Passive Investing: The Movie

Credit: http://www.flickr.com/photos/cheriejphotos/7158114527/sizes/m/in/photostream/It’s only 2 weeks into 2013 and I’m already swamped! These few weeks are absolutely packed for me, with work guzzling most of my brain fuel, and an upcoming work trip to Beijing. I’m also sticking with my 2013 goal schedule, as well as finding time to work on a free ebook (woot!) that will be making its way here soon, I promise!

So whenever life hits me with a gazillion things to do, I usually take things a little slower, kick back and do something chill like watch a movie. But because I’m a huge financial nerd, I get my kicks watching stuff like Passive Investing – an awesome 54-minute video on passive investing (duh) and why it rocks.

While there’re tons of books and articles written on the subject, I believe that this is the first time someone has made an entire documentary on it. The PF community has already been excitedly sharing it for a month or so now (yeah, I know, I’m a little late in the game.. my bad).

It features some of the biggest, badass (in a good way) names in the index investing industry, such as John Bogle, Kenneth French, William Sharpe, Burton Malkiel, and Rick Ferri. The production is pretty high quality, and there are summaries at the end of each chapter in case you get too distracted by the super strong British-newscaster accent.

So grab some popcorn, snuggle down on the couch, and enjoy 🙂

A caveat: While I agree with most of the concepts presented, I don’t fully agree with everything in the film. One of my biggest bugbears is their assertion that the Capital Asset Pricing Model (CAPM) is the “mathematical foundation of passive investing.” I won’t go into a snooty academic diatribe about the the flaws of CAPM here, but it suffices to say that you don’t need CAPM to hold in order to show that passive investing is still the best way to invest for most people.

Other than that though, the film is excellent. I also love how they display all the logos of actively managed funds throughout the film, subtly dissing the crap out of them without actually naming any names. It’s a little more subtle than my usual practice of pointing and loudly jeering at fund management ads displayed on the subway, causing people around me to move slowly away from me and whisper under their breath. I can only assume that they must be talking about how wise I am.

If you’re looking to learn a little bit more about passive investing but aren’t inclined to read a book, you could totally start here. It could be the most profitable 54 minutes you’ve ever spent. 🙂

Image credit: cheriej

The Great Index Unit Trust Hoax

Whenever I check into a hotel, I get really fascinated by just how crazy expensive some of the items in the minibar are.

One time when I was on vacation, I felt a little hungry so I lumbered over to the minibar and pulled out a pack of cashew nuts – just the regular kind you’d find at any convenience store. Just to be safe, I checked the prices before I tore the pack open, and involuntarily yelled: “NINE DOLLARS FOR A PACK OF TWELVE NUTS?! ARE YOU OUT OF YOUR FRICKIN’ MIND???”

It’s absolutely crazy how people are perfectly willing to pay several times the price for the EXACT SAME PRODUCT – a product that they could have gotten much cheaper elsewhere. We see this everywhere: a Nike sneaker vs a non-branded one, Tropicana orange juice vs a house brand, and beer that costs $12 in a restaurant and $2.50 in the supermarket.

A pack of nuts from the minibar might do a little damage to your wallet, but it’s nothing compared to the damage a unit trust (also known as a mutual fund for my American friends) could do to your long-term wealth.

Costs Matter

I’m not even going to discuss actively managed unit trusts with their high management costs. Nobody takes those seriously anymore – There’s more than enough research that shows that as a whole, actively managed unit trusts are a terrible choice compared to index funds.  Check out here and here.

Today, I’ll just uncover a pricing anomaly I like to call The Great Index Unit Trust Hoax, which involves 2 unit trusts being sold to Singaporean investors. Both charge exorbitant amounts to essentially help you invest in portfolios that you could have easily put together yourself… at a fraction of the cost.

To Infinity… and Beyond!

Exhibit A is the Infinity US 500 Stock Index Fund, which is supposed to help you track the return of the S&P 500. To accomplish this, it hits you with a whopping 0.98% expense ratio.  Now 0.98% may not sound like too much of a big deal, but try compounding that over 30 years and you’re talking about a difference of tens of thousands of dollars of extra cash that’s coming out of your pocket.

But hold on – there’s another, cheaper way for you to track the return of the S&P 500 on your own. You could buy an ETF from Vanguard, which gives you the EXACT SAME RETURN, while charging a mere 0.05% expense ratio. This makes the Infinity unit trust almost 20 TIMES MORE EXPENSIVE than the Vanguard ETF. Yeah, I know.

Home Sweet Home… For 4x The Price

Okay, I hear you say, so maybe that’s a problem unique to the USA.

Oh wait, it’s not.

Presenting Exhibit B, the patriotically-named unit trust MyHome Fund run by Singaporean asset management company Nikko AM. It invests in 1) an ETF tracking the Straits Times Index and 2) the ABF Singapore Bond Index Fund ETF. They’ll charge you a ridiculous expense ratio of 1.2% for all their hard work.

But wait! Did you know that you could totally log onto your online brokerage and invest in 2 ETFs which track the EXACT SAME THING for a fraction of the cost? Namely:

1. SPDR Straits Times Index ETF (SGX Ticker: ES3) – Expense ratio: 0.30%

2. ABF Singapore Bond Index Fund ETF (SGX Ticker: A35) – Management fee + trustee fee: 0.20% (I couldn’t find an exact figure for the total expense ratio on their website – those sneaky bastards – but it shouldn’t  be too far away from the sum of these 2 fees).

Total weighted expense ratio: 0.28%

Ta-daahh! You’ve constructed the exact same product, at a quarter of the cost. And that’s not taking into account sales charges, redemption charges, front-end charges, admin charges, and hire-an-attractive-banker-to-convince-you-to-part-with-your-money charges.

Do Yourself a Favor

My point here is to always, always, read the fine print. The finance industry loves to play down details like these because it means higher commissions for them – commissions that come right out of your pocket.

If you plan on investing passively, do yourself a favor and skip out on the unit trusts. You’re way better off buying the equivalent ETFs instead. Of course, there are a few disadvantages in buying ETFs (eg brokerage commissions, currency exposure, inability to invest in small amounts), but they can be easily circumvented (eg investing regularly using no-minimum commission brokers,  or in the case of the STI ETF, setting aside an amount every month until you can afford one lot). None of the disadvantages of ETFs justifies the tens of thousands of dollars you’re giving up in expenses if you invest in unit trusts.

It would be totally awesome if a reputable fund provider like Vanguard would set up an index fund in Singapore (are you reading this, John Bogle?), which would eliminate all the disadvantages in the para above, and yet charge a reasonable expense ratio that doesn’t require us to give up our first-born child.

In the meantime, stay smart and read the fine print. Save your money for those overpriced cashew nuts from the minibar. At least they’re tasty.