John Bogle again distils the main advantage of Index Funds which is the ‘Efficient Cost Theory’.
It’s a pity we can’t achieve close to what he describes here in Singapore
John Bogle again distils the main advantage of Index Funds which is the ‘Efficient Cost Theory’.
It’s a pity we can’t achieve close to what he describes here in Singapore
Cost is a very big determinant in passive investing performance but so is the behavioral aspect of investing
The head of retail investors for SGX came up with an article that you can build a stock portfolio with $100 per month.
I believe she is referring to the regular shares savings plans POSB and OCBC have introduced last year.
I came up with a good guide here for those who missed the article. It talks about how much is the return, the volatility the risk, how to go about investing in it the long term, and the psychological mindset that you need to have.
I thought its good for them to highlight it, and perhaps they are the only one with the data to say something like the following, since STI ETF probably have only 12-13 years of listing history:
If you have invested $100 per month in the STI for 240 months or 20 years, your total original capital investment would have grown from $24,000 to $52,409 by the end of 2013, including capital appreciation and $15, 188 in dividends received.
That’s got to get people interested! Or are we missing something?
The returns if you put it that way aren’t really that impressive. There are passed endowments I remember published in the newspaper that yields > 4%. The old Asia Life or current Tokio Marine is one of them.
I haven’t see a latest endowment tabulation done but I believe the average should be lower than that.
Still the returns have not reached the theoretical 6-7% we saw touted in books.
Seems I am right to manage the expectations that if you want to be wealthy and build wealth, working with 4% conservatively is a much better thing then using 6%
One reason for the lukewarm performance is that the STI after 6.6 years, didn’t reach back to its 3,800 height.
A lot of the world stock markets have and perhaps that is the failings of this government as well.
I profile one and a half years ago on how one of my friend decide to start putting in $1000 every month into the STI ETF at a 2.5% commission.
Back then the CAGR of his return after 5 years is 1.7% with 85% coming from dividends.
So how is his performance now?
You guys can take a look at the actual spreadsheet here.
6.6 years on, it looks a better 2.19%. Dividends make up 61% of returns. Even with the correction from the market highs recently.
This is a testament to his discipline to invest periodically when psychologically it is difficult for a lot of people.
The stupid thing is that his cost is 2.5%! It can be much lower.
If you are using Standard Chartered Online trading with no minimum, your commission cost would be close to 0.256%.
You can grind out 2.58% returns more. That doesn’t look like much.
If you have used POSB Invest Saver? Remember I said 1% is rather expensive to pay as well!
You can grind out 1.71% returns more. That doesn’t look like much either.
Perhaps its just 6.6 years. You don’t see the cost compounding effect come in.
The returns doesn’t seem to vary that drastically at 6.6 years but there is an advantage of POSB Invest Saver.
That is, there is a precommitment mechanism into it. It is mechanically investing for you by deducting from your Wealth Fund (say a separated POSB savings account)
Be it up or down, it does that automatically.
Even when you invest in a mechanical index, investors brain hurt their returns because they somehow think they are doing the right thing.
Their returns turns out to be even worse than the funds actual returns.
If you need to make that transaction, try how my friend is feeling when everyday the market drops 8%. You will hold off your transactions.
Invest-Saver helps in a certain sense because it pre-commits automatically, removing yourself from a multi-step execution process, which give you ample time to say “perhaps I should hold off this purchase until things become calmer”. Automatic has its uses.
Stock market volatility and market plunges can be very uncomfortable for first time equity investors. Do remember what you have pre-committed and preserving your brain is more important than your money.
It always seem that the banks like to release products at exactly the wrong time. Whether it is guaranteed products at the time when you should be buying stocks or in the current climate releasing a Blue Chip Wealth building plan called Invest-Saver at exactly the wrong time.
I wrote about it in a comprehensive article on the merits and pitfalls of investing in Invest-Saver and also how you can use it to build wealth here. [Article]
Since the top of 3480 reached, the index have corrected 10%, another 10% and its an official bear market.
It is not always nice as a first time investor in equity to see your hard earned money go negative.
Already, I see irresponsible journalism telling folks this is the new financial crisis and you should move to cash.
I think I had it worse. At least you guys and gals started when it was near 3250. Take a look at my average at my Stock Portfolio Tracker.
My highest was at 3460! Die!
Often times, investors gets hard done not by the market but by themselves.
They couldn’t manage their emotional state and that becomes the detriment of their investment returns.
The fund managers may not always get it right but coupled with an investor that does not follow the game plan, it becomes even worse. Some don’t even have that in the first place.
For the folks who do not have a game plan, I urge you guys to re-read this.
“Protecting yourself against the possibility that you might turn out to be weak-willed,” she says, may have a “subjective value” to the human brain.
So if you are considering an entry—or return—to the stock market, ask yourself if you are ready to precommit to it.
You could buy a fixed amount every month in a dollar-cost-averaging plan; sign an investing contract, witnessed by family or friends, stipulating how long you will hold your investments; name the account after a goal, such as saving for college or retirement; or craft a checklist that spells out the only conditions under which you would sell.
If you follow the game plan of passive investing, you have already pre-committed to dollar cost averaging into the Invest-Saver, understand the volatility that comes with the assets, how it will benefit you for the time horizon you invest in.
According to what I written, the thing to take care of now is getting a grip on your emotional state.
Lets see if we can hack your brain on this.
When you invest in something like an STI ETF, which is a basket of Singapore blue chips, then tend to move up and down.
That is the fact of life of things traded daily.
A possible worse case scenario is a 10% drop evolves to a 50-60% one. That’s not a very pretty sight for most. To me that is a very good thing.
Essentially, my friend dollar cost average into this at the top. He is still alive, still contributing $1000 to this and living a normal life. You can read about it here.
In another way, this 10% correction can go down a bit further and then go back up just like at the start of 2012.
10% corrections are more frequent than you think. They happen like once every 22 months at least.
If you liquidate all, what happens if it ends up higher in 3-4 years time? STI 6000?
The truth is that we have great run, but we also have a lot of problems, problems you hear in the news.
You are an investor, don’t confuse politics and making money.
All those little dips are 10% at least, with one near 20%.
The truth is that we do not know how much lower it will go
This is debatable. Some of you could be smarter than these hedge fund managers who spend a large part of their life training to be investors, speculators and practicing it daily.
And they missed this large bull market. Read here.
Some of you will get panicky and pull money out or just end this plan. Hey, this plan was started in end July.
It is just one month.
You just got started.
You have 30 years ahead of you probably.
You would probably have 1 month dollar cost average now.
The typical bear market (if it really becomes that long drawn) will be 2-3 years.
When you DCA into an Index ETF monthly, you are injecting a stream of cash flow.
Adding up the stream of cash flow per year could amount to an amount even larger than your current invested holdings.
When you pre-commit to the plan, you have a far longer horizon than investment managers who typically have to perform every single year.
That is also your advantage.
As a person building up wealth you SHOULD hope for more of these corrections.
It means you get to buy a basket of stocks on the cheap.
If you fear missing out on good gains, wouldn’t your gains be even better if its cheaper?
If you have 30 years to go, and you know Singapore will progress through growth and inflation to a much higher level in 30 years time, would you want to get in cheaper or when it is more expensive.
If you have invested 20k, a 70% correction will see you left with $6000. But in the next 3 years of the bear, if you are investing $500 per month, you would be allocating $18000 into it, and at a substantially cheaper price.
A 70% correction on the index at 3250 will mean it falling to 975 (yikes). If majority of your money can be bought at that price, you will only need the index to go to 2000 for you to double your money. The gains offsets the losses and they average out.
A single company like SPH may go bankrupt, and that is the risk when you invest in an individual blue chip.
Blue chips like Chartered Semi Conductor and NOL have shown that even if they are Temasek linked, they can bleed for a long time and profusely.
When SPH becomes a going concern, another better quality company takes its place on the index.
Would an index go belly up? Possible but its rather difficult.
You seen the worse in Greece where the index went down 90%, but there are still value left.
The STI index can follow suite, but that would mean that your companies like UOB, DBS, OCBC, Singtel goes to near 10% of current value.
You think to yourself, if the situation is so dire, would the alternative, which is leaving your money in bank deposits in those banks be any safer?
I hope I give you guys a fair account of how bad it could get but also the opportunity to stay the course and not fall into common psychological issues that plague investors.
If after this, you are still not comfortable, then I guess its better to leave your money in the bank.
Lets revisit this sometime later.
Many Singaporean’s think retirement is far away so they only care about building wealth and not so much about taking distribution.
I find that there are much retirees that needs something like this.
The above pyramid is an interesting take using the familiar food pyramid. It lists at the bottom some of things that you should “consume” more versus those things that you should consume in moderation. For retirees, this is something to think about what you should focus on.
(hint: a lot of acquiring skills, learning, reading and listening!)
Let us get started.
You came to read this topic because you want to know
I believe one question on your mind is: Should you retire at all?
To answer this question, we go into history to take a look how retirement first came about, and how it changes over time.
Once you understand the origins, your beliefs about retirement might change.
Read the Material here >>
Spending wealth down requires very different strategy from building wealth. Failure to understand this could subject your retirement fund from going down faster than you anticipate.
In this article we explain what is the sequence of return risk and some possible solutions to address it.
What is seldom explain by financial advisers who are not specialized in planning how you spend down your money is that the traditional financial assets we put our money in are volatile in their value and cash flow.
It does not mean that if you have a portfolio that provides a 4% return, you can spend all 4% of it.
Likewise, if you have rental properties, you cannot just assume your rental income is always consistent.
The world we lived in is volatile. However, you can equipped yourself with knowledge, and then build in rules to navigate this volatile environment.
In this material, I will explain:
Read the material here >>
There are a few paths to Rome when it comes to planning how to spend down your money in retirement or financial independence. How would we ensure that our money would last for as long as we live?
There are many ways such as purchasing annuities, building a bond ladder, having a stocks and bonds portfolio.
However, each of these instruments have their level of riskiness when we are solely focus on longevity risk. That is, to increase the longevity of your wealth.
The traditional retirement portfolio allocation is to have a high equity allocation, and slowly reduce it and increase your bond allocation during retirement.
Ed Rempel looked through 145 years of data, and came up with evidence that to increase the longevity of your wealth, to have enough for your retirement spending, you need to have a high equity allocation.
Dirk Cotton’s article here attempts to let you understand some of the spending down decisions you have to make in order for you to not have high risk of running out of money.
The 4% safe withdrawal rate have been talked about a lot as the holy grail of retirement planning but it has some flaws. It is more important to understand the variable decisions that we can make during bear markets that can help boost our withdrawal rates.
In this article, I will introduce and compare the various variable withdrawal methods so that you can compare and contrast them.
In this follow up article, I use Timeline App to back test some of these variable withdrawal strategies to see, based on actual historical sequences, whether they improve the success of your money lasting, and provide you decent cash flow to pay for your annual expenses.
In a further post, financial planner David Zolt explains his flexible variable withdrawal method and brings us through some worst case scenario and how we can increase our withdrawal rate and increase the duration our money lasts.
Wall Street Journal Explores why Dynamic withdrawals are the way to go for realistic retirement spend down instead of the 4% rule. Here, they briefly go through T Rowe Price’s 4% adjusted, Bengen’s Floor and Ceiling Rule, Guyton’s Guardrail Rule.
Micheal Kitces wrote up this piece sharing that in the case of an average economic situation, the withdrawal rate should be 6% instead of 4%. Bill Sharpe highlights that the 4% is highly inefficient as it is likely 2/3 of the time, the folks end up with double their wealth even after spending in a lifetime.
He propose a cautious way to ratchet up the spending if the current portfolio exceeds 50% of the initial portfolio amount
Charity foundations and university endowment have a very unique requirement:
Does that sound like a lot of us? I think so!
So this article is my exploration of what do they do differently.
Many investors wished to have passive income in retirement, that are inflation-adjusted. They also wish to preserve their capital so that their next generation can have it.
Thus, by spending only the natural dividend income from their portfolio of stocks, they think they have a good model for achieving this.
In this article, we show you some studies that your income may not be so inflation-adjusting and not so stable. This could affect your ability to spend and the kind of retirement you would like to have.
While playing with the Timeline App, back testing through historical Global Equity, Bond, Gold portfolio, I realize that the Permanent Portfolio might not work so well to make the traditional 30 year retirement last.
You still have your job. And now you are planning the time you retire.
The stock market have gone up for a while already. Should you retire now, or should you wait for after the market meltdown, then you retire?
This article explores the advantages of retiring during or after a market downturn.
A financial adviser by the name of William Bengen did a research to find out whether there is a magical figure that can be a good rule of thumb to let advisers (and yourself) know
He came up with this 4% withdrawal rate.
This means that if you have a portfolio of $1 million, you can take out $40,000 a year in the first year to spend. In subsequent years, your portfolio will grow, will decline but you can get inflation-adjusted income for the next 25 to 30 years.
His work is the basis of many retirement planning models today. There are flaws and critiques to his research but generally we should thank him for it.
What I realize is that many did not fully understand withdrawal rates. Because they do not understand well, they could not understand how safe or unsafe their plan is.
So this section will provide some of my past write-ups in these areas.
At the time of writing (2020), a lot of countries have really low bond yields and many felt that what should be considered as safe rates should be brought down further because in the past, we have not seen low bond rates.
Abraham from Timeline did the research and show that this is not the case.
Safe withdrawal rate research encompass the study of equity, bond returns, inflation rates in a region or country in the past. Abraham has 100 years of data and during this period there are many periods where the real bond yields went negative.
While he always say for the UK the safe withdrawal rate should be 2.5% instead of 4%, it means that this 2.5% encompass the work of 106 years of equity, bond returns and inflation data.
2.5% factors in period of negative bond yields and poor bond returns.
Now that you understand that balancing the objectives of making your wealth last for the period you and your spouse is around, and meeting your total annual expenses need, in a situation where your wealth will be volatile, how should you go about spending down your money?
I created a high level action script for the people that DIY, to plan how much they can spend the next year, and do this exercise on an annual basis. It provides majority of the things to think about.
The common advice given is to have a cash buffer of 2-5 years so that you avoid spending down the portfolio during a large equities draw down.
The research done by others show that cash has an opportunity cost of low growth, and if we have too much low growth financial assets overtime, it affects how long your wealth will last.
Re-balancing seem to matters less.
This is done for a passive Global Equities and Global Bonds portfolio, if you are an active investor, it means that your growth rate needs to be as high as equities for the major portion of your wealth to ensure longevity.
You need to allocate more to equities over time in your retirement.
If not, you need to have more money.
Here is a good video on planning for retirement using annuities to supplement your various income producing assets.
Annuities are complex products and I believe the insurance company want it that way so that they can earn from you and make it hard to compare.
Kiplinger have an article that talks about common annuity mistakes
Monevator breaks down the trials and tribulations of 2 contrasting annuity scheme and how it affects your retirement.
Ultimately, a level annuity offers more flexibility, growth, and value for money, but it does not offer certainty, security, or safety.
An escalating annuity is the superior product if those are your retirement goals, and frankly who doesn’t want some of that in their retirement?
To plan for your retirement, you need to know your annual expenses that you will need rather well.
To know that:
What you need to come up with, is to break your annual expenses into:
Here are some articles that elaborate on this area.
David M Blanchett researched shows that what we know about expenditures in retirement may be rather different:
NYT ran an article providing insights about the subject of 4% withdrawal rate from an experienced planner. Based on his experience, he seldom see people spend in a straight line. Research have shown that spending over time resembles more of a smile.
Thus, they felt that what you need can be less. However, somehow I felt that they are planning for people who are not super optimizer during their working years. If you are, you might not have much things to cut down.
There is always a big fight among the proponents who advocate optimizing expenses versus trying to earn more.
However, in retirement, it is very difficult to “earn more” by increasing your financial assets’ returns over the average.
And thus for many retirees, it might make more sense for you to optimize your view of retirement, and the expenses for that kind of retirement.
Optimizing your expenses will make your plans safer, with a greater margin for error, than if the amount of wealth you have, just about produces the optimum income required for your retirement.
As we lived our lives, we start to stack up a lot of obligations. You may not have realize that these obligations often involve spending more time and money.
Sometimes it is something that you are not very comfortable with.
If your life is filled with obligations, a lot of your expenses are essential expenses.
Then you realize that due to that, you need a lot of money, to feel safe to retire.
Which might be rather demoralizing.
The Lee Kuan Yew School of Public Policy came up with a report in 2019 to find out based on their MIS method, what is our basic living standards.
It is not one based on only essential expenses. It includes the non-essentials and essentials because they ask a group of Singaporeans and sought to construct it based on their lifestyle.
This report is good because:
If we know that Essential + some Non-Essential Expenses comes up to $26,000/yr without housing, we can imagine your CPF Life with Full Retirement Sum (FRS) giving you $13,000/yr.
You will thus need to fulfill $13,000/yr with your non-CPF retirement funds.
For a 30 year retirement, a good estimate of a stock/bond portfolio will be $13,000/0.035 = $371,000.
Every 5 years, the Singapore Statistic Department will compile an annual expenditure survey.
We can tell a lot from this survey:
For those who are planning for financial independence, you can make use of these data and see how your spending will change as you move to not working. You can also use the savings rate to estimate how likely is it for you to early retire.
More to continue….
I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly here.