The "Shiny Things" thread on HWZ Money Mind is a goldmine of valuable investment information. I have benefited tremendously and I highly encourage any investor, new or experienced, to slowly digest the wealth of goodies within that thread.
While I have always known the benefits of low cost ETFs, the discussions further strengthened my perception on them, and more importantly on asset allocation and re-balancing.
The best thing is you get concrete details on the exact ETF to purchase (to cut taxes to minimum), and numerous real-life examples on portfolio allocation.
Below are some copy and paste bits of information that I feel will be useful for my future reference.
Note: I am definitely going to support Shiny Things's book for his contributions and efforts.
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The new Shiny Things Seal of Approval list:
* Singaporean stocks: ES3
* Singaporean bonds: A35
* Global stocks: IWDA on the London Stock Exchange (was VWRD, can also add in EMIM)
* Global(ish) bonds: QL2 (*Changed to CORP if you have >$100K)
* Broker for >$100k USD: Interactive Brokers
* Broker for <$100k USD: Standard Chartered
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IWDA is optimized replication ETF and doesn't have EM. VWRD is fully
replicated ETF and covers EM. These two fully justify 0.05 expense
difference IMO
VWRD does indeed include about 1000 extra holdings and can probably
expect a smaller tracking error though optimisation might lower the
costs for the fund. About 400 of the extra holdings are EM stocks.
As for IWDA, the ETF holds 1621 different companies, while the MSCI
World index which is tracked by IWDA constitutes of 1636 companies (as
of december 31st 2014). It is not full replication, so if you are
worried about those 15 companies having a major impact on your
portfolio, do not bother with this ETF. I think the difference is too
small to make a big deal out of it. It is physical replication (as
mentioned in the fact sheet) instead of synthetic replication, which
means they do hold the actual assets and not for instance derivatives as
with synthetic replication. It is optimised in terms of not holding all
the assets their benchmark holds, but as said earlier this paragraph,
it comes close :wink: .
The FTSE index that VWRL/VWRD tracks is indeed more geographically
diversified. If this is very important to you, you could add an emerging
markets ETF or just buy the VWRL/VWRD ETF, it is your pick. I would go
for IWDA+EMIM because I prefer that they are accumulating and having a
really slight advantage in TER.
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Nah. If you care about emerging markets, then just go for VWRD; if you
don't, then use IWDA. Using a whole bunch of little funds to fill in any
gaps in IWDA is just going to cause you to run up transaction and
rebalancing costs. Just pick one or the other.
Because they're issued by shitty issuers. Hyflux didn't even bother to
get a credit rating on their bonds, they just stuffed the market full of
these bonds on the assumption that "oh people have heard of us, we'll
spin them a nice story, they won't care that we're heavily indebted and
having trouble paying everything".
Bank bonds are good, especially Singaporean bank bonds, because those
are rock-solid names. Bank pref shares are good if you're really gagging
for income, though they should only be a small part of your portfolio.
But high-yield long-dated junk-bond trash doesn't deserve a place in
your portfolio, except through a well-diversified high-yield bond ETF -
and even then it should be 3-5% of your portfolio, absolute max.
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STOCKS (70%)
1. 45% ES3
on SGX / SGD (SPDR® Straits Times Index ETF) / TER 0.30% / Semi-Annual Distribution
2. 20% IWDA
on LSE / USD (iShares Core MSCI World UCITS ETF) / TER 0.20% / No Distribution ie Reinvest dividends
3. 5% EIMI
on LSE / USD (iShares Core MSCI Emerging Markets IMI UCITS ETF) / TER 0.25% / No Distribution ie Reinvest dividends
BONDS (30%)
1. 20% A35
on SGX / SGD (ABF SINGAPORE BOND INDEX FUND) / TER 0.25% / Annual Distribution
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Hang on, hang on. The reason you glide down to bonds as you get older is
so that you don't get clobbered by an equity downturn just before you
retire. You make a tradeoff - giving up returns to reduce your risk.
When you're younger, you can afford to take more risk and invest more of
your money in stocks, because you can sit there and ride out a market
cycle. But when you're older, you can't afford to get blindsided by a
stock-market collapse, so you move into bonds, which have less
volatility and smaller drawdowns.
You should have made most of your returns already by the time you're
close to retiring; moving into bonds locks in those gains, as well.
On the one hand, you're saying "wow switching to bonds is a terrible
idea", but then down below you're saying "what if you'd retired in
2009?". If you'd retired in 2009 with an all-equity portfolio, you'd
have been
completely ****ed, because your retirement portfolio
had just taken a 50+% hit. But if you'd retired in 2009 with a 50-50
stocks-bonds portfolio, you'd have been pretty much fine. You might've
taken a 20% drawdown, tops.
That right there is why you move into bonds when you get older. People
who left their portfolios 100% in equities because "stocks have better
returns, stocks will never go down!" were the ones who had to postpone
their retirement because half their retirement portfolio got wiped out.
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If you keep waiting, you'll end up never buying. When it's going down,
you'll think "oh no it's going down I don't want to buy it when it's
going down!", and when it's going up you'll think "oh man it's going up,
I'll wait for it to pull back a bit" and then you'll end up buying at
the ding-dong high.
Don't be that guy.
Just put it in now and leave it for 20 years. The STI is relatively
cheap at the moment (its price-to-earnings ratio is on the low side), so
now's a good time to buy in if you're in for the long term.
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On agents:
It's good to remember that there's a conflict of interest there. The
more expensive products they sell to you, the more money they make. If
they have a product that gives you 3% returns and gives them 10%
commission, vs a product that gives you 10% returns and 3% commission,
be sure that they will sell you the first one and pocket their 10%
commission.
They can still say, why not use your CPF? Extra 0.5% returns!
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On Algorithm Trading
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I have the minimum required to open an interactive brokers account and
am planning to do 1000SGD of DCA in IWDA each month. Is the cost savings
of spread premium + TT charges (each month) + account inactivity fee
enough to warrant one to open an interactive brokers account since it
seems that the TT charges (each month) seems to eat up the cost savings?
Yep, it's worth it. No wire charges, and FX at mid-market - the
difference between Stanchart and IBKR for international stocks comes
from the inactivity fee at IBKR, and SGD 1k a month is the line between
"it's cheaper to pay Stanchart's FX rates" and "it's cheaper to pay
IBKR's activity fee". And besides, you'll be at the $100k line in IBKR
before long, which is where they stop charging the inactivity fee.
The new rule -
if you've got more than $10k USD, and you do more than $500 USD a month, you should use IBKR. Above that amount, you'd be paying more in FX spread at Stanchart than you'd pay in maintenance fees at IB.
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To any kind of "would XXX stock rise", "will fed rise rates" kind of question:
I would be rich if I know.
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You do have FX exposure, but not quite where you think: you have FX
exposure to the currency of the assets inside the ETF, not the currency
of the ETF itself.
Let's imagine a hypothetical Zimbabwean ETF, listed in America. So the
ETF is denominated in USD; it owns a bunch of Zimbabwean stocks valued
in ZWD; and your home currency is SGD.
Let's say you buy $10,000 SGD worth of that ETF.
If the SGD halves in value, but everything else stays constant: your $10k SGD worth of the ETF is now worth $20k.
If the ZWD halves in value, but everything else stays constant: your
$10k SGD worth of the ETF is only worth $5k (because the value of the
assets in the ETF has halved).
If the USD halves in value: nothing happens! The value of the assets in
the ETF has doubled in USD terms; but the value of the shares has halved
in SGD terms.
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OK, here's the deal. Currency diversification in ETFs really doesn't
matter - trust me on this, I can show you the math if you want - but if
you try to buy a bunch of different currencies' ETFs while you're at
Stanchart, you will get absolutely
incinerated on FX costs.
Stanchart's FX spreads for anything other than USD and SGD-denominated
stocks are way too wide; this is my one and only complaint about them,
but it's a big one.
You can move money directly in and out of IB. The really nifty thing if
you're an expat is that you can move money in and out in multiple
countries - so I can transfer money in to IBKR from my Singapore or
Aussie bank accounts, convert it to USD (at interbank rates!), and then
wire it out to my US bank account.
If you're doing a big lump of cash it can be a monster saving - imagine
you've just sold a house in London for a million quid, and you need to
convert the cash to USD. If you do it at the bank they'll probably take
30 pips out of you, that's $3,000 USD; but if you do it at Interactive
you'll pay one or two pips, so you save nearly three grand.
At Stanchart, the spread on GBPSGD is about 2% wide - so you have to pay
about 1% (half a spread) in foreign-exchange spread each time you want
to buy or sell a GBP-denominated stock using SGD.
IBKR doesn't have a direct GBPSGD pair - you have to do "sell SGD for
USD" and then "sell USD for GBP". But even though you have to do two
trades instead of one, the spread only ends up being 0.02% -
one-one-hundredth of what you'd pay at Stanchart.
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On the Permanent Portfolio:
I'm gonna set my stake in the ground right here: I think the Permanent
Portfolio has some good ideas (diversify and rebalance), but I think the
asset mix it chooses is sort of ridiculous, and it's not a good
long-term investment plan because of that asset mix.
For anyone who hasn't run across it: the PP advocates 25% in long bonds,
25% in cash, 25% in gold, and 25% in stocks. Their argument is that it
covers every possible economic and inflationary scenario: if the economy
strengthens, bonds and stocks do well; if the economy weakens, cash and
gold do well. If inflation, stocks and gold do well; if
deflation happens, cash and bonds do well.
There are two huge problems with this, though.
The big one is that they're basically positioning for the apocalypse.
Stocks do the best out of all asset classes over the very long term, so
you want your portfolio mostly in stocks. These guys are one-quarter in
stocks; I reckon if you looked at this portfolio since 1980 it would
have been incinerated by a boring 60-40 stocks-bonds portfolio. Those
allocations to cash and gold are absolutely huge, so when stocks and
bonds outperform cash and gold (which is what happens the most often)
you're going to have a huge drag on your portfolio from all the cash and
gold you're sitting on.
Secondly, their 25-25-25-25 allocation doesn't reflect how the real
world works. They've got 50% of their portfolio in stuff that works well
during deflation, but (outside of Japan) deflation just doesn't happen
that often. Same for economic shrinkage - they've got 50% of their
portfolio in stuff that works when the economy's shrinking, but
economies just don't shrink that often. If you wanted to weight this
portfolio toward the actual probabilities of this stuff happening, you'd
have maybe 5% of your portfolio in deflation hedges, and 10% in
economic-shrinkage hedges... and that still leaves 85% to put in stocks
and bonds, like a normal person.
The permanent portfolio is pretty much one step above allocating your portfolio to guns and canned goods.
