Please critique this Singaporean portfolio

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Please critique this Singaporean portfolio

Postby eugeneyan » Wed May 08, 2013 3:15 am

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
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Re: Please critique this Singaporean portfolio

Postby NOLA » Thu May 09, 2013 1:33 am

Dont think im good enough to assist you but I will bump the thread for you. Good luck.
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Re: Please critique this Singaporean portfolio

Postby winguy » Thu May 09, 2013 1:55 am

Once again, watch out for taxes of US-domiciled ETFs.
viewtopic.php?f=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
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Re: Please critique this Singaporean portfolio

Postby Elbowman » Thu May 09, 2013 2:07 am

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.
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Re: Please critique this Singaporean portfolio

Postby dratkinson » Thu May 09, 2013 4:18 am

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

"16, Singaporean, need advice"
viewtopic.php?f=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 7:14 pm, edited 1 time in total.
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Re: Please critique this Singaporean portfolio

Postby durrrr » Thu May 09, 2013 7:30 am

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.
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Re: Please critique this Singaporean portfolio

Postby linguini » Thu May 09, 2013 11:29 am

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.
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Re: Please critique this Singaporean portfolio

Postby eugeneyan » Thu May 09, 2013 2:19 pm

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?
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Re: Please critique this Singaporean portfolio

Postby durrrr » Thu May 09, 2013 2:45 pm

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.
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Re: Please critique this Singaporean portfolio

Postby dratkinson » Thu May 09, 2013 7:02 pm

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.
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Re: Please critique this Singaporean portfolio

Postby winguy » Fri May 10, 2013 8:01 am

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?
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Re: Please critique this Singaporean portfolio

Postby eugeneyan » Fri May 10, 2013 10:25 am

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?
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