting. What are we taught to do? Simple: turn off the news, don't listen to it.

Joke in pilot training. It is taught that if you lose your engine at night and your landing light can't find a safe place to land, what should you do? Answer: Turn off the light. :)

See topic: A Visual History of Market Crash Predictions: viewtopic.php?t=169805

You can skip more of the linked news story in above topic, but ensure you read the last part. Why? Because it lists all of the money lost by investors who fled the market because of their fear of a coming market crash.

Bottom line: It's better to stay in the market and ride out all crashes following your asset allocation, than it is to flee the market from the fear of a crash that may never come. And if the market news upsets your emotions, then turn it off.


But what about a market crash as we near retirement? That why our investment allocation should become much more conservative (greater percentage of safe bonds) as we age/near retirement.

Here the asset allocation (AA) reported to last longest in retirement is 40/60 (stocks/bonds): assumes a 4% safe withdrawal rate and is expected to last 30 years. Although a recent topic suggested that maybe the new safest retirement AA has changed to 30/70. Could split the difference if you don't know which to believe.



Any advice is appreciated

Cheers
HKSE investment simulation.

I have a Chinese penpal. I've been trying to encourage her to learn to invest for herself. To that end I've spent some time on the Hong Kong Stock Exchange (HKSE) trying to find appropriate investments to include in an investment simulation for her. (If I can demonstrate that investing works, then she should be more accepting of the idea.)

I will provide you with a link to the simulation's description. I'm suggesting that you try to duplicate something similar for yourself on the Singapore stock exchange. The only stock ETFs I could find were synthetic indexes (created using derivative products---calls and puts---not the real underlying stocks), which is not the best way to go. But it was all I could find.

My penpal's investment simulation description: viewtopic.php?p=2508165#p2508165


Singapore Bogleheads.

I recall there is a Bogleheads group in Singapore. Perhaps you could meet with some of them and trade ideas. Try a Google search: singapore bogleheads site:bogleheads.org/forum

When you find someone in the Singapore BH group, click on their username to send them a private message and ask to join them. That should get you access to all of their current thinking and research into acceptable assets. (Seem to recall they were struggling with this in the last I read about them.)


Updated Investment Review.

Once you decide on your updated investment portfolio, then return here and create a new reply to this topic (the new reply will send out "new reply received" emails and call back everyone following your topic). Your new reply should contain your exact portfolio ideas (ETFs and links to their descriptions... like in the description of my penpal's investment simulation... to make it easier for us to evaluate each). Then maybe some of the senior investor can help you more.

I'm a novice investor; sorry I can't be of more help.



Welcome.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Post Reply