Happy Index Investing in 2014

A feeling of deja vu. The Straits Times Index ETF roughly ended the same way it ended 2012, at $3.21.

As a real life case study, I have bought around 1,400 shares for Nikko AM STI ETF100 (G3B), at an average rate of roughly 100 shares each month. The average cost per share (excluding trading expenses) currently stands at S$3.2486, a little over a cent and a half higher than the price now (S$3.23) as I’m writing this post. Dividends collected came to a grand total of S$71.50 for 2013.

This is not Dollar Cost Averaging. I would have preferred to DCA, but we will have to wait for the Singapore Exchange (SGX) to reduce the standard board lot size to 1 unit before it is possible. Let’s keep our fingers crossed that we would be able to trade in lots of 100 units by this year, and in single units by 2015.

As you can see from my purchase log, I’m not too particularly about when I make the purchase in the month. Start of the month, end of the month, middle of the month – I’ve done it all. Heck, I’ve even forgotten during a month or two. As long as I have the discipline to stick my program, I’m guessing everything will average out over the course of my investment lifetime.

Here’s wishing you a Happy New Year! While wealth is important, there is nothing more important than good health, and happiness. May you have plenty of these two!

The 10% Stock Picking Rule

Once again, this post was inspired by my readers who are looking for something more than Index Investing. One day, what if you can't help yourself and have an incredible urge to deviate from Index Investing? We are only humans, after all. Does this spell total disaster? Don't worry, you'll do just fine.

In the Millionaire Teacher's last chapter, Andrew Hallam recommends that if you really cannot refrain from picking individual stocks, do not commit more than 10% of your portfolio for stock picking. This is one rule that I agree with, and stick to religiously.

Like I have mentioned previously, this blog is about a personal story. A real story. My story. I won't kid you and declare that I don't pick individual stocks. I like to keep my finance journey fun. Who says growing my wealth cannot go hand-in-hand with having some fun?

The next question is, what stocks am I holding on to, besides STI ETFs?

Apple Inc. (AAPL) <USD>

No. of Shares : 1

Buy Price : $434.04
Prev Close : $489.56
Intention : Short / Mid Term

CapitaMall Trust (C38U) <SGD> 
No. of Shares : 1,000

Buy Price : $1.85
Prev Close : $1.98

Intention : Long Term

Both are very interesting companies which appeal me for a variety of reasons.

Trivial Question of the Day

Q : What does Apple and Capitamall Trust have in common?

A : Both pay quarterly dividends.

PS -
It was only a little more than a month ago that the STI almost dived under 3,000 points, halting at 3,004 points. Looks like it is sitting tight at 3,147 points today. Life goes on.

Government of Singapore Investment Corporation To Embrace Index Investing?

The world's eight biggest state fund with its portfolio valued at $248 billion is moving towards Index Investing. For a start, GIC is splitting its portfolio into two parts - one that is actively managed, and another tracks the market.

GIC Pte, manager of more than $100 billion of Singapore’s reserves, is changing its investment strategy for the second time in three decades to be more flexible as the global outlook becomes “complicated.”

GIC will split its portfolio into one that’s actively managed, and another that tracks the overall market, it said as its annual report showed returns were little changed. The company didn’t say how much of the assets will be managed or indexed against the market.

Source : Bloomberg 

SGX Seeks to Reduce Standard Board Lot Size to 100 Units

Source : Channel NewsAsia (19-Aug-2013)

Highlights

• SGX said it hopes to first reduce the board lot size to 100, and eventually to one unit.
• SGX aims to introduce the board lot size of 100 by the first quarter of next year (2014), and it could be at least two years (2015) before the lot size will be reduced to one unit.
• The proposed standard board lot size of 100 units will apply to ordinary shares, real estate investment trusts, business trusts, company warrants, structured warrants, extended settlement contracts and shares on GlobalQuote.
• Board lot sizes for exchange traded funds - barring the SPDR STI ETF and ABF SG Bond Fund - American Deposit Receipts and fixed income instruments, including Singapore Government Securities and preference shares, will remain unchanged. 

So, what does this mean?

For small-time index investors like myself, rejoice! Singapore ETFs, specifically SPDR STI ETF (ES3) and ABF SG Bond Fund, are targeted to have board lot size reduced to 100. A common problem faced by small-time investors is that a single lot of SPDR STI ETF cost in excess of $3,000+ and ABF SG Bond Fund $1,000+. A smaller board lot size will definitely make index investing more accessible for the average guy on the street.

Note

Nikko AM STI ETF (G3B) board lot size is already at 100 currently.

Nikko AM - Diversifying Your Investment Portfolio With ETFs

Part 2 of Nikko AM advertistment on Today newspaper. If you want to achieve the below easily, consider this :

POSB 
- Regular Savings Plan (RSP) @ 0% sales charge (until 31 Dec 2013)
- Minimum investment sum of $100 monthly
(not sure about the initial investment, $1000 if I'm not wrong)

Fund Name 
- Nikko AM Balanced Funds - MyHome Fund HomeGrowth
- 80% into the Nikko AM Singapore STI ETF; and
- 20% into the ABF Singapore Bond Index Fund.
- Management Fee 0.5% p.a. from Fund Factsheet

Extracted from POSB Website

How does RSP work?

- With a RSP you make fixed monthly investments, regardless of market conditions
You avoid the uncertainties of market timing, by not speculating on the “right” time to invest your capital as a lump sum
- By investing a regular sum each time, you have the benefit of “dollar cost averaging” through buying fewer investment units when prices rise but more units when prices fall
- Over time, your average unit cost is lower than the average market price of the security during the same period of time

OCBC Blue Chip Investment Plan (BCIP) vs Phillip Share Builders Plan (SBP)

Time for a simple comparison between OCBC and Phillip regular fixed-dollar amount investment plan. Been wanting to embark on index investing because it seemed so easy via OCBC or Phillip Capital?

Hold on for a second.

Let's assume a simple scenario of buying a single counter (STI ETF) monthly for $100, the minimum investment sum via OCBC Blue Chip Investment Plan (BCIP) and Phillip Share Builders Plan (SBP).

Fee & Charges

OCBC BCIP - 0.30% or S$5 per counter, whichever is higher

Phillip SBP - S$6.42 (inclusive of GST at 7%) for Total Investment amount <= $1000

Winner - OCBC (need to pay $5)

What if we're investing $1000 monthly instead?

Fee & Charges
OCBC BCIP - 0.30% or S$5 per counter, whichever is higher
Phillip SBP - S$6.42 (inclusive of GST at 7%) for Total Investment amount <= $1000
Winner - OCBC (need to pay $5)

Dividend Charges

Seems like both of them charges a 1% on net dividend.
For Phillip Capital, it is stated on their PDF file they charge 1% on net dividend.
For OCBC, one of my readers brought it to my attention, although I'm not sure where the source is. that they don't have dividend charges after he/she spoke to the bank officer.

Penalty Fee for Insufficient Funds

OCBC BCIP - No fee

Phillip SBP - $5.35 (Inclusive of GST) 

Based on my simple comparison, looks like OCBC is the better deal here in terms of net expense incurred. Of course, you can't compare this to Standard Chartered Online Trading Platform which charges a measly 0.2% only - that's only 20 cents per $100, or $2 per $1000. 

They don't sell in odd lots though, so you'll probably need to save up for a few months to make a purchase. As it stands now, if you save $100 each month, you can make a STI ETF purchase every 3 to 4 months.

For a small monthly investment sum of money, the fees are absolutely going to kill you. If you have the discipline, do it yourself via Standard Chartered.

I'll make it even worst for you, and show you just how bad a deal we're getting here in Singapore. Take a look a Betterment, a monthly investment plan based in the US.

Betterment
Monthly Deposit - $100/month minimum
Annual Fee - 0.35%
Looks ordinary. But wait, I have not revealed what the portfolio is.
Is it a single ETF? Nope.

When you deposit money with Betterment, it is seamlessly invested in a blend of two baskets - Treasury Bond Exchange Traded Funds (ETFs) and Stock Market ETFs. 

Stock Market Basket
25% VTI: Vanguard Total Stock Market
25% IVE: iShares S&P 500 Value Index
25% VEA: Vanguard Europe Pacific (EAFE)
10% VWO: Vanguard Emerging Markets
8% IWS: iShares Russell Midcap Value Index
7% IWN: iShares Russell 2000 Value Index

Treasury Bond Basket
50% TIP: iShares Barclays TIPS Bond Fund
50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund

All these, for $100 a month, at 0.35% annual fee. 

Only.

Making The Most Of Index Investing

Objective : Achieve Index Returns

To me, there are two key ways to get the most out of index investing.

1. The Simple Act of Re-balancing

I don't invest all my spare funds into STI ETF. I keep a sizable portion (30%) of my money as cash, and invest the rest (70%) into ETF. A bond ETF would have been better than cash for low correlation with stocks but the 1,000 lot size makes it pretty inflexible.

Besides serving the purpose as a buffer during wild fluctuations in the stock market, when stock market crashes it provides you with valuable funds to BUY into STI ETF at low prices! In the reverse scenario, when stock prices surge, re-balancing forces you to sell STI ETF and take profits. It is almost like a blinking flashlight in your face when you see your portfolio percentage that is heavily skewed.

Be greedy when others are fearful. Be fearful when others are greedy.

2. Index investing is about the amount of time I have in the market, rather than timing the market

As long as the selling price (when I retire) is higher than the average price I purchase STI ETF, it will do. The assumption is that the stock market is cyclical in nature and will not remain in a depressed state for an extremely long period of time, such as in the case of Japan.

To keep the average price low, I buy into STI ETF on a monthly basis regardless of the price movements. Furthermore, STI ETF gives dividends twice yearly, further driving down the average price the longer I hold it in my portfolio.

Don’t Pay For Something You Don’t Get

Came across this article on The Motley Fool. Usually I don't like many of their articles, but this one seems pretty applicable to Index Investing, in particular on STI ETF.

Article : Don’t Pay For Something You Don’t Get
Source : The Motley Fool (8th March 2013)
Author : Ser Jing Chong

Some investors choose not to put their money in actively managed mutual funds and unit trusts for various reasons, including a lack of time to monitor the market, or paying someone who is skilled or an expert in this field to manage their money for them. That’s what the management fees are for. The return of these mutual funds and unit trusts often depend upon the investment skills of the fund manager to achieve market-beating returns. But, there might be cases when the management fees are paid for not for any skill at all. 

In an out-of-print investment classic, Margin of Safety, Seth Klarman wrote that ‘since clients frequently replace the worst-performing managers (and since money managers live in fear of this), most managers try to avoid standing apart from the crowd.’ This means that money managers prefer to stick with the herd rather than risk their career by making bold investment choices. This gives rise to closet indexers – money managers who try to mimic a market index without publicly acknowledging it. It’s a case of you can’t go wrong if you follow the crowd in the money-management business, and is unfair to investors – they could be paying lower fees by choosing an index fund or ETF instead.

For those wondering what gives Seth Klarman the right to make such a statement, consider this: he is the founder and president of Baupost Group, a hedge fund company with compounded returns of close to 20% per year since 1992. Remarkably, Klarman achieved such returns while often holding up to 50% of his portfolio in cash. This is a highly idiosyncratic move that few money managers dare to make. 

Let’s take a look at one such example here in Singapore. Amundi Singapore Dividend Growth fund has achieved annualised net-of-fee returns of 4.8% (inclusive of dividends) for its investors from Dec 2009 to Dec 2012. DBS Group Holdings Ltd (SGX: D05), Singapore Telecommunications (SGX: Z74) and United Overseas Bank (SGX: U11), which are all components of the Straits Times Index (SGX: ^STI), make up the fund’s top three holdings as of 31 Dec 2012. In fact, the top 9 holdings in the fund’s portfolio, with a total weightage of 61.32%, are all components of the STI. 

The fund’s movement and the STI might be tracking each other due to the close parallels of their composition. This would make any substantial outperformance of the market for the fund’s investors hard to achieve due to management fees, which eats into the returns. This fact is borne out by the SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) having higher annualised returns of 8.55% (inclusive of dividends) in roughly the same time frame. Investors in the SPDR STI ETF are essentially investing in the STI as the ETF is meant to track the movement of the index. 

The Foolish Bottom Line 

Investors often do not bother checking the portfolio of their funds. But, in cases where even a rough glance shows a very strong resemblance between a market index and a fund’s portfolio, it might be in the investor’s best interest to switch out of the actively managed, high-management-fee fund to a passively managed, low-fee index fund or ETF. After all, what use is there for a management fee if lower cost and better-return alternatives are readily available?

STI ETF Purchase [24-Dec-2012]

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.20
Order Quantity : 100 share(s)

Trade Consideration : $320.00 [$3.20 x 100]
Client Commission : $0.64 [$320.00 x 0.2%]
SG Clearing Fee : $0.13
Client GST : $0.05

Total Transaction Amount : $320.82

Standard Chartered Online Trading Account

Before you can invest, you'll need to have a trading account.

Currently, Standard Chartered is the only option that offers no minimum commission, which is great for investing small amount of money every month. Every other bank or brokerage is not acceptable due to the high expense incurred e.g. minimum $25.

Standard Chartered Brokerage Fee : 0.2%

For in-depth analysis of the advantages and disadvantages of Standard Chartered, Invest In Passive Income has two excellent posts here and here.

Example of a Trade on Nikko AM Singapore STI ETF (G3B)

Nikko AM Singapore STI ETF Order Price : $3.20
Order Quantity : 100 share(s)

Trade Consideration : $320.00 [$3.20 x 100]
Client Commission : $0.64 [$320.00 x 0.2%]
SG Clearing Fee : $0.13

Total Transaction Amount : $320.77

Passive Index Investing - What To Buy?

In order to perform passive index investing in Singapore, two of the vehicles you have access to are listed below. Both are Exchange-Traded Funds tracking the Straits Times Index (STI).

What is an Exchange-Traded Fund?

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. [read more from Wikipedia here]

While I'm at this, let me add on a third ETF that would be useful to you, and is also one that I'm intending to blog a bit on in future.

[1] SPDR Straits Times Index ETF | Price via Yahoo! Finance

Fund Information :
The SPDR® Straits Times Index ETF ("STI ETF"), Singapore's first locally created exchange traded fund which was formerly named streetTRACKS STI ETF, seeks to generate returns that closely correspond to the performance of the Straits Times Index ("Index"). The Fund is listed and traded like any share on Singapore Exchange Securities Trading Limited.

Lot Size : 1,000
A minimum purchase is going to cost $3,210 based on 24-Dec-2012 price, excluding brokerage fees etc.

[2] Nikko AM Singapore STI ETF | Price via Yahoo! Finance

Fund Information :
The Nikko AM Singapore STI ETF will initially invest in a portfolio of Straits Times Index (STI) stocks listed on the Singapore Exchange. It will mirror closely the performance of the STI. The STI is a market-weighted stock market index based on the performance of the Singapore stock market. It comprises of the most well-known and frequently traded shares on the Singapore Stock Exchange. The Fund's investment objective is to replicate as closely as possible, before expenses, the performance of the Straits Times Index or upon the Manager giving three (3) months' prior written notice to the Trustee and the Holders, such other index which tracks the performance of Singapore listed equity securities. The Fund will seek to achieve its investment objective by investing all, or substantially all, of its assets in Index Shares in substantially the same weightings as reflected in the Index.

Lot Size : 100
A minimum purchase is going to cost $321 based on 24-Dec-2012 price, excluding brokerage fees etc.

[3] ABF Singapore Bond ETF | Price via Yahoo! Finance 

Fund Information :
ABF Singapore Bond Index Fund (the "Fund") will initially invest in a portfolio of high quality, Singapore government and quasi government bonds. It will mirror closely the basket of bonds in the iBoxx ABF Singapore Bond Index. The target tracking error of the fund is set at not more than 0.4% per annum.

Lot Size : 1,000
A minimum purchase is going to cost $1,180 based on 24-Dec-2012 price, excluding brokerage fees etc.

What is Index Investing?

If you're here, I would assume you have a general idea of what Index Investing is all about. If not, here is a rather easy-to-understand article from The Motley Fool that you can finish reading in 60 seconds.

If you have more time to spare, watch this excellent video on passive index investing which would change the way you think about investing.