Some Fund Recs (Because I Survived the Wilderness)

Hola! It’s been awhile, hasn’t it? I’m back after an epic 2-week hiatus where I was literally sleeping in the wilderness, scaling great heights, and constructing a makeshift boat with my bare hands. Okay fine, it’s less awesome than it sounds – I was away at my company’s Outward Bound course for a grand total of 5 days. And the remaining 9 days was spent… recovering. Yeah, you know I’m sexy and rugged like that.

So I haven’t been doing a very good job at keeping this blog updated on a regular basis. Up till my last post, I’ve been managing about one post a week, partly because my posts are so damn long. I can’t help it – I usually have so much to say when I want to talk about something that I go on and on and on and on and before I know it, I’ve spent like 2 hours on a post. Not to mention the time taken to find that perfect, non-copyrighted title picture. Damn you, intellectual property!!

So I’m gonna try something different from now: I’ll try writing shorter, more regular posts, splitting a huge topic out into different bits. Hopefully this way, blogging’s not going to be as daunting of task to me, you won’t get so damn bored with my 1,000 word essays, I get momentum to write more, and you get more fodder to help you hatch a rich life. All in all a good deal for the both of us. I won’t always be able to come up with superdamnentertaining analogies – some of my posts will be factual and serious, but at least I’ll be able to use those to get some blogging momentum.

Are you ready? Good. Here we go.

So I got a comment from Jing asking if I could recommend some Exchange Traded Funds (or ETFs for short). Okay, I’m not a financial advisor. There’s no way that I can decide if a particular ETF would suit your needs. But I can tell you what’s in my portfolio and then you can decide for yourself, kay? These ETFs suit my own personal investing style of a buy-and-hold, dollar-cost-averaged, and index-based strategy (which you can read about here, here and here). And so the five ETFs I currently have in my portfolio are (drum roll please):

1. SPDR Straits Times Index ETF (Ticker: ES3): Benchmark index of the Singapore stock market, traded on the SGX. Comprises 30 blue chip Singaporean companies, some of which are effective monopolies. I invest in this mainly for the home bias, and to mitigate exchange rate risk from the US Dollar.

2. Vanguard Dividend Appreciation ETF (Ticker: VIG): Comprises US companies that have consistently grown their dividends over 10 years or more. Blue chips like Coke, IBM, McDonald’s. I’m a big fan of dividend investing, especially in companies that consistently grow their dividends. Traded on the NYSE.

3. Vanguard FTSE All-World ex-US ETF (Ticker: VEU): Global stock index fund, to give me some exposure into the developed world outside of the US for diversification. Traded on the NYSE.

4. SPDR Dow Jones Intnl Real Estate ETF (Ticker: RWX): I also believe in diversifying across asset classes, and real estate is one of them. RWX is a global, ex-US, real estate fund, traded on the NYSE.

5. Vanguard REIT ETF (Ticker: VNQ): US real estate fund. Okay I admit – I’m biased towards the US because I went to college there. So a large part of my portfolio consists of US holdings, and I invest a small portion of my portfolio in VNQ because real estate plays a particularly pivotal role in the US economy. Traded on the NYSE.

I’m also looking to invest in the ABF Singapore Bond Index Fund (Ticker: A35), another global bond index fund, and some Singapore REITs to diversify, once I build up a large enough equity base.

Okay but before you get all excited and run out and throw your money in these funds faster than army boys at a strip club, let me just say two things:

1. I have a certain investment style (long-term, buy-and-hold, index-based) which may or may not suit your style of investing. There are literally thousands of ETFs out there that can suit just about any investment style. You should decide on your own style and invest in the assets that suit your objectives.

2. I am not your financial advisor and these are in no way outright recommendations that will guarantee you riches and ca$$$hhh moneyyy baby. DO YOUR OWN RESEARCH before you invest in anything. Investing means taking on risk – please don’t be a baby and blame me (or someone else) if you lose money.

Till next time, assuming I don’t die from my sandfly bites, adios!

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Why Whole-Life Insurance Is Like Picking Your Nose

There are some things that I would never pay someone to do for me. Like brushing my teeth. Or reading. Or organizing my iTunes library. Or picking my nose. Even if there was someone offering  these services on Craigslist, I wouldn’t pay him a dime because 1) he’s probably expensive as hell and 2) he would probably do a shitty job. Like I have serious doubts that a Professional Nose Picker would be able to offer as much nose picking satisfaction than what I would have been able to do myself.

Now think of an insurance company as a dentist offering additional professional nose picking services on the side. I’d pay him to protect my teeth – that’s his job. But hell to the no on the nose-picking services. He’d be expensive, and I could totally do it way better if I did it myself.

Whole-life insurance plans (also commonly known as “investment-linked plans”) is kind of like a professional nose-picking service. My insurance company’s job is to protect my family against the risk of a huge anvil plastered with the words “ACME” falling on my head. But it has no business poking its head in my investments, which should be growing as time goes by so that I can buy my own badass anvil protection.

But the sad fact is, most insurance agents are incentivized to sell you whole-life investment-linked plans, or a similarly pricy product. The result? Most Singaporeans blindly listen to them, because we assume that they’re “professionals”.

But the professionals may not always have your best interests at heart (Think of all the doctors who prescribe unnecessary -and costly- treatments because it helps to line their pockets, but that’s another rant I have altogether). There’s a better way to do this: Buy Term and Invest the Rest (or BTITR for short, because Singaporeans love acronyms).

So why BTITR?

1. It’s simple

Term insurance is the simplest form of insurance that exists. You pay monthly/annual premiums for a period of time, and if you die/get injured/get killed by Loki’s Chitauri army before the Avengers save you, your insurance company pays you a helluva lot of money. It’s simple – you’re not mixing your savings, or investments, or speculation, or livelihood, into your protection needs. Contrast this with whole-life insurance, where you have to worry about where you’re gonna invest your premiums, how your funds are doing, and argue with your agent on the administrative fees. Way too complicated.

2. It’s cheap

The premiums for term insurance are often around 10x less than those for whole-life insurance. You’re paying for the simplest protection needs – so there really isn’t much administration that needs to go into servicing your plan, which translates into a cheaper premium.

Tan Kin Lian (presidential candidate that got an embarrassing number of votes at the last Singapore presidential election, but gives really good financial advice on his blog nonetheless) estimates that you would pay only $10,800 over 30 years for term insurance, compared to $180,000 over 30 years for a whole life insurance plan with the same coverage. This table also compares how much cheaper your premiums will be for term vs whole life.

3. You get way better returns by investing on your own

This is my favorite part. Instead of spending a bomb on whole life insurance, buy term insurance instead, take the amount you saved and invest it in a low-cost index fund.

Using conservative assumptions, Tan Kin Lian shows pretty decisively that you would end up with more money by investing on your own instead of relying on an insurance company to invest on your behalf. To give you an idea of the figures, you’d end up with around $390,000 if you’d invested on your own after 30 years, vs approximately $270,000 if you’d relied on the insurance company to invest for you. And the difference is even greater if you extend the coverage period.

Why the difference? The key is that 15-20% of your premiums go into administrative fees and commissions for servicing your account in a whole-life insurance plan. And for the remaining 80% that does get invested into unit trusts (or mutual funds, as they call ’em in the US), you’re charged an annual “management fee” of 1-2% of your funds. After all of these fees, your whole-life insurance plan should return approximately 2.5% per annum, if you’re lucky. Contrast this to the return of an index fund like the STI ETF, which should return at least 5% per annum even if you’re conservative. The difference between 2.5% and 5% may seem puny, but extend that outperformance to 30 years and that translates into a whopping $120 grand.

So don’t be a pansy. Buy term and invest the rest, and have fun picking your own nose.

Some Good Investment Research… and Terrible Advice

I didn’t want to blog about investing till much later, but the Straits Times had an interesting article yesterday titled Stocks v Property. It deals with the issue of “Where the hell should I put my money?!” when it comes to investments. Everyone talks about investments, like: “yeaaahhhh I should really save up for a house… but it’s really expensive…” or “yeaaaahhh I’ve been meaning to invest for awhile now, but I don’t think I have enough time/money/interest…whine whine whine”. But very few people actually get off their ass and actually do some real research on what they should be investing in, so they either 1) don’t invest altogether, or 2) make some stupid investment decisions.

So an article like this gets some of that research done for you, which is awesome. I loved the first part of the article, which used numbers and statistics to back a case and destroy some common assumptions that we all have. The article should’ve just stopped right there, but part 2 of it gave some absolutely terrible investment advice, and I just had to say something about it, in a minute.

Some good investment research

From the ST article: “Retail investors, especially those in Singapore, tend to think of stocks as a short- to medium-term investment. When seeking a long-term investment, most Singaporean investors think of property first. 

But a recent comparison done by the Singapore Exchange (SGX) has shown that, in fact, local stocks have outperformed private residential property over the long run. In the 10 years from 2001 to 2010, the benchmark Straits Times Index (STI) gave an annualised return on investment of 4.9 per cent. Meanwhile, if you had bought property in 2001 and sold it in 2010, you would have made an annualised return on investment of 3.9 per cent over the period.”

Sure, the study excluded returns from dividends and rents, but add those into the mix and stocks have still historically outperformed real estate over the long run. And while 10 years is hardly considered to be the “long run”, other studies have shown that stocks have outperformed real estate over longer time periods (see this New York Times article).

Some terrible investment advice (esp if you’re young):

So the Straits Times article would have been awesome if it had presented the statistics, drawn a conclusion, and stopped there. But page 2 of the article had some terrible investment advice:

Mr Vasu Menon, OCBC Bank’s head of content and research, noted that such wild swings in the stock market are even more prevalent today. As a result, he said, holding on to stocks for the long term is no longer a relevant strategy in this day and age.” (emphasis added).

“So even if stocks had outperformed property between 2001 and 2010, he said, there is no guarantee that they will do the same over the next decade. His advice: Set a target for your stock investments and have the discipline to stick to it. Say, for example, that you hope to make a 30 per cent return on a certain stock within three years. If the stock somehow reaches that 30 per cent target within six months, just sell, Mr Menon said.”

Hello?! Stocks are “no longer a relevant strategy in this day and age” just because the market has been volatile and uncertain? Mr Menon obviously needs a lesson in economic history: volatility and uncertainty are NOTHING NEW to the stock market. They’ve always been there – the Great Depression from 1929, the 1940s when stocks pretty much didn’t go anywhere, the “Black Monday” of 1987, the dot-com bubble of 2000, the collapse of Lehman in 2008…  and yet the US market has averaged a whopping 9.96% annually from 1920 to 2010. Volatility and uncertainty aren’t “unusual”, they’ve been characteristic of the stock market for the past 200 years. And anyone hoping to benefit from the long-run return of the stock market would have to learn to deal with these characteristics.

Next – Mr Menon is advocating that you cut your gains short by selling as soon as your stocks make a certain amount of profit. Sure, that might prevent your portfolio from turning into a loss, but it also prevents you from ever getting rich if the stock market does take off, leaving you sitting by the sidelines and whining like a baby. If you’re a young investor with a steady income and many years of investing ahead, then Mr Menon’s advice is absolutely terrible for you. He’s right that there is no guarantee stock prices will rise over the next decade – there are no guarantees when it comes to investments (unless you consider Ponzi schemes to be “investments”) – but over a long enough time period, there’s a pretty damn high likelihood that the stock market will come out on top.

So what the hell should you do?

Let’s be clear – your job isn’t to make sure that your portfolio makes money over the next 6 months, 1 year, or 3 years. Your job right now is to ACCUMULATE as many assets as you can. Since we know that stocks are ultimately likely to give you the best return over the long run, your job is to make sure that you have as many of those assets as possible, so that your returns will be multiplied across all those assets after a long, healthy period of investing! We’re talking 10, 20, 30 years here. Who cares if volatility wrecks havoc to your portfolio over the short run – it doesn’t make a difference because you’re not thinking of selling within the next couple of years anyway. Ignore the day-to-day fluctuations, ignore the uncertainty and fear that pervade the news, and ignore the stupid, complicated investment advice out there. Investing can be simple, straightforward, and best of all, automated (I’ll be blogging about that in time to come). Stick to your guns and accumulate as many stocks as possible, and you’ll be rewarded in the end.

To me, the answer is pretty clear: multiple studies, research and 200 years of stock market history have shown that the stock market is more likely to give you a better return over the long-term. Do I think that property is a bad investment? Of course not. The best portfolio would consist of both stocks AND real estate, among other asset classes. There’s way too much to say on this topic, so I’ll be blogging more about it as we go along. But I thought I’d start us off with a little taste of it here. 🙂